|
A EUR/USD Breakout? A lesson in technical analysis subjectivity |
by Ryan Teeples
Technical analysis is, by nature, a subjective exercise. Give two technicians the same chart, and they'll often interpret patterns, trends and potential breakouts differently. No matter what you hear from sellers of "fool-proof" technical trading systems, there is always room for interpretation in the charts. 
 Read/Post Comments
And more importantly, you must be flexible enough in your analysis to adapt to changing market conditions. This often means you must admit to being wrong in your prior analysis.
The current EUR/USD chart is a great example of how subjective technical analysis can be, and how you must be careful in using it as your only factor in placing trades.
Last week, the EUR/USD was in an obvious downtrend, and seemed to be range-bound in a channel. Here's the chart we looked at at the time.
(Be sure to read Charting with Support and Resistance or Technical Patterns to become familiar with these charting and technical analysis concepts.)
Fast-forward to today, and based on our previous analysis, it looks like the EUR/USD has plainly broken out of the consolidation (chart below). This would lead us to re-evaluate our sentiment on the pair and look for a new trend to watch.
BUT, here's where subjectivity comes in.
Some analysts draw support and resistance lines at the wicks of the candle, while others use the body as a guide. Others just use both as a general guide and draw trend-lines thick enough that it doesn't matter, because they are longer-term traders focused on the trends, not the break points (which is a good method).
In the case of the EUR/USD today, the chart below is changed to be more broadly applied, ignoring the major outlyers on the wicks at the beginning of the trend. As you can see, doing so makes the earlier apparent break disappear, and the price movement of the past three days actually falls within a channel that would indicate a continued down-trend.
In technical analysis, it's not about a right way and a wrong way. The point is that there's subjectivity in it. Our personal tolerances, tastes, bias and methodology are reflected in our charting, and we must understand that and be willing to adjust our analysis as conditions change.
The other lesson is that using technical analysis as a solitary timing device can be difficult and dangerous.
| |
|
