A Little (more) controversy

Earlier in the week, I almost managed to start a debate regarding the relationship between the interbank market and the retail market and also tried to fan the flames of peoples’ view of social trading.

Today it’s the turn of technical analysis.

Basically, I think it is impossible to make money trading FX (or any other market) by using technical analysis alone. No matter what indicators, time frame or system you use it cannot work in isolation.

These markets work on so many levels with so many influences, inputs and indicators that to limit oneself to one seems to me a little naïve.

I once had a colleague who used no news services at all while trading, had no idea (or interest in) what was being released that day or who had said what. He closed his mind to his knowledge of what was happening in the world geopolitically and just traded his charts.

He saw an awful lot of client flow business and this was his backup store of profit. His proprietary trades were wrong 60/75% of the time! Not directionally and his entry and exits were fine but he got whipped around very often by influences that he had no idea about. It was a bit like being in a car and driving in the same manner no matter what the road conditions were like, taking no account of outside influences.

Every retail trader that I have spoken to uses technical analysis above every other indicator and to a very high degree of influence over his positioning. I would say that more than 50% use nothing else. Even last week I saw blog where people were asking what is the problem in Spain or what is the ECB doing?

We all know the statistics that are thrown around for profitability and longevity of traders in the retail market. There can be no other reason for these numbers than each trader’s style of trading. So therefore it follows that if there is a large percentage of traders all trading in the same manner and a large percentage are unsuccessful that there must be some linkage.

It would be unfair to use any kind of analogy between interbank and retail markets to suggest a more rounded approach. In the interbank market, traders are making prices to each other and are market makers not market users. They can get a better “feel” for the market by seeing price action minute by minute, second by second and having access to what every sector (Corporate, Hedge Funds, Real-money etc.) are thinking. They also have orders to both execute and trade around.

To a certain extent the retail trader is oblivious to this so naturally gravitates towards charts. But, with the best will in the world, charts show what has happened not what is going to happen. It is possible to replicate what the interbank guys are doing by watching price action, understanding how the “big guys” operate and opening our eyes to what is happening in the market as a whole. FX is influenced by every other market. Take note of what bonds, commodities, equities etc. are doing understand the relationship and correlation and become a more rounded trader. Don’t sit in a darkened room pouring over charts. Open the curtains and find out what’s happening in the real world. It will help in the long run

2 members like this

Comment by ZeFxBrown on September 20, 2012 at 9:32am: Trading exclusively on the back of TA does not mean being closed to the world. You could easily follow all markets by checking / following charts on different asset classes (bonds, single stocks, indices, fx, even macro indicators such as NFP etc). I reckon your point was not about TA per se however about being open minded. I do believe in that ie a good trader needs to have an open mind hence why if babies could trade they probably would be the best at it. Also making a general case out of a single colleague who traded solely on TA and failed is not saying much.

To me, the debate about TA or FA or anything mixing them up is a false one. I will not comment on your statement that "charts show what has happened not what is going to happen" it could make for another debate :). Each trader is unique, you probably will find many similarities in successful traders such as good money management, discipline etc however saying that "it is impossible to make money trading FX (or any other market) by using technical analysis alone" is naive and not showing much in terms of open mind.

Comment by Sundaram on September 20, 2012 at 9:41am: Well said ZeFx! As far as I am TA is able to provide some trade opportunities even in the dullest moment in market. The only thing that FA provides is huge volatility. Traders need to be aware of these news events and be prepared and not be caught with their pants down! There are many ways to skin a cat, and many ways to trade! :-D

Comment by Peter jcp on September 20, 2012 at 10:16am: I Like Sarra's comments and his articles as they are controversial and therefore challenge your thoughts etc. I plan to respond later with my own finding etc but for now I cannot help jumping in on the back of Lisa's remark.

I have this funny mental picture of Lisa as a religious democratic pro life forthright sociable housewife, a loving caring mum, a very studious technical trader - and so therefore also I would have thought a strong female chauvinist etc etc.

So - am I right you have just said Men lead the way - and Woman follow ? ;-))))

Comment by Romano on September 20, 2012 at 10:50am: Well my findings were that exactly because of those "news", economic calendars, big player speeches, CoT reports, bonds and stocks etc.. I couldnt do any money. When chart was telling me to go long, reality looked like apocalypse and I was afraid to take position. Of course later I saw I was right. One such example is this picture I posted some time ago:

http://api.ning.com/files/0cm0HDeFMgVXRUa4OqnvMC2-fT4KddK1yzDN3sNr3...
_
Have look where we are now. I didnt took that trade because when I looked "whats going on in the world", it looked like very bad idea. My bad.

Comment by Romano on September 20, 2012 at 10:57am: Update: Ok look here: http://www.fxstreet.com/news/forex-news/article.aspx?storyid=7304c9...

This is *The* most retarded, disabled, stupid, kretenish lie and excuse I have EVER seen in my life. No thanks, I will stick to tech. analysis only.

Comment by Alan Hill From Sarrafx Trading on September 20, 2012 at 11:23am: Romano I don't understand the point you are making in your last reply.

No one seems to want to address the connection between retail loss levels and high degree of reliance on TA

Comment by Alan Hill From Sarrafx Trading on September 20, 2012 at 11:24am: All i really want to do is add a little perspective

Comment by Peter jcp on September 20, 2012 at 11:39am: I hope to be able to Sarra - a bit later on today though

Comment by Alan Hill From Sarrafx Trading on September 20, 2012 at 12:23pm: Lisa, like the comment except starting with "Poor Sarrafx"

Its cool that you have an opinion and I can relate to your assertion regarding TA vs. FA but what I am saying is that the market is not just TA or FA or any other A! It is a combination and in my experience, it is the well rounded trader who makes money and often from a financial background. I said in a previous blog that it is incredible to me that something like 1:1000 retail traders who have physically seen the inside of a trading room and maybe 1:25000 who have worked in one.

I wont get Peter going by saying the markets are similar (they aren't) but knowing how things are done and how things happen and just getting a feel for the operational capability must help.

Must get you a T-shirt for Christmas.............TA Rules!

Comment by Alan Hill From Sarrafx Trading on September 20, 2012 at 12:48pm: Not sure about the Paris analogy, but I am sure I would be a better mechanic if I visited Detriot in its heyday.

I agree its all about what works for you.

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