The truth about technical analysis

There is a lot of hate here on technical analysis. I tend to agree it's not worth your time, but it's also insanely misunderstood.

A few simple examples:

Here's a really simple example of it. Let's say BTC has been hovering around $30k for a while now. During that time lots of people buy their first Bitcoin. Then we have a good week like we did this week and it goes up to $35k. But sadly, that was temporary and we start dropping back to $30k. All these new buyers don't want to loose money so as it drops to their buy price, they sell. Simple supply and demand then forces the price lower. People that didn't get out at $30k are starting to loose money and so they sell to cut their loses, pushing the price down further. This is the most basic type of technical analysis pattern called support and resistance.

Here's another example. Let's say you see the Stegosaurus Under a Rainbow pattern (https://www.reddit.com/r/CryptoCurrency/comments/op6xvs/bitcoin_will_reach_75k_in_september_heres_how/). And now imagine the scenario in which everyone thinks that's a real pattern and when it "completes" it means the price can only go up. Everyone wants to get in on the profits, so they all start buying. This forces the price up. Thus now the pattern has merit.

It's not the charts and lines we draw on them that is magical. It's a way to trade on the hivemind (to steal a Reddit term). It's one of those "if everyone else is jumping off a cliff, would you also do it?" things. It ascribes predications modeled on human psychology.

How is makes you money:

Now a lot of people hate on technical analysis because it's not always accurate. You need to think of it like playing blackjack and counting cards. Just randomly playing a hand (or buying crypto) gives you about 50/50 odds of making money. Now when you start counting cards (or using technical analysis), maybe you tip the odds to 50.1% in your favor, but that's all you need. Over the long run, it eventually pays off.

What technical analysis is not:

It's not a magical predicator to guarantee you profits. Just like the counting cards example above, if you use it incorrectly, it may make your odds even worse than random chance. Other events can overshadow its effectiveness. For example, if Vitalik tweet's Ethereum is a scam, that is obviously going to overshadow any predictive powers technical analysis has and things are doing down.

Should I use technical analysis?:

In my opinion, it's not worth the effort and can be frustrating if you are wrong. It's easier to just DCA. The most I'd use it for is maybe trying to find good entry or sell point. That being said, knowledge is important. It's at least important to understand something and make an educated decision not to use it rather than bashing something you do not understand.

Disclaimer:

Obviously not an expert in it. This isn't financial advice. This is just an attempt to provide some layman's knowledge on the subject.