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Deep Posts Reader Questions Answered

I think technical analysis is crap, and I should study economics to swing trade forex

Here’s something I came across on Trade2Win.

I am a newbie, have been reading forex stuff for about 6 months on a daily basis.

I am now interested in trend trading over timeframes of few days to a week or so. Where I can make a trade and come back when I need to close, without having to watch the charts all-day long.

After a lot of reading through the forums, I am not very interested in technical analysis or price action, but more on the fundamentals/news etc. Personally I believe most of the TA is bs.

So, should I start studying macroeconomics? I am already a university pharmacy student, but I would like to study economics on the side, out of interest.

Could anyone advise me on whether I should go ahead with this, and also whether there are any good books or resources I should go to for studying this subject matter.

The purpose of studying economics would be for me to have a deeper understanding of the world and of price moves in forex – since right now I’m not all that certain about many economic issues. Also so I can understand other markets like commodities etc.

Thanks.

The biggest issue this individual has with their plan is the timeframe. Fundamental analysis can be very useful, but it’s only applicable in timeframes that are generally measured in months or longer. You cannot trade fundamentals when making end of day trading decisions in the forex market. The big picture things which drive trends just don’t change that frequently.

Now, if you’ve been reading this blog for any length of time you’ll know that I’m primarily a technical trader and market analyst. Clearly I don’t think technical analysis is “bs”, though there certainly are many technical methods which I personally find to be based on flimsy logic, but then I just don’t use them. At the same time, fundamental analysis plays a large role in my stock market trading, though significantly less when I trade forex and other markets.

Getting back to the trader’s question about studying economics, the answer is clearly “Yes”. But for a market like forex that means focusing on macroeconomics. The micro stuff and subject matters related to social planning and whatnot might be interesting, but don’t really help the forex trader.

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Deep Posts Reader Questions Answered

What do you suggest is the best way to trade fx markets?

Here’s a part-comment, part-question I received from a trader named Garry the other day.

Simplicity is the key, so what do you suggest is the best way to trade fx markets? Daily charts and what indicators if any?

Firstly, I’m going to agree that simplicity is generally a better idea for most traders than complexity. That’s not going to be the case for everyone as some traders thrive with complex methods and ways of evaluating markets, but an awful lot of traders would do better thinking more simply about things. There is a tendency to think that more is better when oftentimes it isn’t.

As for the best way to trade fx, there is none. There is only what’s best for you. The process of becoming a good trader is largely the process of figuring out the optimal way for you to approach trading and the markets. That’s why I spend so much time laying the groundwork for doing just that in my book and course. Without knowing quite a bit about someone, I can’t really make any judgement about what’s best for them. It’s a very personal sort of thing.

Here’s an example related to Garry’s question about daily charts and indicators. I personally am not a great fan of indicators. Some very successful traders swear by them, but I’m primarily a chartist. They only indicators I look at in any meaningful fashion are ones which provide me a relative reading on volatility. You could argue that those aren’t even proper indicators the way others would define them. They’re more like statistics. And as for the daily charts, I very often look at the weeklies (or longer) because I like to do more position trading than shorter-term stuff, but then I also look at shorter term charts if I’m looking for a shorter term opportunities.

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Deep Posts Reader Questions Answered

Kondratieff Long Wave Theory

I was asked the other day:

What is your take on the Kondratieff Long Wave Theory?  Would you say we are in the Winter phase?

I’ve heard of a lot of different analytic methods and concepts, but I have to say I have never heard of this. But then again, I’m not a trained economist, so I could have just missed out on this one in my education. Having taken a quick look, I now realize it’s basically a theory based on super cycles.

Kondratieff Long Wave Theory came from Nikolai Dmyitriyevich Kondratieff (1892 – 1938) who was involved in the early Soviet economic planning processes. You can learn more about him and his ideas here:

http://www.kwaves.com/kond_overview.htm
http://en.wikipedia.org/wiki/Kondratiev_wave

I’m going to have to read up on all this stuff. Until that’s done, I’m not going to venture a guess as where we might be in the cycle. I encourage anyone else who has some thoughts on the subject to leave a comment with them, though.

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News & Updates

Catching up after a bad long weekend

I’ve been a bit under the weather of late, so I’m in catch-up mode when it comes to answering questions which have been submitted to me. There have been a couple of very good ones, which I will definitely be getting to shortly. In the meantime, I’ve seen some interesting stuff from my fellow bloggers I thought were worth sharing.

