Ask Colin

Chris Tate indicates his testing shows that indicators only have 50% reliability at best. Does this mean there is no point to technical analysis?

Many of the best traders, using indicators, or other methods, seem to struggle to have 50% winning trades. Yet they still make money. Why? It is because they make more when they win than they \d\r\o\p when they lose. In other words, they let their profits run, but cut their losses. This is the real secret to trading and investing.

Analysis is only the first step in the process of trading and investing. Next come money management and psychology (self management). There are plenty of brilliant analysts, who are lousy traders and vice versa. This is not surprising because an analyst has to think quite differently to a trader.

Understanding how you can succeed with only 50% or less winning trades and that 20% of the trades you do will make 80% (roughly) of your profits is absolutely necessary before you can succeed at trading and investing.

Now, to go back to Chris Tate. I have no idea how he has come up with that figure. Nor do I clearly understand exactly what he means by "50% reliability".

Ideally, one never relies on a single indicator. One should first study the actual price and volume chart to  discern the trend, support and resistance levels, any continuation or reversal patterns and then move on to indicators. Indicators are simply a mathematical manipulationof the price and/or volume to try to confirm one's chart analysis. If all the chart indications and indicators point to a likely trade, then one might take it, but with the expectation that it will succeed only around half the time if the analysis is soundly based.

My thinking is that if one is worried about indicators, it is best to work mainly on the chart itself. I personally use very few indicators and most of my analyis is charting based.