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How The Financial Industry Benefited By Supporting Technical Analysis

Technical analysis gave the false perception to a very large number of traders that there was an easy method of dealing with uncertainty one could use to profit. Speculators, instead of going to casinos, traded the markets with known results.

The contribution of technical analysis in the early growth of the financial industry was substantial. Traders were taught the trivial and dubious technical methods of dealing with market uncertainty and at the same time were charged high commission rates. The result was that most traders lost if they stayed long enough in the game, save the lucky ones. Scalpers and day traders could not maintain an edge when charged high commission rates, even in the case they had one.


Source: Deutsche Bank

This chart is in my new book 15 Lies About Trading And Investing. It shows how the commission rate in $/share has dropped while volume has increased. It may be seen that in the 1980s and 1990s the commission rate for stocks was in the range of 20 to 25 cents per share. That has dropped to about 1 cent per share or even less in recent years. Despite popular misconceptions, HFT has contributed to the low cost and any losses because of HFT frontrunning are just a small fraction of the realized gains due to market efficiency. However, there is still high level of misinformation in this area by those who have lost their license to rip off traders and would like to see the old system re-established.

Despite their devotion to technical analysis and to things like chart patterns and indicators, most scalpers and day traders were ruined and virtually eclipsed in the late 2000s. The peak of intraday stocks and futures trading was in the early 2000s. It took about 10 years for the financial industry to drive this group out of the market.

The financial industry had windfall profits from the losses of technical traders. While they were ruined with their money pocketed by locals, market makers, specialists and other professionals, more diplomas were issued by technical analysis associations after passing examinations. The examinations included some grossly unjustifiable answers to some ridiculous questions based on unfounded and unsupported claims found in some technical analysis books published by individuals that were elevated to the status of an expert. These shameless tactics and practices continue even nowadays although these societies are now more of networking grounds for those looking for a job or clients.

Technical analysis was the vehicle of wealth redistribution, maybe of the largest in recent history. Money flew every minute from technical traders to market professionals. Yet, the losers had the false perception that they had a chance. More importantly, some are still allowed to sell hopes and dreams in the form of diplomas, certificates or even courses that teach how to spot patterns, draw lines and indicators on charts. Thanks to the blogosphere, the number of people that fall victim of such schemes has decreased substantially in recent years.

Technical analysis is a broad term that includes a wide spectrum of methods and techniques for dealing with market price action. Some of the methods work under some conditions but most do not.  The hard work lies in determining whether some method provides a true edge. This is attempted by quants but even in this case some practices are questionable. In my book Fooled By Technical Analysis I discuss these problems in more detail and offer potential solutions.

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