Some traders and investors denounce technical analysis (TA) as a superficial study of charts and patterns without any concrete, conclusive or profitable results. Others believe it is a sort of Holy Grail that once mastered will unleash sizable profits. These opposing viewpoints have led to misconceptions about technical analysis and how it is used.  

Technical analysis tries to capture market psychology and sentiment by analyzing price trends and chart patterns for possible trading opportunities. Contrary to fundamental analysis, technical analysts do not necessarily care much about the companies behind the stocks they trade or their profitability.

Some misconceptions about technical analysis are based on education and training. For example, a trader trained in using only fundamentals may not trust technical analysis at all. But that doesn’t mean someone who is trained in technical analysis can’t use it profitably.

Other TA assumptions are based on bad experiences. For example, the incorrect use of technical indicators often leads to losses. That doesn’t mean the method is necessarily wrong; possibly the person just needs more practice and training. The negative sentiment can be perpetuated by unscrupulous marketing, promising overnight riches if a simple TA indicator is bought and used. It rarely is that easy.

Here are eight common technical analysis myths—and why they simply aren’t true. 

1. Technical Analysis Is Only for Short-Term Trading or Day Trading

It is a common myth that technical analysis is only appropriate for short-term and computer-driven trading like day trading and high-frequency trades. Technical analysis existed and was practiced before computers were common, and some of the pioneers in technical analysis were long-term investors and traders, not day traders. Technical analysis is used by traders on all time frames, from one-minute charts to weekly and monthly charts.

2. Only Individual Traders Use Technical Analysis 

While individuals do use technical analysis, hedge funds and investment banks make ample use of technical analysis as well. Investment banks have dedicated trading teams that use technical analysis. High-frequency trading, which encompasses a significant amount of the trading volume on the stock exchanges, is heavily dependent on technical concepts. 

3. Technical Analysis Has a Low Success Rate

A look at the list of successful market traders, who have decades of trading experience, debunks this myth. Successful trader interviews have cited significant numbers of traders who owe their success to technical analysis and patterns. For example, Market Wizards: Interviews With Top Traders (Wiley, 2012) by Jack D. Schwager features interviews with many professionals who’ve profited solely by using technical analysis.

4. Technical Analysis Is Quick and Easy 

The internet is full of technical analysis courses that promise trading success. Though many individuals enter the trading world by placing their first trade based on simple technical indicators, continued success in trading requires in-depth learning, practice, good money management, and discipline. It requires dedicated time, knowledge, and attention. Technical analysis is only a tool, only one piece of the puzzle.

5. Ready-Made Technical Analysis Software Can Help Traders Make Easy Money 

Unfortunately, this is not true. There are many online ads for cheap and costly software that claims to do all your analysis for you. In addition, less-experienced traders sometimes confuse technical analysis tools in broker-provided trading software for trading models that will guarantee profit. Though technical analysis software provides insights about trends and patterns, it doesn’t necessarily guarantee profits. It’s up to the trader to correctly interpret trends and data.

6. Technical Indicators Can Be Applied Across All Markets

While technical analysis can be applied to many markets, specific asset classes have specific requirements. Equities, futures, options, commodities, and bonds all have differences. There may be time-dependent patterns like high volatility in futures and options nearing expiry, or seasonal patterns in commodities. Don’t make the mistake of applying technical indicators intended for one asset class to another.

7. Technical Analysis Can Provide Precise Price Predictions 

Many novices expect recommendations from technical analysts or software patterns to be 100% precise. For example, inexperienced traders may expect a prediction as specific as, “stock ABC will reach $62 in two months.” However, experienced technical analysts usually avoid quoting prices so specifically. Rather they tend to quote a range such as, “stock A could move in the range of $59 to $64 in the next two to three months.”

Traders betting their money on technical recommendations should be aware that technical analysis provides a predictive range, not an exact number. Technical analysis is also about probability and likelihoods, not guarantees. If something works more often than not, even though it doesn’t work all the time, it can still be very effective at generating profits.

