Hello traders! In this week’s newsletter we’ll talk a little about the psychological theory of cognitive dissonance, and how I perceive that it applies to trading. Plus, moving averages!
This past week I had the great opportunity to teach our three-day Market Timing Orientation class in a large town in North Dakota. One of the students had been trading for quite a while, but with limited success. She insisted that classical technical analysis works. In fact, even though she wasn’t making any money trading and had lost what would be the equivalent of a nice house, because it worked ‘sometimes,’ she felt with just a tweak or two she could make money like the market gods certainly wanted her too.
Now, cognitive dissonance is a theory in psychology defined by Wikipedia as ‘the mental discomfort (psychological stress) experienced by a person who simultaneously holds two or more contradictory beliefs, ideas, or values. This discomfort is triggered by a situation in which a belief of a person clashes with new evidence perceived by that person. When confronted with facts that contradict personal beliefs, ideals, and values, people will find a way to resolve the contradiction in order to reduce their discomfort.’
In our world of trading, and especially in our orientation classes, I meet people frequently who experience this. Here’s how it worked in this example: classic technical analysis works; I am not profitable using it. Therefore, I must be using it wrong.
During this class, we shared numerous examples of how classical technical analysis is either very late for entries and exits, or completely wrong about market direction. This particular student loved moving averages. Not those ridiculous, slow moving averages like the 50 and 200 mind you, but much faster, smaller, nimble moving averages like the 9 and 20 period. As many of you know from previous newsletters, the larger the number, the slower/smoother/further lagging the moving average is. Using a crossover of the faster moving average through the slower moving average generates buy and sell signals in this student’s technique. Here are a few examples of how late and wrong they can be:
The most important thing I can say about this chart is LOOK AT WHERE PRICE IS WHEN THE SIGNAL SHOWS UP.
Oval number | Signal | Problem | Probable trade outcome |
1 | buy | Upward move is almost over | Loss |
2 | sell | Missed start of move by 40 pips | If held long enough, winner |
3 | buy | Missed start of move by 60 pips | If held long enough winner |
4 | sell | Signal came after move was over | Loss |
5 | sell | No move to speak of | Loss |
6 | buy | Signal came after move was over | Loss |
7 | sell | Move almost over when signal came | Loss |
8 | buy | Bought at top of move | Stop probably hit, loss |
So lets take a look at what using supply and demand trades could have looked like on this chart:
Arrow number | Signal | Probable outcome |
1 | sell | Large winner |
2 | buy | Flat |
3 | buy | Winner |
4 | sell | Winner |
5 | buy | Small winner |
6 | buy | Winner |
7 | sell | To be determined! |
Before you OTA students pepper me with emails about all the zones I missed, I tried to make this as clean and easy to explain as possible! There were 3 entries between arrow 1 and 2, 3 more between 3 and 4, and another 3 between 6 and 7. Plus a couple more….
Back to the Market Timing Student. During every three-day class we show a few examples of how our core strategy works in action, via a short Extended Learning Track recording. (Extended Learning Track is our online classroom where you watch instructors trade in front of you.) In EVERY instance of an instructor using pure supply and demand for entries, this student would ask ‘which moving average were they using?’ or ‘what Fibonacci retracement was that?’ or ‘was the stochastics overbought or oversold? You get the idea. By being SHOWN profitable trades WITHOUT using what she believed were necessary analytics, she was having trouble accepting what was in front of her eyes.
As has been said hundreds of times before in our newsletters, trading is SIMPLE, but not EASY. Very often you will have to throw out some things that you thought were true to become a successful trader. This is why we often also say that charts are the easy part, between your ears is the hard part.
Read the original article here - Do You Question What You See?
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Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.
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