Yesterday, David Keller answered a great question from his mailbag:
“What predictive power does technical analysis really have? Sometimes the signals are just plain wrong.”
I think David answers this in a very eloquent, but practical way. As we know, nothing in investing/trading is “perfect”. But in the long run, it is about probabilities. And as he points out, technical analysis does not aim to predict the future. It simply about evaluating these probabilities.
Davis says on of the most difficult lessons for novice investors, is that “Great investors aren’t right all the time. They just admit when they’re wrong and move on.” When it comes to school or sports, those who work harder do indeeed usually perform at a higher level. However, when it comes to the market, this correlation isn’t always as direct. He also mentions that a large component of success comes down to luck and randomness.
David further points out that accepting when your wrong and that your position has moved against you, is one of the more critical things he has seen from success investors over his career. To do this, you must overcome many personal biases.
In the end, as David says, technical analysis is essentially a “truth serum” for the markets. I totally agree with this statement. You can do as much quantitative or fundamental research as you want. You can run a thousand backtests. You can be absolutely positive about the direction of a certain trade. Hours of diligent work. But in the end, only price pays. And only price will tell you if you were right or wrong.