Trading is a fascinating activity.
There are so many layers to it. And so many paths that you can go down.
Soon after we first got interested in the stock market I became captivated by technical analysis. I finally felt that I was in control. It gave me great confidence to have all these tools to use.
We bought some expensive charting software and I started playing with the hundreds of indicators that it contained. Exotic sounding devices with impossible to understand mathematical formulas.
So, armed with all these new tools, I was sure we would be making a killing in no time. Because now we had science on our side!
And so I spent night after night, weekend after weekend trying to understand them. Backtesting. Trying one and then another.
But still we struggled to pick the winning trades.
I can remember buying this add-on to our software that gave us even more indicators. And I was convinced this would finally make the difference.
So I tried yet more indicators. Using different settings and different combinations.
But success still eluded us.
And it took us quite a long time before we understood why.
But before I explain what we discovered, let me tell you about eating bitumen.
My office is close to home. So some years ago I decided it was silly for us to have a second car. And so I traded it in and bought a scooter.
Now the only real problem with scooters or motor bikes [apart from getting wet in the rain] is that you are fairly likely to get hit by a car at some point!
It just stands to reason.
So I am always careful to watch cars to see which way they indicate they are going to turn or whether they are stopping.
But this one day I was in a bit of a hurry.
And as I approached an intersection a car was parked at the stop sign on my right. I was going straight through and the driver was indicating to turn left.
[At this point I should remind some of our overseas friends that we drive on the left side of the road!]
So I knew it was OK for me to keep going straight through the intersection. Or so I thought!
Next minute I am slamming on my brakes as the car accelerates across the street immediately in front of me. As my scooter hits the fender I go flying across the front of the car and land on the pavement on the opposite side.
For anyone who has experienced such an event you will know what I mean when I say that it was like the whole thing happened in slow motion. Quite weird!
I can remember looking at the car as it headed for me and not believing that this was really happening.
Because I was convinced it was going to turn left. The driver had indicated that he was turning so what was he doing on my side of the road?
But there he was. I couldn’t believe my eyes but eating bitumen convinced me that this was indeed reality!
Ever since, I don’t trust car indicators. Instead I have learned to look at the front wheels. Because this is the true indication of which way the car is actually going to go.
And you can’t rely on looking at the driver, even if you can see them. Because they often don’t seem to know where they are going, either!
But the wheels don’t lie!
The car can only go in the direction they are pointed.
Now what on earth has this got to do with what I was talking about before?
You remember I was telling you about the problems we were having with technical indicators? Well what finally dawned on us was that we were not taking enough notice of price action.
And so we started to study the chart before adding any indicators.
And suddenly we saw what was really happening. It was like looking at the car’s wheels instead of its blinkers.
You see, technical indicators are just what they say they are – indicators. Not reality. Not price action.
But an interpretation of price. A filter.
And so you need to look at a stock’s price chart on its own to get a picture of what is really going on.
This is not to say that technical indicators are not useful. But the critical thing is to only use them after you have analyzed price action. Not before.
Just remember – the wheels tell the truth!
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The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.