If you are not a charting aficionado you might think that trying to predict future price movements from past price movements is pure folly. And guess what? You would be right.

What? Did I just say that? Well, yes I did but there is more to it than the simple answer. We cannot predict price movements but we can assign probabilities to what might happen based on what already happened.

“What’s the difference?” you ask.

It’s a big difference. If you say you can predict what will happen you are gazing into an orbuculum. That’s a crystal ball, for you lay folk.

What technical analysts do is gauge future possibilities based on the footprints the elephants leave in the butter. Here is the phrase that pays:

Chart patterns are those similar situations. The “forecast” is the similar manner of action. Nowhere does it say “will” or “must.” 

Let me pull a large quote from my favorite author with that phrase embedded.

“Chart patterns are formed by the buying and selling actions of people and people tend to act in a similar manner when faced with similar situations. Some blame this on a self-fulfilling prophecy: if enough investors believe in the significance of a chart pattern ending then they will act, and thus their actions will assure that the assumed result will occur. ” – A Beginner’s Guide to Charting Financial Markets: A practical introduction to technical analysis for investors by Michael Kahn

Wow, that guy makes sense! Let’s continue:

“But investors may not act the same way this time and the charts will tell us when that is the case quickly before losses begin to mount.” 

That implies that technical analysis does not expect to be right all the time. If it did, then probabilities would be 100%. Therefore, trying rate the efficacy of technical calls just by the success rate is a failed methodology.I challenge you to show me the price/earnings ratio at which a buy signal will always result in profits. Or a percentage of orders or inventory that is 100% right when making a buy or sell call on a stock.