Myth 1: Past Prices Aren't Useful for Predicting Future Prices
One of the most biting criticisms of technical analysis is the idea that there's no way past prices can be a crystal ball for future prices. But that argument is seriously flawed.
Anyone who's ever bought a stock can attest to the psychological impact of watching a position's gains climb or losses mount. It's human nature. That's a good indicator that entry prices do have at least some impact on future behavior. Remember, we judge our performance by comparing a stock's current price against our entry -- and those entry prices are past prices. Because investors' entry prices have a lot to do with their eventual decisions to close their positions (or buy more), it's naive to think that past prices don’t have some impact on how a stock trades in the future.
No, it's not that past prices magically work their way into future prices that's important. Rather, past prices are significant because they are the best way we have to identify pockets of supply and demand in the market.
So we've established that past prices do impact future prices to some extent. But can you predict future prices with a chart alone?
I certainly can't.
I'll concede that technical analysis doesn't make predictions -- but bear with me. The problem with this claim is that the word "prediction" conjures up crystal-ball-style connotations. Technicals aren't a crystal ball, and I don't know a single professional trader or analyst who believes they are.