Over the past few years, the field of Technical Analysis (TA) has experienced significant growth, and I believe that cryptocurrency, as well as self-proclaimed internet trading gurus, have played a significant role in this expansion.

My expertise in TA is rather limited, and therefore I kindly request that you do not take my foolishness as an insult. However, I will make an effort to provide a concise overview of the subject. Technical Analysis is a discipline which aims to forecast market trends based on the security changes in price, volume traded, implied volatility, as well as other indicators, which we can generalize as trading data/market-derived information. Using those indicators, TA claims to indicate future movements of the security looked into. A key point to take away about it is that it exclusively utilizes market-related data. Factors beyond the market are ignored, concepts like economic conditions, company performance, and global developments are left out of the equation.

As an outsider to economics and finance, I won’t be trying to prove the effectiveness, or ineffectiveness, of Technical Analysis. In and of itself, TA has already been, and still is, discussed within finance and economical groups to prove its efficacy, and to my understanding the debate is still on going. My focus is going towards the dangers of such a complex looking tool in the hands of influencers, whether they are on social media, private groups, etc.

Investing, and finance in general, is a topic which has to be taken seriously. Our financial system is complex and intricate, as a non-professional investor, it’s quite difficult to grasp all the components which, when aggregated, provide a single number shown to us as the stock/security price. Most people are aware of this fact, and I would like to, for the sake of argument, categorize non-financial experts into two categories. Firstly, we will encounter those who would rather not spend time and effort investigating further, they will avoid the subject, or maybe will delegate it to a professional. This category won’t be affected by any kind of hype or heavily marketed self-investing solutions to invest.

The second category is quite more interesting, I will call this category financially-curious, those are people who want to be proactive with their money, and if possible, generate interest with it. This opens a gap, a market gap which can be targeted either by professionals looking to offer advice to a wide audience.

By teaching a large audience, to react to specific analysis, giving them specific guidelines to which they should give attention. Effectively making them expect our financially-curious group to be able to predict a future outcome based on a rigid model. Which will often be sold as a method which is complex to understand (which I do not doubt) but with practice offers a guaranteed financial outcome. All of this, without requiring of you to educate yourself about basic finance and economics, is a recipe for disaster. At least if you are not an ill-intentioned individual trying to generate money out of it.

Let’s now imagine our financially-curious army of traders, behind their terminals, through fully looking at a specific stock, which might have been advertised by an influencer over the course of the last weeks. Eureka! All the lines are converging, this stock is about to blow, they are totally convinced! The technical analysis gurus have shown us, if the indicator X reaches this threshold, indicator Y has been low for a few weeks, and in addition to all of it everyone is talking about it, the trading volumes are increasing! It is time to create a long order (or short it, whatever the numbers are telling you). Here we are, owning a crypto token which was never heard of prior to buying.

You might have noticed how, through careful planning, and with a large enough reach, you could pick a stock, which has a relatively low market cap (depending on your reach), and almost predict the future price of the asset, by sharing your interest for it. As all, your community is programmed to react in a specific way to the market information, it would be easy to identify an asset which, following your teachings, looks promising. Once identified, the last step is to share it, then like a headless chicken, your army of financially-curious technical analysts students would identify this great opportunity. And might event make a profit out of it, not as big as you did but still a profit for some.

This story might be a bit exaggerated, but I wanted to highlight two things, first, the self-fulfilling prophecy aspect of technical analysis. For this argument, I would even like to extend it to professionals in finance and economics whom might apply those rules. As those rules might be taught to numerous people, you end up creating a self-fulfilling prophecy on those rules, if everyone follows them, obviously it will happen. Which is something to consider. This can be easily leveraged against the masses by powerful enough individuals or groups of individuals. Second of all, if we take a step back to our example, what ended up happening was not even technical analysis working, but a coordinated pump-and-dump scheme, made to dump on the same group which was pumping. Without realizing it, our financially-curious group was raising the price of the asset, and then taking profit against those who were helping them rise the price.

I think everyone must be aware that financial markets are quite complex, and populated with some ill-intended individuals which will try to win no matter the cost. One might end up thinking he learned valuable skills, which will help him make a profit with minimal effort, but they are no shortcuts. I would advise everyone to make sure they have a profound understanding of finance and economics before engaging with such markets. As it is too easy to leverage the knowledge gap of non experts, to turn them into a quick cash grab.

For those interested in expanding their read, I would recommend the Wall-Street Journal article: Some Traders Are Talking Up Cryptocurrencies, Then Dumping Them, Costing Others Millions (wsj.com)

Thanks for reading 🙂