What technical analysis claims, and what the evidence says

What this is about

Before any individual indicator, the honest overview: what technical analysis is actually asserting, where the evidence supports it, and where it does not.

This lesson exists because every other lesson in this chapter is more useful if you already know the size of the claim being made. An indicator taught without this becomes a rule you follow. Taught with it, it becomes a tool you use.

The claim

Technical analysis says that price and volume history contain usable information about what price will do next — and that fundamentals, news and the business itself can be set aside while you read it.

That is a real, testable claim, and it comes in three strengths:

Weak: price history summarises what is known. The chart compresses what every participant has already concluded. Almost nobody disputes this, and it is mostly what indicators actually deliver.

Medium: patterns in that history recur usefully. Because participants behave similarly in similar situations, past shapes carry information about future ones. Contested, and the evidence is mixed.

Strong: the chart alone is sufficient. You need nothing else. This is the version sold in courses and it is the weakest supported of the three.

What the evidence actually says

Momentum is the one that survives testing. Jegadeesh and Titman (1993) documented that shares which outperformed over the previous 3–12 months tended to continue outperforming over the following 3–12 months. It has been replicated across decades, countries and asset classes, and it is one of the few effects mainstream academic finance treats as real rather than as noise.

Note carefully what that is: a broad statistical tendency across many holdings over months. It is not "this chart looks strong, so buy this share on Tuesday".

Most named patterns test far worse. Studies of candlestick patterns and classical chart formations in liquid modern markets generally find little reliable edge once transaction costs are counted. Where an effect appears, it tends to be small, inconsistent between markets, and to weaken in later periods — which is what you would expect if it were being competed away, and also what you would expect if it were never there.

The theoretical objection is worth understanding, not just quoting. The efficient market hypothesis says prices already reflect available information, so past prices cannot predict future ones. In its pure form the evidence does not fully support it either — momentum is a genuine embarrassment to it. The useful position is neither camp: markets are hard to beat, not impossible, and anything easy to see has probably already been acted on.

Why it still works as a tool

Even taking the sceptical view, a chart earns its place:

It shows you what you are buying into. A share that has fallen 60% in six months is a different proposition from one that has doubled — regardless of whether the shape predicts anything.

It makes risk concrete. How much does this normally move in a day, and how far away does a stop have to sit? Those are chart questions with factual answers, and they feed straight into position sizing.

It imposes structure on decisions. "I will act if X" made in advance is better than reacting to a red day, largely because it was decided while calm.

It is a shared language. When somebody in a channel says "it broke its 200-day", you now know what happened, whether or not you think it matters.

The two failure modes

Confirmation. With enough indicators, something always agrees with you. Choosing the indicator after forming the opinion is the most common way this chapter gets misused, and it does not feel like bias while it is happening.

Confusing description with prediction. Every indicator in this chapter is a formula applied to past prices. Not one contains information the price did not already have. They rearrange what is there so it is easier to see — which is valuable and is not prophecy.

What this does not tell you

It does not tell you technical analysis works. It says one narrow part of it survives testing, some of it is useful for reasons other than prediction, and much of what is sold under the name is unsupported.

It does not tell you fundamentals are better. They answer a different question, they are covered in their own chapter, and they are equally capable of being used to justify a decision already made.

It does not tell you which indicators to use. The next four lessons describe what each one measures and what each one misses. Whether to act on any of them is yours.

Where to see this in the app

Chart carries the indicators this chapter covers: moving averages, Bollinger Bands, RSI and MACD. Four, not forty — the intent is that each is explained properly rather than that the list is long.

Chart → Technicals shows a summary reading rather than a recommendation, and naming what it is built from is deliberate.

Portfolio is where the honesty check lives. Every trade you place through the app is priced and timestamped by us and written to a log that cannot be edited afterwards. If an approach works, that record shows it. If it does not, that record shows that too — which is the only way anybody ever finds out.