Technical Analysis - Distinguishing Between Noise and Useful Chart Patterns

Technical analysis has been around since the 18th century and over the past few decades more and more individuals have been turning to this form of analysis partly due to the continued advances in computer and internet technology, but also due to the increased literature on the subject. Although an ever increasing number of traders are attempting to fulfill their dreams of riches earned on the market through day-trading using technical analysis techniques, the reality is very, very few of these traders ever become successful. Consistently earning money on the market (i.e. not from a stroke of luck) is extremely difficult, and unfortunately the majority of introductory literature on technical analysis portray it in a manner that makes one believe that all it takes to earn money with technical analysis is the ability to detect certain chart patterns. However, this is a massive oversimplification as instead it is extremely difficult to master technical analysis in a manner which allows for consistent long-term profitability, and is certainly not as simple as just entering trades each time a certain chart pattern forms. The majority of books on technical analysis are full of explanations and pictures of chart patterns such as rectangles, pennants, head and shoulders, and saucers to name a few, which the author will suggest that when formed offer an excellent time to enter as these patterns consistently precede significant moves in price. New day-traders look at the examples provided in books as well as online tutorials and are led to believe that once they gain the ability to detect these patterns in a timely manner they will then see the dollars roll in. However, not surprisingly a technical trader with this mindset will soon discover that it is not nearly as easy as most of the literature on the subject makes it out to be. Instead after the formation of these supposedly all powerful patterns, price is just as likely to go sideways or in the opposite direction then what is taught, as it is to move in the expected direction. Now this is not to say that technical chart patterns are worthless, as in fact they can be very valuable, but in order to make use of the great power one can obtain from technical analysis a trader must learn how to discern true signals from the noise in price movement. (Just to note before continuing, when I use the term noise, I am referring to movement in price with which technical analysis does not have the ability, at least in its current state, to interpret in any useful manner.)