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When you first learn to trade you will most likely be misled by the alleged use of the massive information that is out there, a successful trading career does not require you to use level 2 stock charting quotes, breaking news on stocks, technical analysis, fundamental analysis, volume and options data etc, all at the same time. Attempting to use just 2 of these techniques combined can be confusing enough, let alone all of them.
Complex systems make you lose focus and result in conflicting opinions about the markets.
This is more evident in today’s markets where information is made available to thousands of traders at light speed. Today’s intraday market moves, particularly those on report release days are a result of the emotions of these thousands of people collectively and not reasoned judgement relating to economics. Also you can use technical analysis tools alone, on multiple timeframes, and still end up having conflicting signals, especially to inexperienced new traders. Even the simplest of technical signals and chart formations such as a Head & Shoulders formation can be too confusing. Why? Simply because these technical analysis techniques are more complex than they look, a minor overlooked detail makes all the difference and can turn a selling signal into a buying signal.
So is technical analysis ambiguous? At a glance it appears to be so, but what good traders do is this, they look at charts, at multiple time frames, if weekly charts confirm formations seen on the daily etc. If they still can’t spot any reliable indications on market direction they turn back to longer term fundamentals, but their approach is simple at every level.
Trading on news and report releases in hope of catching fast, volatile intraday market moves can sabotage your trading system.
It’s impossible to develop a simple trading system based on the news and economic news releases, certainly not without having a mentor teaching you right from wrong.
Trying to add the ‘news’ component into your early trading system will simply sabotage your trading altogether! Here’s why: Most new traders do some lame mathematical calculations on compounded theoretical gains based on the chance of getting on the right side of the market being 50%. – Big misconception! According to real life traders like George Angel and Afshin Taghechian the truth is that the real chance you have of getting on the right side is a tiny 12.5%.
Yes that’s right; the seemingly fifty fifty probability game is an actual losing game because you have to figure out these variables:
A) Is the news about to be released, really news or has it been already priced in the markets?
One more fifty fifty binary event variable.
B) Will the news to be released be better or worse than analysts expect?
That’s one more fifty fifty binary event variable.
So the supposed 50% chance trading idea gets divided by 2, twice more, giving 0.125 or 12.5%. A guaranteed way to lose money in the long run.
The best approach?
The best thing you can do is find a mentor, a veteran trader with a system that starts simple and ideally uses technical analysis, so you won’t have to worry about breaking news, Federal Reserve interest rate policy etc. Technical analysis based trading systems are easy to understand, emotionless and this takes a huge complex factor out of the equation.
Paul Murphy is a passionate and successful trader. Always in search of the best trading systems, and researching ways to help you be the best trader you can possibly be. Discover how to improve your trading performance with articles and interviews at his blog: www dot trading powerhouse dot com