Over-analysing the market has dangers
MANY of the world’s most successful traders spend years refining their trading technique to strip away complexity and arrive at a simple trading style.
“The problem that we find with a lot of people new to financial markets is that they study technical analysis and learn dozens of different ways to interpret the market using charts,” says Hardus van Pletsen, CEO of online broker QuickTrade, a Financial Services Conduct Authority-licensed overthe-counter derivatives provider (ODP).
“They load up their charting programmes and it looks like a Christmas tree it has so many lines and colours. We teach newcomers to the market that knowing what these indicators are is important, but trying to interpret too many of them at the same time will just confuse you. We have found that people who over-analyse the market don’t know what to do, and often make bad trading decisions that result in losses.”
Some of the best traders rely on nothing more than a candlestick chart, and they trade only in the direction of the market. If the market is trending bullish, only long trades are allowed. They look for areas of consolidation in the charts with a 1:2 risk-reward ratio. In other words, they are prepared to risk US$100 in the hopes of making a US$200 profit.
Most of the best traders place far more emphasis on risk than on technical analysis.
Some use trend lines to determine the direction of the market, and then fine-tune their entries by waiting for the price to consolidate.
“When the rising red trend line is broken by the down-moving price, we have entered a short-term bear trend and therefore will only short the market until the trend changes,” says Van Pletsen.
“The horizontal light blue line indicates an area of consolidation, so we would enter a short sale at this level.
“We are looking to make twice as much profit as we are prepared to risk, so we would place a stop-loss outside of the consolidation range, say at 1,0756. Our take profit level will have to be double the distance from our entry to the stop-loss, so it will need to be at around 1,07186.”
“One does not need to get complicated in developing a trading style and one can use minimal technical indicators, or none at all — just relying on good old candlestick charts,” says Van Pletsen.
The main thing is to focus on your risk-reward ratio.
“If you make US$200 for every US$100 you lose, you can still end up in profits, even though you may be losing more than 50 percent of your trades. And that is how the most successful traders do it. They see it as a numbers game, where profits are steadily accumulated.”
There are many investors who trash technical analysis, opting instead for the directional crumb trails left by earnings and dividends. Technical analysts are not particularly concerned about this, believing all the information you need to know about the company, index or forex pair is contained in the price chart.
There are many technical analysts who have been extremely successful simply by understanding chart patterns and when to take a trade.
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