Lessons from the Pros

Same Tools, Different Thoughts

I have made my mark in trading and trading education by thinking differently. One of the things I am always fascinated with is how we are taught to do certain things and how we learn, specifically when it comes to anything that has to do with competing. In the United States for example, we compete for jobs, money, better this, and better that… Have you ever realized that in the biggest democracy in history, our school systems don’t teach classes on how to compete? In capitalism, there is typically a winner and a loser unfortunately, yet people in this country are never taught in school how to compete. In fact, it’s the opposite. The natural education path of our school systems train everyone to think the same way. This is bad news for those who have those herd mentality blinders on and great news for those who focus on the art of competition. It all begins with thinking differently. If you bring herd mentality mindset to competing in the trading markets, you will likely hand your account over to those who think different and think the markets properly.

The books that teach conventional Technical Analysis tend to teach it the same way which offers little to no edge. Be careful taking the same action the masses do in the markets; they are not the ones who consistently profit, they lose. Let’s take a look at two ways to use these same conventional principles a bit differently than conventional thought.

Trend Analysis

Most people know all about assessing a trend. Typically, people look to see if the market in question is making higher highs and higher lows for up-trends or lower highs and lower lows for down-trends. Others use moving averages to determine whether they are sloping up for up-trends or down for down-trends. These are the two most popular ways to assess a market’s trend. Another way to assess a trend is to look at the pivot lows in up-trends and pivot highs in down-trends. Let’s take the up-trend for our example. Looking back at recent prior data in any market on a price chart, it is easy to see what the current trend is. What is equally important is to assess how healthy the current trend is and when and where it may end. One way to do this is to measure the distance between the lows of the pivots that make up the up-trend. Notice the up-trend in the chart below; the distance between the pullbacks (pivot lows) is decreasing as the trend moves higher. This means the trend is becoming weak and is likely to end soon. The logic behind this is that a strong trending market does not pullback often. If it does, it is not a strong trending market anymore. Keeping with our constant supply and demand theme, remember that a trend on any time frame is really a supply and demand imbalance moving back into a price level of temporary balance. This is a larger time frame chart but the assessment can be done in any market, and any time frame.

Figure 1

Moving Averages

Figure 2

Moving averages are another common piece of conventional Technical Analysis. The two ways most traders use them are first, to determine trend by looking at the slope of the moving average. Second, they use the moving average cross to time an entry (buy or sell signal) into a position or an exit out of a position. This technique is very flawed in that moving averages by definition will lag price; they have to. Adding any tool that lags price to the execution portion of your trading plan adds risk and we don’t want that. Again, instead of thinking the same way as your competition, let’s take a slightly different view of moving averages in a way that may help us gain an edge over our competition. Notice in the chart example, I have circled the moving average cross. Moving averages cross because there has been a relatively strong move in price. At the origin of a strong move in price, demand and supply are out of balance. Price levels where demand and supply are out of balance are where we typically find low risk, high reward, and high probability trading opportunities. So try identifying moving average crosses in the past and let that lead you to investigate the price action in that area. Chances are high that you will find a key demand or supply level there. In other words, when you find a moving average cross above or below current price, look slightly to the left of the cross and investigate the price action as that is where the origin of the strong move likely was which means a demand / supply imbalance.

These are two examples of how you can take conventional Technical Analysis, look at it and use it slightly differently than your competition in hopes of attaining an edge over them. While I don’t use these two examples in my own trading, I make sure that my tools and strategy are VERY different than my competition, almost opposite. This is the only way to be consistently profitable speculating in markets. The purpose of today’s piece was to encourage you to think differently and not follow the herd and their very flawed thought process.

Have a great day.

- Sam Seiden sseiden@tradingacademy.com