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Can Technical Analysis Beat the Market? (How Well Does It Work?)

Last Updated on 11 September, 2023 by Samuelsson

When starting to trade we put in a lot of effort in order to achieve returns that are higher than the market average, which you could easily get by just investing in a regular index fund. One common approach to beating the market is to use technical analysis to find out when is the best time to be invested in the market. So can technical analysis beat the market?

Yes, technical analysis can beat the market. However, it’s important to recognize that technical analysis in itself doesn’t hold any answers, but is merely a tool used to define and quantify market behavior. As traders and investors, it’s up to us to make sensible use of the information our technical analysis methods provide. 

In this article, we’ll look closer at the whole concept of beating the market, and how you should go about to increase your odds of being one of those few who manages to get above-average returns!

Let’s start by looking at how hard beating the market really is!

How Hard Is It to Beat the Market?

Beating the market is really hard, and something very few people manage to do. If we look at some statistics, we see that as many as 90% of mutual fund managers fail to beat the market after deducting fees and transactional costs, over longer time periods.

Following this, one common argument against beating the market as a retail trader is that if professionals can’t beat the market and provide above-average returns, then retail investors and traders will stand an even smaller chance.

Now, this comparison isn’t completely correct, since mutual fund managers suffer the following inhibiting factors:

  1. The Size of the Fund: As funds grow bigger, their sheer size makes some types of operations impossible. This means that retail traders and investors have access to investment opportunities that mutual funds can’t take advantage of since there isn’t enough liquidity in the market to support those bigger players.
  2. Restrictions: Fund managers fall under strict frameworks that dictate things like the maximum allowed weighting of a single position, and other similar metrics. This means that they may have to make decisions that are not in line with the welfare of their fund, but that are needed to meet the regulatory rules.
  3. Investor Relations: Being a fund manager means that you manage other people’s money, and this means that a lot of people are going to monitor how you manage their money. As a result, many managers focus on keeping returns more in line with the expectations of their clients. This once again means that they cannot make the decisions they actually believe are the best for the business, out of fear of jeopardizing short term growth. Many times these funds report on a quarterly basis, which means that they focus too much on presenting impressive quarterly figures, which often is detrimental in the long run.

As you see there are quite some factors that make the life of a hedge fund manager much harder than that of a retail trader.

At the same time, beating the market still is very tough, and requires a strict approach that tries to remove the randomness of the outcome. Let’s look at the steps you need to take!

 The Steps You Need to Take to Beat the Market

Can Technical Analysis Beat the Market? (How Well Does It Work?)
Steps to Beat the Market

In this section of the article, we’ll present the steps we believe you should take to overperform against the market using technical analysis. This is what we do ourselves, and have found work well!

1. Learn to build strategies

In order to have any chance at all, you need to learn how to turn technical analysis into trading strategies. This involves coming up with an idea for an entry and an exit, and then see how those rules have fared on historical data, using backtesting.

The strategy is what will make you a profitable trader in the long run, and what sets you apart from those who just make guesses based on no fundamental data whatsoever.

Our article on how to build a strategy deals with this topic in much more depth!

2. Learn to adapt to changing market conditions

While trading strategies are what make you a profitable trader, it’s extremely important to recognize that no strategy will last forever. Markets change all the time, and in some cases, it will result in our strategies getting out of sync with the market, which will cause them to fail.

In cases when our strategies simply don’t produce profits anymore, it’s important to cut them off, and start trading new ones. In that sense, the concept of cutting losses and letting winners run not only applies to single trades, but to strategies as well!

Most new traders have never heard of this, and expect that they can find one strategy that will bring them all the money. And while you may be very lucky to find one or a few strategies that work well for a long time, nothing lasts forever!

3. Continue Building Strategies

Due to point number 2, trading becomes a continuous process where you always strive to come up with new strategies to trade, that can replace those that fail. This also comes with the benefit that you’ll get a lot more strategies that often times are better than those you trade already. In other words, your trading will improve with time!

Should You Even Try to Beat the Market?

Many people new to the market simply don’t understand the amount of work you need to put in to have a realistic chance of getting above-average returns. You simply cannot learn technical analysis and expect to become a successful trader right away. As we expressed earlier, technical analysis is merely a tool and not the final answer to all trading challenges.

For those who are willing to put in the work that’s needed, we recommend that you have a look at taking a trading course. Learning trading on your own is possible, but you’ll save a lot of time and money by learning a proven method that has taken others years to develop. Here at the Robust Trader, we do offer a range of trading courses!

If you find the task daunting, and just want to reap the benefits of passive investing, which in itself is a great way to make your money grow over time, we recommend that you settle with an index fund. On average, you then can expect to double your money every 10 years, which will add up quite nicely over time.

Remember that most people lose money by trying to time the market. Thus, if you aren’t ready to put in the hours required, you’re much better off settling with a normal index fund!

Technical Analysis VS Fundamental Analysis in Beating the Market

Many people who wonder if technical analysis can be used to beat the market also tend to ask the same question about fundamental analysis.

While technical analysis looks at the price and volume data of a market to figure out where it’s headed next, fundamental analysis looks at the financial and fundamental factors surrounding the company or market traded. In general, fundamental analysis isn’t used so much for short term trades, but more for trades that may go on for several years.

You certainly can use fundamental analysis to beat the market, but the same mantra as we’ve presented earlier still applies. That is, it’s a tool rather than a ready to use formula, which needs a strategy to work.

Ending Words

You certainly can beat the market with technical analysis, but it requires that you have patience and take the time to develop the trading strategies that will take you there! On its own, technical analysis is merely a tool. Unfortunately, this is something that most beginners haven’t gotten their heads around yet!

For further reading, we recommend our article on how to build a trading strategy, as well as our swing trading, algo trading, and daytrading guides.

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