How often have traders been vexed with the pressing question, “should I follow the news or should I follow the charts?” The answer leaves most traders grasping at straws because neither answer appears to be 100% correct; the lines are too blurred and the interpretation is too gray. If we choose to only follow the news, we may see how interruptive or disruptive the news can be to a trader’s plans. If we choose to only follow the charts, we often experience a seed of doubt wondering if we are seeing everything clearly and correctly, especially if we are not informed as to which headlines are potentially driving the markets.
Find Sucess Where Analysis Meets Persistence
Traders want black and white, but traders receive whatever the market delivers. As a result, the battle rages on and traders are right, wrong, or indifferent to what market action provides. The aforementioned debate exposes vulnerability for many new traders. Despite seasoned traders flashing bumps and bruises, I have found that it is more important that they radiate persistence and perseverance because that is truly what it requires to be a trader. Is it mandatory that every trader experience highs and lows and euphoria or big wins or maximum pain of losses? Of course not, but it is highly recommended that new traders pursue a legitimate education focused on long-term success and market-tested technical analysis. Sound technical analysis is not foolproof, but important elements to improving and trusting one’s analysis rests in understanding support and resistance lines, structure highs and lows, and trendlines. By themselves, they are all very straightforward concepts. But when combined, they collectively provide an essential framework to consistently plan for and capitalize on opportunities.
The Dangerous High of Making Fast Money
I’d say that most traders can empathize with the newbie who starts with zero knowledge and quickly absorbs anything and everything deemed "trading". This trader may begin with the theory, demonstrations, webinars, books, etc. Then, the trader begins navigating broker platforms to familiarize themselves with a demo or live trading account and starts to experience the endless opportunities that financial markets have to offer. In my opinion, one of the worst lessons in trading is to make fast money. Forex is an easy example using the classic news straddle trade; it is like a high that you may never experience again, but will continue to chase.
This may sound familiar – a news announcement’s knee-jerk reaction is unidirectional, the trader is pushed into profit immediately and profits are captured almost instantaneously. The trader is left feeling the rush of amazement, pride, greed, and winning all at once. Now, the trader is hooked, potentially addicted to the feeling of this rush of returns, and continues to browse economic calendars for that news announcement over and over again. Check in with the trader weeks later only to witness a strung out junkie perplexed by a series of bad trades and instant losses. The once-found profits are long gone, replaced perhaps by a headache brought on from all the head-scratching. Trading is not that easy – especially given all of the noise that exists day in and day out.
There are controllable and uncontrollable factors in trading. Now, guess which ones you should focus on? Traders have the power to control the size of their trades, which in turn can help control emotions, as well as their planning processes, and most importantly, when they will and when they won’t enter the market. Traders may not realize it, but refining and improving those few controllable factors are all you need to gain an edge in the market. In recent weeks, following the global markets felt like Jekyll and Hyde price action. The SPDR S&P 500 ETF (SPY) ’s (Figure 1) bipolar appearance has most likely disrupted the trading plans of most funds and individuals. The market quickly sold off 9.89% only to gap higher and rally 11.29% in a few highly volatile weeks. Traders could have participated at any juncture of the move and ride the coattails of short-term volatility. Position-based sellers may have committed to the short-term retracement, salivating for more bearish confirmation, while position-based buyers saw the dip as another buying opportunity to reload for another rally. After the dust settled, the market takes no prisoners, but surely left behind heroes and casualties. At the moment, the bullish structure remains intact and perhaps the global markets are poised for an additional rally to continue making new highs.
Gain an Edge by Taking Control Where you Can
So, let’s revisit this question: “what can you control as a trader?” The answer certainly is not nothing nor is it everything. For the same reason every trader is responsible for trailblazing their own path for profits by adopting or creating a consistent trading plan, I’ve found that every trader must take ownership of what they can and cannot control. As complicated as trading appears to be, the elements of trade size, choice of instrument, quantity over quality, and sound technical analysis can significantly reduce the market noise and enable traders to produce profitable results and in this control as found and leveraged by traders.
Figure 1 – SPY Daily Recent Price Action