Technicals as Memetic Ideas

Patternicity, Apophenia and Classical Trading Voodoo

Preamble

I don’t consider myself a technical trader, however, I have found the methodology useful in its tractability in decision-making under uncertainty and demarcating risk/reward asymmetries. I have been sitting on this essay, or at least a version of it for about a decade now… Hence, I figured it’s time to publish it. I hope you find it useful.

Patternicity, Apophenia and Classical Trading Voodoo

Human cognition is a mosaic of pattern recognition, stitched together by evolution to navigate an uncertain world. This tendency—known as patternicity—is the cornerstone of both survival and error. In financial markets, patternicity expresses itself most vividly in the realm of technical analysis. The technician, that classic archetype of market participants, relies on a framework of lines, patterns, and statistical tools to divine future price movements. Yet, the rational observer might dismiss this as voodoo—a constellation of apophenic beliefs founded on little more than subjective interpretation. Still, these ideas persist, proliferate, and even influence markets in profound ways. Why?

The answer lies in recognising technical analysis not merely as a methodological framework but as a set of memetic ideas—ideas that replicate, evolve, and exert influence within the intersubjective domain of financial participants. By exploring the intersections of behavioural economics, evolutionary psychology, sociology, and cognitive science, we uncover why technicals, despite their tenuous claims on reason, hold an enduring place in market practice.

The Cognitive Roots: Patternicity and Apophenia

Humans are pattern-seeking creatures. From recognising faces in clouds to spotting predators in the brush, our brains are wired to identify regularities. The cognitive architecture biasing humans towards patternicity confers survival advantages but also leads to errors of inference. Apophenia, the propensity to perceive connections where none exist, is the darker twin of patternicity, and in financial markets, it manifests in the interpretation of charts and patterns.

Classical technicians see head-and-shoulders patterns, trendlines, and Fibonacci retracements not as arbitrary squiggles but as harbingers of price movement. Evolutionary psychology suggests that such pattern-seeking behaviour is deeply ingrained, a vestige of our lizard brain—the limbic system, responsible for our base instincts, fight or flight and fornication. But the technical trader does more than observe; they act, turning their degree of belief in a given idea into a capital commitment. In this way, their apophenic ideas are no longer inert; they become causal forces in the market’s reflexive ecosystem.

Technicals as Sociological Artefacts

While technical patterns may lack inherent logical consequence, they thrive in the intersubjective realm where shared beliefs create self-fulfilling dynamics. In FX markets, where imperfect information reigns, technicals often serve as a common language among participants. A line on a chart—an apparent boundary—may hold no objective power. Price action becomes a real-time socially constructed referendum, making price a contest where if enough traders see it as a support or resistance level, their collective actions imbue it with causal efficacy.

This sociological dimension positions technicals as memetic artefacts. According to Richard Dawkins’ definition, a meme is an idea that replicates, evolves, and survives based on its appeal and utility. To varying degrees, technicals meet this criterion. Their replication across trading communities and platforms is driven by the psychological comfort they provide, their adaptability to new contexts, and their ability to organise collective behaviour. Like any meme, they compete for credence among participants, and their survival depends on perceived efficacy rather than epistemic rigour.

Reflexivity and Second-Order Thinking

George Soros’ theory of reflexivity—the interplay between market participants’ perceptions and reality—offers a lens through which to view technical analysis. A technical pattern becomes significant not because it predicts the future but because enough participants believe it might. This second-order reasoning anchors technicals within the decision-making process of traders.

In reflexive markets, technicals can act as Schelling points, focal points around which expectations converge. Consider a widely observed support level. Traders may buy not because they believe in the intrinsic value at that level but because they anticipate others will, like a Keynesian Beauty Contest. Thus, technicals gain their efficacy not from inherent logic but from the collective behaviour they catalyse. Reflexivity transforms technical ideas from mere voodoo into actionable hypotheses with market impact.

Experience, Credence, and Degrees of Belief

The credence traders place in technicals often stems from personal experience. A trader who has witnessed a pattern’s success will naturally assign a higher degree of belief to similar setups. This Bayesian updating—modifying one’s belief based on evidence—is central to the technical mindset. However, this process is fraught with cognitive biases, from overfitting to recency effects, which can distort the weighting of past outcomes.

Despite these pitfalls, experience imbues technicals with a pragmatic legitimacy. Traders trust the patterns that have worked for them, and this trust translates into willingness to risk capital. The size of their positions reflects the strength of their belief, which in turn reinforces the pattern’s presence in the market’s collective psyche. It is this interplay between belief, action, and outcome that cements technicals as functional tools, despite their epistemological fragility.

Technicals as Memes: An Ontological Perspective

Technicals exist at the nexus of reason, experience, and credence, straddling the line between subjective interpretation and intersubjective validation. Ontologically, they are neither pure abstractions nor grounded certainties. Instead, they function as memes within the market’s social fabric, their influence contingent on the degree to which participants adopt and act upon them.

From a Dawkinsian perspective, technicals survive because they are effective replicators. They adapt to new market conditions, borrowing from behavioural economics, neuropsychology, and even aesthetics to appeal to the pattern-seeking instincts of traders. Their memetic nature ensures their persistence, even in the face of skepticism from rationalists who demand more robust foundations.

Conclusion: Technicals in the Analytical Framework

In our analytical framework, technicals occupy a secondary yet indispensable role. They are directional, forward-looking, and purposeful; qualities shared with any other speculative idea. While their claims on reason are tenuous, their sociological and psychological dimensions make them valuable ancillary tools. They shape market behaviour through their memetic propagation, their reflexive influence, and their ability to organise collective action.

Ultimately, technical analysis is a mirror of the human condition—a blend of reason and irrationality, experience and intuition, credence and doubt. To dismiss it as mere voodoo is to ignore its profound impact on markets as cognitive, sociological, and memetic constructs. In understanding technicals as ideas that bridge the subjective and the intersubjective, we uncover their true significance in the ever-evolving landscape of financial speculation.

Thanks for reading,

C.H-T.