You Already Have the Answers You Need

Posted January 25th, 2011 by Sam Evans in Education

You Already Have the Answers You Need

Is it just me or does time seem to fly faster every single day? I really can't believe that we have just seen the turn of 2011 and if you are anything like me, you should be full of positive thoughts and resolutions to take you on the journey ahead. I believe that it is vital at this early stage of the New Year to set our goals for the coming months, and use this time as a good solid reason to move forward in developing not only our trading activities, but also our aims for life in general. To most new and struggling traders, being at the screen and seeking perfection in our trading performance can easily become our single focus, and this can often ironically lead to frustration and despair as we enter the market with a newly formed confidence, only to quickly discover that nothing has really changed from the last year after all. Trust me, I have been there and it is my hope in this article to make sure that you don't fall into the very same vicious circle as I had.

In numerous articles of the past, I have talked about what I feel are the key factors and elements which go towards making and building the complete trader. In the very first instance, we all need to recognize that the one thing none of us can escape in trading is loss. Accept this truth early in your career and things will improve by leaps and bounds. Try to avoid loss and inevitably, your actions will result in misery. This may sound like a harsh statement to make when first read, but in stark reality of speculation, we also need to understand that the market itself will never be anywhere near as forgiving if we fail to protect ourselves.

Having taught a wide array of students through Online Trading Academy classrooms worldwide and in the ongoing graduate Extended Learning Track (XLT) program, I have noticed how so many students of the market can easily fall into the traps of over-analysis and to this day, I feel that this single aspect of trading is perhaps one of the greatest reasons why so many speculators find it increasingly difficult to maintain consistency in their performance. At first glance, the need to over-analyze could be interpreted as a means to find a way to win more often than not, thus resulting in a positive cash flow for the given trader. I would go as far to say that every single person trading the markets in some way, shape or form has fallen victim to this dynamic at some point in the journey. However, a deeper understanding of the mental aspects of "grail searching" tells us that really a trader is not looking for a system to help them win more frequently, but rather a system which will prevent them from losing more often than winning. This simple observation highlights the inner psychological frailty which is ever-present in all human minds and which needs to be conquered quickly in a speculator's trading career.

We have all made a "discovery" when looking at our charts which falsely lures us into thinking that we have finally found something which works the vast majority of the time, only to enjoy limited success for a short run of time, before then falling foul of this latest system and ending back to where we started in the first place. More often than not, this happens when a trader attempts to use too many technical indicators on a chart, while searching for the magic signal which doesn't actually exist. The interesting flip-side of this scenario is that the reliance on technical tools alone can easily (and wrongly) distract the trader's attention from the things which he or she needs to be focusing on. For example, take these two separate chart layouts:

Figure 1

In this first example, we are looking at the GBPUSD on a Daily chart with a whole host of indicators applied, including Bollinger Bands, Moving Averages, MACD, Stochastics and RSI. While this array of tools may seem impressive at first glance, we need to answer one question above all else: What do they tell us that price fails to itself? Compare this chart to the following one:

Figure 2

Here we have the very same chart of GBPUSD, but with all of the technical indicators removed this time. By simply highlighting the most obvious traits of price action like Trend, Support and Resistance, the objective analytical trader can now cut through the noise of derived indicators (which should be noted only function as a result of price itself) and gauge the next possible move for the pair. Any indicator signal given from the previous chart will always lag price itself, seeing that the indicator requires price to move in the first place, thus slightly defeating the objective of using them in the first place. From looking at this example, we see that following a steep and usually unsustainable uptrend in the summer months, the pair has now made new lows and lower highs, showing potential weakness in the Cable. One could simply look to short the pair at one of the previous areas of resistance following a rally in price, for a low risk, high reward trading opportunity should the paring go on to make further lows in the New Year. I am not concerned with the result, but rather the setup itself and what the chart is showing me objectively above all else. I know I may be wrong and I can live with that, but loss will be small and reasoning for the trade logical and objective as opposed to over-complicating my analysis with what an indicator is telling me to do.

While this approach may seem too simple for some, I know that in my experience of trading, simple always offers me the path of least resistance. So many novice speculators make the mistake of believing that there is some magic formula out there or a secret to trading success, but in reality, this is simply not the case. Only the strong of mind, disciplined in nature and simple in analysis have the greatest chance of attaining consistent profits in trading, which itself is the complete opposite to what many think is needed in today's trading environments. Instead of frustrating yourself with searching for the answers to questions which cannot ever be answered, you should instead sit back and see that you already have them in the palm of your hand...

Sam Evans "