Hello Technical Analysis…Goodbye Money
So someone told you about a guy who turned $5,000 into $2,000,000 by day trading and you started the quest for the trading holy grail. You started reading every day trading book you could find. You bought a couple of day trading systems and day trading courses. You’ve studied the charts and know everything there is to know about technical analysis. You know all about support and resistance and pivots and trendlines and what not. You understand how to set trailing stops and profit targets. You’re ready to put your newfound expertise to work and retire in two years.
If riches do not fall into your lap, it’s because you didn’t read the charts right. That wasn’t a real double top. That was a false breakout which became a pennant which became a flag and then turned into a talking duck. Here’s a tip: Save yourself some money and don’t buy anything else which talks about technical analysis. It’s killed more traders than mortgage-backed securities.
Mechanical day trading systems simply do not work in the long run. If you’ve found one that works in the short run, consider yourself lucky, take your money off the table and use it for a vacation…because eventually the system will blow up. There is a simple explanation for why this is so.
Greenspan did not move markets. Bernanke does not move markets. Economic numbers such as the unemployment rate and durable goods reports do not move markets. Computers crunching code do not move markets. PEOPLE MOVE MARKETS. The PEOPLE who buy and sell. This would seem to be self-evident but suprisingly is not and this is why no automated day trading system will ever work in the long run. A computer cannot anticipate what a person is going to do. Especially not a person who has money at risk. And people move the markets. People who run the trading desks of major banks move markets. Guys who run billion dollar hedge funds move markets. Sometimes, an individual day trader who can afford to swing three or four thousand contracts moves markets ( If you don’t believe me, do a google search for “the flipper bund”. Read some interviews). You and I alone do not move markets. However, if you and I and 1,000 other small traders all go in the same direction at once, we will move the market.
A trading chart has very little use to major players. Charts represent the past. Traders are interested in the future and more importantly, the very near future. As in now.
What you have to remember is…even if a technical setup works, it doesn’t work because it’s a technical setup. It works because more money went with the setup than against it. It’s all about which way the most money is going. Sharp moves are caused by new money coming into the market and scared money exiting the market at the same time. Everyone is going the same way. A trader must keep this in mind at all times.
All the professionals I know make their decisions by reading the order book which is also called “reading the tape”. They watch the bids and offers. A person who has never attempted to do this has no idea how much valuable information there is right there on a market depth trader or DOM (depth of market platform).
If you want to make money day trading, you have to learn how to anticipate what the big players are going to do next. You have to learn how to read the price action in the order book. You have to learn how to decipher the information in the bids and offers. The biggest traders in the world trade on this information. So should you.
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