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I am considering whether or not I should learn technical analysis after fundamental analysis. When I searched for "technical analysis" on internet forums to gauge whether or not it is worthwhile for me to learn, I noticed people saying that technical analysis involves astrology and tea leaf reading.

I was curious about this piece of information, so I searched further. I found that most connections between technical analysis and astrology seem revolve around William Delbert Gann and his trading methods. However, I was not able to find a connection between technical analysis and tea leaf reading.

I am new to this, so I may not have fully understood the implications of the use of astrology and tea leaf reading in technical analysis. As mentioned above, I know that technical analysis involves astrology, but I don't know how it involves reading tea leaves. Can someone explain how technical analysis uses astrology and tea leaf reading?

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    It’s not a connection or a usage, it’s a comparison—they share a common trait, irrationality, and the best way to use them to make money is sell it as it a service or training to others. Just as the best way to make money as an alchemist is to sell your recipe for turning lead into gold, the best way to make money as a tea leaf reader or technical analyst is to get people to pay you tell to them what they should invest in. Don’t forget to include a disclaimer that past performance is no guarantee of future success (in the fine print).
    – jmoreno
    Sep 9, 2020 at 0:44
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    Gann did a lot of sensible things as well as looking at charts. For example, hiring a plane to fly over factories and count how many of the chimneys were smoking. That's not "tea leaf reading" but practical econometrics.
    – alephzero
    Sep 9, 2020 at 1:36
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    @jmoreno perhaps most importantly: all three allegedly predict the future
    – Caleth
    Sep 9, 2020 at 16:09
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    IMO, this analogy is just fear uncertainty and doubt cast on TA methods used. Consider this, any price graph if you zoom far enough in may look like a straight line and zoom out enough may also be a straight line. The key for TA is time-frame, pick one and optimize your TA strategy for your own use on a specific equity. EDIT: I wrongly assumed (probably for the past few years) that TA also included quantitative methods. That is incorrect. I would skip TA (GANN etc) and just go straight to quant methods like oscillators, momentum, etc. and work your way up to machine learning. Sep 9, 2020 at 20:53
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    @miiiiiitchko which is why it's useless. You can always blame something you did "wrong" when it fails, and tout its success when it works. Buffett has said he “realised that technical analysis didn't work when I turned the chart upside down and didn't get a different answer.”
    – Almo
    Sep 10, 2020 at 17:21

3 Answers 3

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It doesn't literally involve astrology or tea leaf reading... While some people swear by it, technical analysis is often derided as pseudoscience, similar to astrology or tea leaf reading.

As it's relatively common, knowing the basic concepts gives you an idea what other market participants might be thinking, especially with regard to support/resistance levels but your mileage may vary.

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    It is sarcasm and not literal?
    – user102086
    Sep 8, 2020 at 14:13
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    Yes, that's how I would read it.
    – 0xFEE1DEAD
    Sep 8, 2020 at 14:18
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    @user102086 It's not really sarcasm, it's figurative language. An analogy.
    – eps
    Sep 8, 2020 at 22:43
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    The analogy is not just figurative. Reading tea-leaves involves learning to recognize dozens of patterns in the leaves and knowing what they mean. A large part of technical analysis follows exactly the same process. Of course it "works" in the sense that if everybody is looking at the same chart and thinks it means the same thing, they will all act in the same way and create a self-fulfilling prophecy.
    – alephzero
    Sep 9, 2020 at 1:32
  • @alephzero Like a Ouija board!
    – James_pic
    Sep 9, 2020 at 9:09
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It's an analogy.

In general, many hold the belief that the typical traders (read: not Warren Buffett levels of money where the simple act of trading can change the market) cannot beat the market in the long run. "Wisdom of the crowd" and all that — everyone has already made their best guess what the price should be and the average of those guesses is probably much better than your guess alone.

So technical analysis can very much be seen as "reading tea leaves". You look at a whole bunch of indicators and see what you want to see. Another person looks at the same indicators and sees something completely different. If you're successful, it feeds confirmation bias. When it fails it's written off as a fluke.

In many ways it reminds me of sports prediction before statistical modeling took over. You had all the so-called experts who lived and breathed the sport their whole lives making predictions and they were pretty terrible at it. Then people treated it like a data analysis problem and did extremely well. The main reason? There were all these stats (much like in technical analysis) but people just aren't very good at understanding how all those variables interact. People are quite good at seeing single variable relationships, but they are terrible at multivariate problems. Once you get more than a couple of variables, people can no longer keep track of how all of them interact and feed into the outcome.

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  • People are generally pretty terrible at seeing even bivariate relationships, except on the largest and smallest of scales i.e. when the relationship is so big in perspective that you can't miss it.
    – Nij
    Sep 10, 2020 at 4:45
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    Could you give some examples of these "single variable relationships" and "multivariate problems" you mentioned?
    – user102086
    Sep 10, 2020 at 7:37
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I think that your source of information is conflating different things.

Tea reading is one of dozens of methods of fortune telling. If you believe that the market can be predicted from any of these, man, have I got a bridge to sell to you. Regards from Miss Cleo, RIP.

Astrology attempts to divine information about human affairs and other events by observing the movement of planets and stars which is constant. The study of planets and stars is a true science. AFAIC, applying astrology to the chaotic movement of the stock market is a pseudoscience.

There is some merit to some aspects of technical analysis. It can identify current momentum, the trend, areas of support and resistance but the bulk of it is a reflection of past price and/or volume movement and it predicts absolutely nothing going forward. It's like looking in the rear view mirror and expecting that to tell you where you are going. Any trade that you take based on such analysis is based on the HOPE that whatever trend or momentum you have identified will continue.

People talk a good game about different indicators but when you utilize them in real time (not curve fitted historical performance) none perform spectacularly. The next time you come across someone who tells you how great technical analysis is, ask them to post their picks in real time so that the picks can be monitored for performance. Chances are, you’ll get a bunch of excuses and no picks.

If TA indicators really did work, why would anyone invest/trade based on any other criteria? Why would anyone ever lose money? Why would anyone ever take the other side of the trade if the future was predictable?

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    “Astrology attempts to divine information about human affairs and other events by observing the movement of planets and stars which is constant. The study of planets and stars is a true science.” While those two sentences are both true, I hope you're not implying any connection between them… (The study of planets and stars is astronomy, not astrology.)
    – gidds
    Sep 9, 2020 at 14:03
  • Astrology is a pseudoscience that claims to divine information about human affairs and terrestrial events by studying the movements and relative positions of celestial objects (Wiki). Astrological progressions are one of the main means used in Horoscopic astrology to forecast future trends and developments (the other means is transits, which are simply the ongoing movements of the planets across the sky). (also Wiki). Similar definitions elsewhere as well. Sep 9, 2020 at 14:46
  • There is no conflation. The 'study' of planets and stars may be true science, but the application - attempting to divine anything, whether information about human affairs and other events or the chaotic movement of the stock market is exactly the same as applying tea leaf reading divination.
    – mcalex
    Sep 10, 2020 at 3:34
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    The study of tea leaves is also a true science, mostly involving Brownian motion.
    – TRiG
    Sep 11, 2020 at 8:53

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