Insights Good Chart Readers Can Live By
Millions of traders rely on charts to generate trade signals and find entry and exit points, but technical analysis must be a strictly disciplined, rule-based study in order to deliver precision results.
Many traders use charts and technical analysis to determine the different patterns and direction in individual markets, to identify the overriding or macro picture, and to time entries and exits for their trades. If you use charts, or are considering using them, the most important thing to realize is that you need to keep your analysis constant from one scenario to the next. How you determine pattern and direction on one time frame in one market is how you should make those measurements in all time frames and in all markets.
Your tools and measurements should always be uniform. While you may favor an exit based on the amount you risked on the trade, your entries should be the same regardless of the market or even the time frame traded. If you favor a trade entry based on a short-term trendline break accompanied by a stochastic cross, then your entry should always be based on those two occurrences.
While we encounter different trading scenarios every day, how we analyze the markets and enter and exit trades never varies because we use the same trading plan every day.
Avoid the Dreaded “Analysis Paralysis”
As a chartist, you need to be very careful about what overlays (i.e. trendlines, retracements, pivots, and indicators) you place on your chart. A confusing chart reflects a confused mind. It is difficult for even the most gifted minds to keep track of more than four or five simultaneous occurrences. Most people quickly lose track around three.
It is very important that you know exactly what each overlay and indicator is, and exactly how to use them, or they are going to confuse you and drag down overall results. It's easy to think that a trading plan is a linear checklist—and it is, to a degree—but in the constant bustle of the markets, there is no time to shift focus away and leisurely run down a checklist.
A clean, orderly chart where they understand everything at a glance is the rule for professionals. I label the different patterns in the market with text and color code all my overlays so they are the same every time. I also never change the market or the time frames on my screens. My eye is trained to go to the same place for the same information in the same market every time.
Never rely on your memory when you can set an alert, or at least make a physical note. In the time you can answer a Skype or your cell phone and have a short conversation, you can miss a trade signal. When trading, you should never let yourself get distracted for longer than a glance. And just as you need to protect yourself from physical interruptions, you need to train your mind to block out distractions.
If you know that you need the market to create a specific occurrence at the close of a candle before you can act, why waste thoughts on trying to anticipate when this might happen or what might happen afterwards? You need to quiet your mind as you observe the market's behavior as it moves from set-up to signal and back again. The more relaxed and at peace you are, the more receptive you will be to what the market is telling you, and believe me, the only way you will succeed as a trader is to have a method that is focused on what the market is doing, not what you think it is going to do!
“No Trigger, No Trade”
Market analysis really becomes an art form when you are so familiar with the mechanics of your method and so experienced at observing a market’s pattern as it unfolds that you start to envision the next market move correctly. This is your trader's intuition, and it occurs not because you are so smart, but because market growth and contraction curves mimic the same proportioned patterns we see all around us in nature and beyond.
Fibonacci’s .618 and Gann’s .625 can be found in everything from sea shells to flowers, to the proportions of a model’s face, to the swirl of a galaxy. Whether we know it or not, certain proportions are pleasing to the eye, and some are frightening to the wallet when we’re caught on the wrong side of them!
Before we start considering proportions and intuition, however, we need to focus on our trading plan and be reminded that the impetus to place a trade must first come from price and the chart, and not from our intuition or opinion.
At Trading University,we like to say “No trigger, no trade." We cannot take action until price gives us that specific set-up and mechanical signal that we have already addressed a hundred times before. We don’t decide it’s time to go long or short the euro, for example; the market itself tells us by way of our trading plan.
Imagine how easy your job as an analyst/trader becomes when you fully realize it's not you making the trading decisions, but the market instead! At the end of a good day or week, don't let your ego get away with taking the credit; remember to thank the market.
Bottom line: We must be aligned with the market’s pattern and direction on the chart and allow that to lead us. Only then may we allow our own experience to contribute.
By Jay Norris, author, The Secret to Trading Forex: Risk Tolerance Threshold Theory
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.