Warning: Controversial trading subject matter (that may change your outlook!)
Why clutter your mind with information that won’t help your trading?
Asking “why” is something many people ask but don’t know how to implement the answer into their trading.
Let’s use an example of something that many people are quite familiar with – oil.
(then I want to show you when why is a great question)
This chart clearly show that crude has been falling in price for quite a while. What is causing the drop?
You can certainly go into geopolitical factors but at the end of the day, generally less demand for oil and a larger supply causes cheaper prices.
To get more in depth, it’s quite easy to suggest that the oil producing nations will slow production, lower supply, and the may cause buying pressure to kick in.
Does that help you in your trading?
It made my in-laws think I was smarter than I am but for trading, it does nothing for me. I will see events change in the price before I will be able to decode all the intricacies that may make price move in the other direction.
In my opinion, “why” makes much more sense when asking…..
“Why should this work?”
As you search out any trading method, knowing “why” it should work is of paramount importance. “It just does” is not really an answer that I can quantify nor feel confident there will be consistency.
Moving Average Trading Method
This chart shows a simple moving average cross over and a buy stop above the bar that caused the flip.
Moving average crossovers is still a pretty popular trading method but the question is….”why should it work?”
All that has happened is the average of X bars has increased which caused the cross.
- Is there any reason that should have caused an increase in buying pressure?
- Is there any secret moving average to use?
Why should this crossover trigger an imbalance big enough to move the market? I can’t answer that.
Hanging my trading future hat on this type of method when I have no clue as to the “why” it should work, would be a mistake.
Support and Resistance – The Holy Grail?
How about trading support and resistance levels? This is another very popular method of trading.
Why should they work? We read that these levels are closely monitored and can set up “high probability” trades depending on the levels. People love to trade around these areas.
Let’s see how well this works……
This random chart has several areas marked off and full disclosure, this is after the fact:
A. Support breaks and price retests from the underside
B. Price bounces nicely off of this level and while counter trend, it’s 200 pips
C. Price rallies and bounces off resistance for a 115 pip move before price rallies
D. Another resistance bounce and price drops over 400 pips
There are other areas I didn’t mark off such as between A and B but the chart would have gotten cluttered. As you can see, pretty nice moves that all offered up some profits.
Seeing this chart and the profits that could have been made, there are a lot of people that would pay for the “secret” of finding these levels inside of previous data and extended out to the hard right edge.
Let’s scroll the left and see if these same lines had previously been used.
You can clearly see that these levels were used previously as well!
The fact is….I don’t know why these levels worked so well.
Highly Technical Trading – Not
These levels were found with a highly scientific and number crunching method…..
I closed my eyes, picked a random chart, just dropped random lines on it, and then opened my eyes to see what I got.
That whole chart is random.
Random lines got bounced.
There really is no reason why price should have bounce at these levels…some right to the pip.
If there is no reason I have to ask….where is the edge? Random levels provided great trading opportunities!
These levels even had multiple touches in the past which is one thing you look for in determining s/r levels! This means that others may have determined these levels to be strong.
For me, I don’t see an edge that can be exploited consistently. I also don’t see why big money would come in at these random levels and move the market.
All is not lost though. In a future post I will touch on the “why” of certain areas that will usually show an imbalance to can lead to some decent trading.
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