One interesting bit comes from Brett Steenbarger. He periodically takes a look at his blog‘s readership with the view of it being a contrary indicator. The idea is that when readership spikes it indicates traders’ feeling the strain and looking for answers. Brett isn’t the only one to have made that observation. His latest observation is “The pattern of readership of late has been consistent with tops, not bottoms, in the market.” This fits in well with what I’ve seen in terms of the Commitment of Traders data and the VIX.

Brett also posted The Psychology of Mechanical Trading Systems. As much as I am primarily a discretionary trader, I’ve long had an interest in the mechanical side of things. The common reason many folks speak in favor of trading mechanically is taking the emotion out. There are some good arguments that one can never really do that completely.

The theme of my Those Who Can’t Trade Teach post from a couple weeks back has been picked up by Ray Barros. He’s posted a two partner on his blog: Can Teachers Trade – l? and Can Teachers Trade – II?. I’m going to get back to that subject before too long here as there have been a number of good comments to my initial post worth addressing. Ray makes very good points as well.

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Reader Questions Answered

Questions about the Following the Quest for Value course

Another trader question came in over email recently:

I have a couple of questions for you on your “Following the Quest for Value” course. Can you provide some additional details as to what that course covers? Most often when I read turning points, pivot points come to mind which are pretty simply calculated but everything I’ve read (and even seen) is that one of the real reasons that pivot points work is that enough people use them.

Also, is there any prerequisite level of knowledge/experience to really benefit from that course?

Let me answer the second question first.

The only real prerequisite for the FQV course is a basic understanding of technical analysis. Oh, and an open mind helps considerably. In fact, someone with a great deal of experience may not get as much from this as someone relatively new based on the fact that they may not be as able to adjust their mindset.

The main focus of the course is outlining the way I use and apply a charting methodology I refer to as price distribution charting, but which is altnernately known as Market Profile, volume at price, and some other names. No matter what it’s call, basically the concept is to look at the frequency of trading action at the various price levels. Seeing this distribution provides us information about who is in control, where the real support and resistance points are, and where the market is likely to be drawn as it moves.

The course does not outline a specific trading system. It doesn’t use any indicators. While using the price distribution charts – which are becoming more readily available under various names - does offer definite benefits, it is not absolutely required. Price distribution charting is most definitely something heavily in the discretionary side of trading, so you won’t find much you can apply in a mechanical fashion (though I have long had thoughts about ways maybe it could be done and might one day have the time to focus some research in that area).

For me, however, the biggest focal point of the course is changing one’s thinking. It’s about stripping things down and understanding what’s really going on behind the process of price changes.

Hope that helps.

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Reader Questions Answered

What type of trading resources would help me read charts?

Here’s a question from a relatively new forex trader named Craig which gives me a bit more to work with than some others, like the one I answered yesterday.

I’ve recently (since July) been trading forex.  I find it to be quite exciting and really enjoyable, but am looking at anything you might be able to suggest that will help improve profitability.  I’ve been using some systems by J. Welles Wilder (Swing Index System to be precise) and I’ve found some success (have had a week with 18% gains, and other times where I’ve pretty much given that all back). So what type of resources/advice/readings could you suggest that would help me become more astute at reading the charts, interpreting market direction, etc as my goal is to hopefully turn my trading hobby into a full time job at some point in the future (looking several years down the road at a minimum).

This may sound strange, but a book which I found to provide a good starting point for simple chart reading is How to Make Money in Stocks. Obviously, that’s not a book about forex trading, but chart analysis is chart analysis and not market dependent. I consider that book the one which launched me on the path toward being a technical analyst and trader.

Of course John Murphy’s book Technical Analysis of the Financial Markets is considered the best overview of technical analysis methods. It’s a great place for anyone interested in pursuing technical methods to start. There are a great many different ways to approach technicals and the Murphy book can help you identify the one or ones which make the most sense to you.

Having that fit is extremely important, by the way. There’s a vast array of indicators and techniques. A lot of folks will argue the most of them don’t work. More correctly, most of them won’t work for you. Some will, though. Those are the ones you need to identify.

I think another great read for anyone getting into trading is Markets In Profile, by James Dalton. This book will help you understand the real inner workings of the markets and how/why prices move. The charting methodology and analytic techniques are the basis for the Following the Quest for Value
course I developed.

And I cannot present a listing of good books and such without mentioning Market Wizards, Jack Schwager’s collection of interviews with top traders and money managers. I consider them a must read for all traders.

In terms of tools, I’m a big fan of MetaStock. I have used it for many years in my own trading and analysis and also use it at work for my stock market analyst job.

I’m always open to answering questions. The more you give me to go on, though, the better I can be of assistance.