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