Key points covered in this podcast
- Simplifying your approach and removing less useful indicators
- Why there are really only four outcomes of a trade
- The power of intermarket analysis
JC Parets is an accomplished and highly respected technical analyst and founder of technical analysis resource All Star Charts. In this edition of our podcast Trading Global Markets Decoded, our host Tyler Yell talks to him about intermarket analysis, removing useless indicators from your strategy, and how the social revolution brought together the leading trading and investing minds. Benefit from the technical analysis tips with JC Paret and listen to the podcast by clicking on the link.
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JC Parets credits the social revolution of 2008-09 with bringing together the investor and trader community in a fresher, more collaborative way.
He was approached to be part of the StockTwits Network, comprising leading industry minds keen to share advice. ‘Fortunately I was able to curate the advice of people I was surrounded by, and through my blog that’s been running for ten years, I can go back and see what I was thinking and when. It’s so therapeutic to put thoughts on paper and be able to benefit others.’
In terms of JC’s trading style, he finds himself simplifying his approach more and more as time goes by. ‘I see people adding indicators and building algorithms, while I’ve been eliminating these tools over the years.’
He doesn’t use a 50-day moving average, any oscillators or momentum indicators other than RSI, and uses RSI in two basic ways. While he uses a 200-day moving average, he says he is ready to eliminate it from his arsenal, as he finds it less and less valuable.
‘I use it to identify the direction of the primary trend, but price really lets you do that without looking at moving averages, higher highs and higher lows,’ he says. ‘I traditionally have used moving averages as just a supplement to identify the primary trend.’
Pay Attention to Opportunity Cost
JC discusses how opportunity cost is often overlooked by traders. ‘If a trade is going sideways, it’s about more than just not losing too much money, it’s the opportunity cost of what else could we be doing with that money. The trade may be sideways but really you have lost because you could have been in something more profitable.’
He’s fascinated by human behaviour. ‘Every day as technical analysts, we’re watching the behaviour of the market, and that’s driven by supply and demand. And that supply and demand dynamic is being driven by our crazy minds,’ he says.
JC Parets of All Star Charts
The problem with humans is our ego, he adds. ‘We are afraid of taking that loss. Our objectives are completely screwed up, because when our stress levels are elevated, which is the case when money is involved, we do the wrong things at the wrong time.’
Ultimately, we’re not here to be right and feed that ego, we’re here to make money, he stresses. ‘So the idea is to manage risk, not to be right. We could be wrong half the time and still make a fortune. That’s the beauty of this thing.’
The Four Outcomes of a Trade
JC sees there being only four potential outcomes in a trade. ‘You can make a little bit, you can make a lot, you can lose a little, and you can lose a lot. Three of these are ok. As long as you can eliminate 25 per cent of those outcomes, you are going to win. It’s not about being right all the time – it’s about managing risk.’
Who are his heroes? ‘I am a John Murphy disciple. When I took the CMT exam, there were a zillion books and John wrote many of them. ‘Technical analysis of the Financial Markets’ is a good one. Then another is [Robert D.] Edwards and [John] Magee’s ‘Technical Analysis of Stock Trends’.’
When it comes to time frames and trading: ‘I don’t care what happens today, or next year, or next quarter. We want to make money this quarter, so we look at weeks and months.’ JC has his long-term charts for structural perspective, then breaks it down to short-term charts, looking back 9-15 months for more tactical opportunities.
But those fall within the context of a long term structural trend – the top down approach, using multiple timeframes. ‘I look at weekly and daily charts as my multiple timeframes, while some look at intraday charts, maybe 30 minute charts , and daily charts. But it’s still the same principles being applied to the market.’