8. The Winning Rate in Technical Analysis Should Be Higher

It’s a common myth that a high percentage of winning trades is needed for profitability. However, that is not always the case. Assume Peter makes four winning trades out of five, while Molly makes one winning trade out of five. Who is more successful? Most people would say Peter, but we don’t actually know until we get more information. Profitability is a combination of win rate and risk/reward. If Peter makes $20 on his winners but is down $80 from his one loss, he ends up with $0. If Molly makes $50 on her win and losses $10 on her losses, she walks away with $10. She is better off, even with fewer wins. Proper trade structuring allows for profitability even with few winners

The Bottom Line

Technical analysis provides a large basket of tools and concepts for trading. There are successful traders who don’t use it, and there are successful traders who do. Some believe technical analysis is the best way to trade, while others claim it is misguided and lacks a theoretical basis.

Ultimately, it is up to each trader to explore technical analysis and determine if it is right for them. It doesn’t guarantee instant profits or 100% accuracy, but for those who diligently practice the concepts, it does provide a realistic possibility of trading success.

3C1 refers to a portion of the Investment Company Act of 1940 that allows private investment companies to be considered exceptions to certain regulations and reporting requirements stipulated by the Securities and Exchange Commission (SEC). However, these firms must satisfy specific requirements to maintain their exception status.

Understanding 3C1

3C1 is shorthand for the 3(c)(1) exemption found in section 3 of the Act. To fully understand section 3C1, we must first review the Act’s definition of an investment company and how it relates to earlier sections of the Act: 3(b)(1) and 3(c). An investment company, as defined by the Investment Company Act, are companies that primarily engage in the business of investing, reinvesting, or trading securities. If companies are considered investment companies, they must adhere to certain regulations and reporting requirements.

3(b)(1)

3(b)(1) was established to exclude certain companies from being considered an investment company and having to adhere to the subsequent regulations. Companies are exempt as long as they are not primarily in the business of investing, reinvesting, holding, owning, or trading in securities themselves, or through subsidiaries, or controlled companies.

3(c)

3(c) takes it a step further and outlines specific exceptions to the classification of an investment company, which include broker-dealers, pension plans, church plans, and charitable organizations.

3(c)(1)

3(c)(1) adds to the exceptions list in 3(c) citing certain parameters or requirements that, if satisfied, would allow private investment companies to not be classified as investment companies under the Act.

3(c)(1) exempts the following from definition of investment company:

“Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons (or in the case of a qualifying venture capital fund, 250 persons) and that is not making and does not presently propose to make a public offering of such securities.”

In other words, 3C1 allows private funds with 100 or fewer investors (and venture capital funds with fewer than 250 investors) and no plans for an initial public offering to sidestep SEC registration and other requirements, including ongoing disclosure and restrictions on derivatives trading. 3C1 funds are also referred to as 3C1 companies or 3(c)(1) funds.

The result of 3C1 is that it allows hedge fund companies to avoid the SEC scrutiny that other investment funds, such as mutual funds, must adhere to under the Act. However, the investors in 3C1 funds must be accredited investors, meaning investors who have an annual income of over $200,000 or a net worth in excess of $1 million.

3C1 Funds vs. 3C7 Funds

Private equity funds are usually structured as 3C1 funds or 3C7 funds, the latter being a reference to the 3(c)(7) exemption. Both 3C1 and 3C7 funds are exempt from SEC registration requirements under the Investment Company Act of 1940, but the nature of the exemption is slightly different. Whereas the 3C1 exemption hinges on not exceeding 100 accredited investors, a 3C7 fund must maintain a total of 2,000 or fewer qualified purchasers. However, qualified purchasers must clear a higher bar and have over $5 million in assets, but a 3C7 fund is permitted to have more of these people or entities participating as investors.

3C1 Compliance Challenges

Although 100 accredited investors sound like an easy limit to monitor, it can be a challenging area for fund compliance. Private funds are generally protected in the case of involuntary share transfers. For example, the death of an investor results in shares being split up among family members would be considered an involuntary transfer.

However, these funds can run into issues with shares given as employment incentives. Knowledgeable employees, including executives, directors, and partners, do not count against the fund’s tally. However, employees who leave the firm carrying the shares with them will count against the 100 investor limit. The one hundred person limit is so critical to the investment company exemption and 3C1 status, that private funds put a great deal of effort into making certain they are in compliance.