5 Ways Technical Analysis Can Fail

Technical analysis is a discipline that many individual traders use on a daily basis. This is the analysis method of choice for day traders. This type of analysis seeks to find patterns in price charts instead of looking at the fundamental aspects of a security. While it could potentially provide you with valuable information, there are certain times that technical analysis can fail miserably. Here are a few ways that technical analysis can fail you.

1. Geopolitical Events

One of the scenarios in which technical analysis can fail is during a geopolitical event. Anytime that a political event takes place, it can affect many financial markets instantaneously. For example, it can affect the exchange rate between two currencies, which can also affect the prices of stocks in those countries. You have to be aware of political events in order to see if your technical analysis is worth anything.

2. Economic Data and News

Economic data and news releases can also have a drastic effect on the reliability of technical analysis. When an economic news announcement is made, it can cause prices in the market to swing wildly. Many times, despite your best efforts to analyze the market, you cannot predict what direction the news will move the price. Because of the volatility surrounding economic news announcements, many brokers will not honor take profit levels or stop loss orders. This is an extremely risky time to trade, and technical analysis will not do you much good.

3. Natural Disasters

Natural disasters can also have a dramatic impact on the financial markets. When a natural disaster occurs, it can significantly impact the economy of the area in which the disaster took place. This can have an impact on the currencies market and on the prices of the stocks of the companies that are located in that region. For example, when a hurricane destroys the majority of a city, the stocks of the companies that are located in a city will generally plummet. This can throw off the entire financial market. If you were using technical analysis in order to trade any of these stocks, your information would no longer be applicable.

4. Acts of Terrorism

Terrorism is another unexpected event that can reduce the effectiveness of technical analysis. When acts of terrorism occur, they generally make investors in the market very pessimistic. This will bring down the prices of most stocks and currencies. At the same time, commodities like gold and silver will skyrocket in price. When you are relying on technical analysis to tip you off to these circumstances, you will most likely be disappointed.

5. Internal Conflict and War

If a country is going through a great deal of internal conflict or a civil war, the financial markets will be in a period of unrest. The patterns in the market that were formed before the internal conflict occurred will not be relevant at this time. The market will act very unpredictably, and you may find yourself on the losing end of many trades if you are not careful.

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