Monthly Archives: July 2011

Comfortable Lies and Uncomfortable Truths

"We do not err because truth is difficult to see. It is visible at a glance. We err because the lie is more comfortable."

… Alexander Solzhenitsyn

 

Are comfortable lies holding you back from making progress as a trader?

Is the time and effort you currently devote towards the comfortable lies, perhaps better spent in learning to accept some of the uncomfortable truths?

Comfortable Lie:

  • Market insider shares secrets to massive success. Only 5 copies left. Be one of the lucky few to own the Forex Orgasmatron.

Uncomfortable Truth:

  • There are no market insiders sharing secrets. There are no secrets. The Forex Orgasmatron will never leave you satisfied! There is no Holy Grail magic system that can make all your dreams come true. Success requires talent. Talent requires time and effort to develop.

Comfortable Lie:

  • I just need to trade this pattern with discipline and I’ll be a success.

Uncomfortable Truth:

  • Trading is not about blindly taking pattern based entries. Trading is about knowing when to take your pattern based entry and when to avoid it. And on those occasions when you do take the entry, it’s then about knowing when to hold your position and when to scratch it.

Comfortable Lie:

  • If I just set a target of three times my risk then I only need to be right 25%
    of the time.

Uncomfortable Truth:

  • As you increase your target, your winning percentage will also reduce. You cannot just increase your target and expect to maintain the same winning percentage. Quite likely you may end up getting close to that 25% winning rate. How will that affect your mindset? Targets need to be suited to the market environment. Sometimes, in some environments, the market will not offer three times risk.

Comfortable Lie:

  • I just need to trade without emotion and I’ll be fine.

Uncomfortable Truth:

  • You can’t! You’re human! Emotions are part of being who you are. You cannot just
    block them out. You need to understand them and learn to work with them.

Comfortable Lie:

  • The broker took out my stop.

Uncomfortable Truth:

  • Perhaps you put your stop in a really dumb place!

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3 Simple Steps to Accelerate Your Learning

In the absence of a curriculum for trader training, and of a mentor who can provide daily guidance, oversight and correction, we are largely left on our own to both chart and navigate our path forward from novice to (hopefully) becoming a professional and consistently profitable trader.

All too often though, the way forward is obscured. And we find ourselves scattered and confused as we are bombarded from all directions by conflicting and ambiguous advice; regardless of whether from well-meaning and respected educators, unscrupulous promoters of Holy Grail trading solutions, or from our own exploration within the mediocrity of trading forums.

We lack focus!

Our efforts are spread too thinly across too many fields, allowing us to master none.

Our progress is often more a result of chance, as opposed to planned and determined application of effort.

Our motivation levels parallel our equity curve, with bursts of excitement and enthusiasm one day, followed the next day by crushing defeat and a feeling of never-ending despair.

Ok… enough of that…. the picture is painted. What's the solution?

The following is a concept that will aid in your trader development, despite the lack of curriculum and despite the lack of full-time mentor. It doesn't replace any current routines and learning strategies which you may find effective; rather it should work easily and effectively alongside them. Or if you have no current plans for your own trader development, it will operate effectively as a starting point. It ensures progress through providing that which was missing from our previous attempts… FOCUS.

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What is Price Action Analysis?

I’ve received a great question in response to one of my old videos at YouTube:

  • lots of traders criticize indicators (and correctly so, apart from the moving averages and RSI, I don’t find these oscillators or macd good) and prefer price action.. what exactly IS price action, I mean, what methods would you categorize under price action? Thanks.

Price action analysis is simply the analysis of charts with a focus on price, rather than on indicators which are a derivative of price and therefore lagging.

Underlying all price action analysis is Dow Theory; a set of principles or guidelines for price movement developed by Charles Dow in the late 19th century and later refined by William Hamilton and Robert Rhea. Dow Theory can essentially be considered the starting point for modern day technical analysis. Of particular importance is the way Charles Dow defined the market stages of accumulation, participation (trending) and distribution. And how he used peak and trough analysis (swing highs and lows) to define price trends.

For a good overview of Dow Theory, see the following Investopedia tutorial which commences on this webpage: http://www.investopedia.com/university/Dowtheory/ . Please note that at the bottom of the page you’ll find links to the following nine sections (ten in total).

Beyond Dow Theory, analysis of price can largely be thought of as comprising two main approaches (at least as I see it).

The first is what I call pattern analysis. Most traders will be aware of this style of analysis, and in fact for many it will be the only type of price action analysis that they’re aware of.

Pattern analysis can also be further broken into two parts – macro patterns and micro patterns.

Macro patterns are the larger scale patterns describing the general market movement. You’ll recognize the names of these patterns, such as head and shoulders, double tops, double bottoms, triangles and flags. This work can be first attributed to Richard Schabacker, and later documented in the classic technical analysis book, “Technical Analysis of Stock Trends” by Robert Edwards and John Magee.

Micro patterns are the smaller scale patterns describing short-term market movement. You should be familiar with the basic candlestick patterns and price-bar patterns, as defined in the following video series:

The second approach to price action analysis appears to be less well known.

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