Untrained traders flooding in paired with unprecedented market volatility means the game has changed for professional traders, says veteran Mike Baghdady, but the solution is simpler than others would have you believe...
Drawing charts by hand back when only trading floors had access to live data is a bygone era today, but this was the scene when I started out.
We relied solidly on price charts and chart structure and what we thought were cast-iron indicators to predict price behaviour and we placed bets en masse, moving in the same direction and largely profiting or losing together.
However, with the ratio of newcomers to professionals now sitting at around 9:1 - unthinkable only a decade ago - the edge we once had from the indicators we relied on to show where prices were likely to go, are now largely irrelevant.
What remains however, are Price Behaviour and Price Structure analysis - which have been and still are THE cornerstones of successful trading in a world where the latest indicator lasts only weeks in the current market before its weaknesses are laid bare.
Trading for many today has become a function of taking buy and sell signals from technical indicators rather than applying the basic principles of Price Behaviour and chart structure. What I'm teaching my clients to look for are price points rooted in the charts that indicate how people are behaving and how to use this human behavioural information to successfully trigger a buy or sell.
Take for example the failure of a price to continue in a specific direction. When it changes to the opposite direction that is the trigger to take a position before the amateurs flood in and exacerbate the price. It can be seen simply by observing the chart, without requiring the use of indicators.
Every single trader who is taking a position at this stage is expressing his unique emotions and psychology and this is all reflected in the Price Behaviour.
The price reflects the combined feeling of the market participants and everything that is known or knowable about any instrument is reflected in the price at this precise moment. As traders, we are constantly looking for opportunities that arise from human emotions, where every error in someone else's judgement represents an opportunity. Professional traders know how these errors manifest themselves in the Price Action and have the confidence to place a trade and prosper from them instantaneously.
Human beings rarely make completely rational trading decisions while the markets are going up - seen through their euphoric buying - or when they’re under duress as they fall; people also make poor assessments of risk and event probabilities and there is nothing more stressful than losing money or worse still, their capital , as many new traders currently do.
It is imperative to understand how human behaviour is influencing the price action in order to gain an 'edge' in trading, and this is what they are really failing to appreciate, leading them to lose more than just their financial capital. Capital comes in two varieties: mental and financial. Of the two types of capital, the mental is the more important and expensive of the two. Holding two losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital. One must also have an entry strategy and exit strategy as well as a good portfolio selection.
Right now, I am advising clients to look at the forex market, selling short the pound and dollar, and especially concentrating on buying commodities, which are fast becoming the new global reserve currency.
As countries including China are diversifying their national reserves by buying copper, platinum and other industrial metals they are increasingly sending their value up, and the amateurs don’t yet seem to have cottoned on.
The good news is that trading remains a very teachable skill. The great trader Richard Dennis proved it with his 'Turtle Program' in 1983 where he took 20 novices and within a year turned the majority of them into some of the best traders in the world.
That was actually the inspiration behind the formation of my trading school, Spyglass Trading, where we help aspiring traders demystify price action.
If you can understand Price Behaviour and follow the rules of a system, your trading will be consistent and profitable despite the inner emotional struggles after a series of losses or large profits, regardless of the volatility of the current market.
And while the indicators come and go, Price Behaviour works and continues to work because it is based on the human behaviour and market movements that result from the systematic and repeated irrationality that is embedded in every person.
