By Adinah Brown

I know that you have seen the advertisements. In fact, it’s these types of outrageous claims that bring new people into trading. The ones that say “I made $200 an hour from my home with this simple trick” or something like that.

Ultimately, it will provide you with a link to a technical trading system, or a social trading service that uses some sort of amazing technology to beat the market and make millions. With dreams of wealth flashing through your head and the knowledge that people can and do make wonderful money through trading, you desperately want to believe that it will work for you.

But is it a scam? And how can you tell?

Since most of these systems work by automated algorithms, it relies on the principles of technical trading. At the core of this issue is a pointed question that strikes at the very core of trading ideas – does technical trading actually work?

Broadly speaking, technical trading is trading based on market patterns. The technical trader will review historical charts, looking for shapes, patterns, variations and movements to determine how and why a market reacts. They will then identify which indicators gave a reliable prediction of the market direction and apply these indicators to predict the future activity.

At the end you have a system of predictors of market activity, that will allow you to trade with the expectation that the market will respond when the confluence of factors line up.

But, there are a few main issues with technical indicators that make trading with them somewhat concerning.

1. They tell you nothing about the actual value of what is being traded.

2. They are often based on the vicissitudes of trader behaviour and psychology, which is not necessarily something that is the same in all situations and therefore may not be applicable.

3. The trader may not be any good at identifying which of them are pertinent.

4. Some technical indicators or methods/patterns are just plain stupid.

Now all the above points are not as simple as they have been made to appear, and there are good arguments either way, but on some level these are legitimate concerns.

At the core of the issues is the main point – technical trading does not look at what is being bought, yet it’s buying that very thing that it is not even looking at. It’s like buying a house without knowing anything about the house, other than other people have bought houses.

Yet, it’s not quite like that. Your intention is to buy a house, knowing that other houses have been bought and with the expectation that this house will increase in value, like the other houses have increased in value.

But it’s also not this either. This approach is the same as buying a house because you have an indicator that shows house prices will go up because the changes in housing values have hit a set of critical factors like the amount of houses sold, the amount of people bidding on houses, the short term increase in housing values moving in an upwards and downwards pattern of increasingly tighter timeframes to a value where the market is expected to make a decision….

So there are few issues at play with technical trading, but one great constant trumps all these factors. Traders believe in technical trading. And because of this, the activities behind technical trading become self fulfilling. You see if enough people trade on an indicator, the market will respond to those trades.

And this is the crux of the reality. Those that don’t believe in technical trading will cite the issues I mentioned above, and they will be right, sort of. But they are ignoring the other truth of the market, that markets react based on trades. And therefore, those things that traders use to trade are relevant.

And traders use technical indicators. So technical indicators become relevant, and will move the market if enough traders use them.

That doesn’t necessarily mean that a technical trading tool advertising that it makes $200 a day will do that. But that is a discussion for another time. For now, you can at least have the comfort of knowing that it very well could.

About the Author:

Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.