July 6, 2010
It seems the more traders try to predict, the more it can’t be done. Just like we cannot predict future life events, we cannot predict future market events. The fantasy or “holy grail” that many traders believe is that we can predict the future of price activity. The reality is that we just cannot! Hopefully, I’m not bursting any bubbles out there, but better to hear it now than lose a ton of money later!
The greatest traders are those who realize this concept, accept it, believe it, and therefore trade based on the current reality in the market vs. the fantasy or market opinions, and always use stops and risk control. Great traders grasp the concept of risk and probabilities in trading. They also grasp the concept of money management, stop-loss setting, and simplification. In addition they understand that trading is both a science and an art!
If trading were just science, you could buy a mechanical trading system, start it, walk away, and come back and be rich. And if that system did exist, believe me, it would be so expensive that you and I could not afford to buy it; in fact it would probably be kept so secret that we would not know it exists! Now, don’t get me wrong, there are some good technical science tools on the market today, but remember they are tools only, not “holy grails.”
When I began my trading career, I used many trading indicators. My trading indicators indeed gave me indications that prices or trends may change, but they really did very little to help me consistently time those changes accurately enough to make money. In fact, if trading indicators and high powered computers where the answer alone, then why do 90% of the current traders loose money consistently using these indicators and computers? And isn’t it interesting that this is, approximately, the same percentage of losing traders before computers even existed!
Let’s take a few examples that may help illustrate what I mean:
Example One: Let’s say your trading and bullish divergence just occurred in an MACD oscillator you are using while prices are currently in a down trend. Right away you the trader will now be forming an opinion in your mind that the market is going to reverse and start a new trend upward. Thus you now have an opinion in your mind that prices should change from its current downtrend to an uptrend. So, you look for a reason to go long, an entry signal. Well one comes along and you take it. You think to yourself that you would not have normally taken that signal if you did not see bullish divergence but with bullish divergence you feel you should. Well, prices continue downward even lower and the bullish divergence remains bullish so you stay with your long position. Can’t go much lower you say to yourself. Well it does go lower and now you’re worried but you do not want to sell and take the now large loss, so you hold on. After all, the MACD divergence is still bullish but not as much as before. Well soon the divergence turns into no divergence and instead the trend down becomes apparent and you now must sell out. You now feel depressed, frustrated, and let down by your MACD oscillator! In fact if the oscillator was not even there you would never have been tricked into taking the trade to begin with!
Example Two: You get a trading signal to go long but this time your stochastic oscillator indicates that prices are way overbought already, so you do not take the long position. The so called overbought stochastic oscillator formed an opinion in your mind to not take the trade. Now you sit there and watch a great uptrend happen right before your eyes and the stochastic oscillator remains overbought during the entire 10 point uptrend! Had you never looked at the stochastic oscillator, you would not have had an opinion, and would have gone long.
Example Three: You see bearish divergence on the MACD oscillator so you form an opinion that the uptrend is ending and now you look to get out of your long position right away. So you use a trailing stop and exit the market. Only to find prices reverse and go higher, the MACD oscillator turn bullish, and you are left scratching your head.
I could go on and on but I think you get the idea. And that idea is that oscillators form opinions and opinions are not always in the best interest of the successful trader. You as a trader want to be like for example the “tail on a dog” which follows the dog everywhere the dog goes without knowing where the dog is going. All “un-grounded” market assessments form opinions and this includes Elliott Wave theory, and any and all forecasting methods. It is my experience that it is better to trade the current realities of the market you are trading then try to forecast market direction. Instead, learn to listen to what the market is actually saying to you, the realities of the current moment.
When you trade you want to create an environment without opinions! And furthermore that means it’s best to avoid reading financial newspapers, watching financial T.V., or listening to financial news in any format while trading.
News forms opinions, trading oscillators form opinions; analysis forms opinions, analysts form opinions, etc., etc. As traders, we really do not know how the markets will react to news and financial recommendations. If we think we do, then we are forming an opinion about the news! How many times have companies come out with great earnings and sold off right after the announcement. And when it does the news commentator comes out and says well the stock ran up already in expectation of the good numbers and then sold off. And if the stock continued upward, the news commentator would say, good earnings drove the market upward, etc., etc. They operate on 20/20 hindsight. We as traders do not have this luxury. The less opinions you have, the better trader you will be! And it is that simple!!!!
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Posted by Nicholas Wheeler