Learning about trends – smelling them
It’s often thrown around that ‘The trend is your friend’. I had heard or read these words several times in the last three years. I understood the words and the idea behind it. It is not a difficult thing to understand that the prices of instruments in markets move in trends. This is easy to see by watching a moving average (MA) or exponential moving average (EMA). But it is easy to spot a trend with the unassisted eye, as a significant movement of price over a certain time period emerges.
Exploiting a trend is a different matter. It is easy to see the trend after it has been on the chart. The chart itself presents a bias of historical information which has been processed mathematically. In live trading a trader is unaware what will happen to price in the longer term. He may not know that he is in a trend, though he may see early indications of price movement up or down. Looking at well formed patterns shown on charts makes them deceptively easy to spot. This ‘deception of hindsight’ bias built into charts can lure new traders into a sense of easiness about trading. Experience tells that real time trend trading is no easy business. Why? Because there is no picture painted out – there is no future written by patterns. There are only probability estimates and these live in our heads.
Some traders insist on using moving averages (e.g. MA or EMA). The problem with these, is that they too cannot see the future. As they are lagging indicators – relying on historical price data – they are late in the game. On occasions by the time an EMA100 crosses an EMA200, a whole lot of price movement has passed the trader. Moving averages of any type appear well formed on charts as trends because the historical data has been available and was processed. In live trading moving averages are not static at all, simply because the picture they are trying to paint is affected by new price information. This is not to say that MAs are bad for trading. My contention is that they are late in the game. The latter is not specific to MAs. All indicators suffer the handicap of having to wait on data to paint the next pixel.
Harmonic trading – a trend continuation strategy – exploits trends by looking for key patterns in the chaos, which give probability estimates of what may happen to price in a future. This method relies on well formed data and price movements that have happened. However there is a big problem evaluating PRZs – in the original Scott Carney method. If on a 4H time frame, a PRZ could take days before it is ripe for a strike. This is terribly time consuming. It works well though for some traders.
No in-depth exploration of techniques is attempted in this post (as Newtrader.club does not do tutorials). The point of this post is not to evaluate different methods or trading-techniques.
The key issue is ‘learning about trends’. What does that mean? It means paying less attention to all systems and methods for assessing trends – so called trend analysis. This may seem rather crazy. To learn about trends one has to experience them. How does one experience a trend? One way, as the author often does it, is to stare at charts for long periods of time – lower time frames. This direct observation is a representation of what happens on higher time frames. In looking closely at price movements, there is opportunity to reference knowledge of harmonics, trend lines, channels, support/resistance levels – and much more. This direct sort of experience means that one has a feel for the insides of the market in real time. Real time – is important. When the totality of knowledge is referenced (not used purely for learning by observation) in movements of prices, one can truly understand at a deep level what the chaos to be managed is about. One can see for oneself how market trends obey and disobey various methods of analysis. One learns about the character of trends. Importantly, different instruments have different ways of behaving. So there are different understandings of different trends. How can one truly learn about the ‘personality’ or character of different instruments? There is no manual on any of the latter. One just has to spend time with them.
One can read all about it but to truly learn about ‘the stuff’, one has to get very close to the subject matter and mingle with it i.e. live with it in real time, and probably for a long time. This is no different to studying people, or wild life. You spend time interacting with them in their presence. This is entirely different to virtual interactions such as by video-conferencing or email, which do not give information to all your five senses. Yes – the smell of a person may tell you something about them. Interacting live with charts in the markets is like getting so close to a person, that you can smell them!
I’ve referred elsewhere about learning to drive etc. The learners manual may equip one sufficiently on the basics. One may be able to drive the car. But one is not an expert driver. Novices to trading are punished or ‘killed off’ early on, for just studying ‘the trading manual’ (the stuff on the net) and getting on with it. Trading environments are pretty impersonal. The markets don’t know you or care about you. It is right even when you think it is wrong. It knows no set of rules. In fact the markets do not know up from down – you do – so you may think that price moving up is a great thing. It isn’t. Yes – you who reads this understands the words but have you seen this sort of stuff? Have you gotten close to the markets, to be brutalised and rewarded? The markets are mindless though contributed to by the interaction of minds. That may be a strange thing to say but the markets truly have no ‘mind’ as we know it. I would concede that markets represent a collective will, but that does not give them minds. And yes on occasions I would have said that ‘the markets have a mind of their own’. That’s speaking figuratively.
Learning about trends is also the experience that brings understanding of when trends are exhausting themselves. This can be studied from written materials. However, the best depth of understanding is that level of experience where one can spot the phenomenon without need of a manual.
In wrapping up I would summarise some other reflections. Listening to many a true expert trader, I’m usually impressed that they have not been using a wide range of indicators. When one is learning to ride a bicycle, balancers may be necessary – and that’s how I now look at indicators. I’m not suggesting that all indicators should be discarded. They are often necessary but it’s about how, when they are used, and in what combinations. Again – there is no magical combination and certainly no manual about the latter.
You write your own manual because you are different to everybody else. Get learning. Get writing.
Whilst volatility is necessary in trading there are issues with extreme volatility that traders needRead More
Disentangling currency pairs
Many a new trader will find listen to the news about which currency is doingRead More