Have You Evolved Yet?
Have You Evolved Yet?
I had to laugh while reading Gabe Velazquez' article titled, "The Evolution of a Trader." I was already putting this Lesson together, with my own take on a trader's evolution. While Gabe focused more on taking losses and (hopefully) learning from mistakes, this week I will focus on what gets added to and subtracted from charts over time.
Evolution Path One
In the beginning of a trader's career, very often he or she will start off down one of two chart setup paths. Path One begins with a purely naked chart - all you see is price action displayed by bars, lines, or candlesticks.
Seeing this pure price action seems too easy; trading must be harder than just looking at this chart right? It is, but not much harder.
Bewildered by all of the flickering lights and flashing numbers and lacking confidence in his ability to read charts, this new trader will quickly run out and buy a book on trading, or scour the internet looking for the "Holy Grail" of trading. This Holy Grail might be a Bollinger Band with a moving average crossover with a Commodity Channel Index and a Moving Average Convergence/Divergence over a Slow Stochastic above the Relative Strength Index inserting the Gobbledygook Assymetrical Triangular Parabolic. Try typing that three times fast! When all of these super awesome indicators line up and tell you to buy or sell, you have a very high probability of being right. At least that's what the source of this trading Holy Grail will tell you! In reality, by the time all of these indicators line up, you've already missed the lowest risk entry. Put another way: You're late to the party. Being late in a trade means your stop loss is much larger and your profit target is smaller. By the way, there is a Holy Grail in trading. I'll give it to you in a later issue.
What do you see on this chart? The price has already left the Bollinger Band, closed below a moving average, the Commodity Channel Index is trending down but almost into oversold while the MACD showed divergence and a crossover with the Stochastics showing a divergence and a crossover and the Relative Strength Index looks flat, I think. I think. It's almost impossible to see what the actual price action is doing with all of this extra information on the chart! (You would be surprised at how many students I've had over the years who immediately put several indicators on their charts when we trade in class. By the time our class is over, their charts look a lot like the next one.)
Over weeks, months, or even years if this trader still has any trading capital and patience left, he will remove some of these indicators and settle on just one or two.
Evolution Path Two
The second path a trader may take in his or her evolution of chart setups is to learn supply and demand levels, and perhaps throw in an indicator to confirm his or her assessment of the chart.
Very often, this trader comes to an Online Trading Academy class or two, and arrives at this level of evolution in a matter of days. Always remember that all of the technical indicators are using price and/or volume to show you what price has already done. Every one of these indicators have good ways to use them, and bad, and every indicator has a fan base who thinks that their particular favorite is the best!
The main lesson is this: Many people make the mistake of making trading more difficult than it has to be. I remember the first time I stepped onto a SOES (Small Order Execution System) trading floor back in 1996. Being a young and arrogant former stock broker, I thought I knew it all. When I met the most successful trader on this floor, I laughed when his chart layout was shown to me. His charts were nearly naked. Of course, my first thoughts were that this person didn't know what he was doing, which couldn't have been further from the truth. I made charts more complicated than they had to be in my own evolution, much like many of you have! Today, my charts look a lot more like chart 1 than chart 2!
Please don't make the time and money wasting mistake of experimenting with dozens of indicators on your charts; learn to trust your supply and demand levels!
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