“Why Technical Analysis Shows Us Everything We Need To Know”
Fundamental Trading Always Beats Technical Trading 100% of The Time… That was the title of the forum post, that drove me to write this.
Now, before we go any further… Let me say something that the “experts” and “pundits” will never say…
Fundamentals Don’t Drive The Markets!
That’s right… I said it! And before you go thinking I’m crazy, just hear me out. You see, it’s not the actual Fundamental Data that moves the market…
It’s the interpretation of that data!
What Do I mean? Well before we continue, let us first define: What the market is.
Well, the market is not some mythical beast… It’s a collection of people (albeit a lot of people) that are all buying and selling based on their own self interests.
Now, what do we know about people?
They Act Emotionally, and Justify Decisions Logically!
Now, let’s take Snap Chat for an example. Snap Chat losses over $300 million a quarter. Yet, people still buy their stock… Why?
Well it sure isn’t because of their sound business model and profit margins. In fact you hear things like: “well they have a lot of eyeballs…” or “the stock is going up, and I’m going to make money.”
So, let me get this straight… The rational is: they have a lot of users and, there is someone out there dumber than me, that will pay a higher price down the road… Sweet!
Now let me ask you: Does that sound like a logical thought process above? If you answered NO, then you’re on the right track.
Next, we have the analysts. That’s right, the dumbest investors on the planet. Analysts know nothing, and they prove this all of the time.
For example, there are a ton of analysts out there that actually have a “buy” rating on Snap Chat. Not only that, they have actually put a “fair market value” on the stock somewhere around $15 - $20.
Think about this for just one second. You have a company… that loses millions of dollars a quarter… and there are analysts that recommend you buy the stock.
Imagine one of your friend came up to you and said: “Hey I’ve got a great idea for a business… want to invest in it?” And you respond: “Sure, how about I invest $100,000 and you pay me a dividend of 5 percent… sound good?” And then your friend replies: “Oh no, you miss understand… There will be no profits made… In face we’ll probably lose a few million a quarter.”
Now nobody in their right mind can look at that situation and say: “Oh yeah, that makes sense.”
You see, if fundamentals really drove the market - Snap Chat would be worth NOTHING! But it isn’t… and that’s because fundamentals don’t drive the market, sentiment does.
People Are Predictably Irrational!
And because of this, it does not matter what the fundamental data is… all that matters is how individuals interpret the data. And because of this, trading successfully based on fundamentals is a near impossibility for retail traders.
You see, if you’re going to place a trade based on the fundamental data, you must predict a couple things correctly.
First off… You must accurately predict what the data is going to be. So, if it’s Non Farm Payrolls for example - you must accurately predict whether or not the number will come in above, below or on par with the current forecast.
Second, you must accurately predict: how the market is going to interpret that number when it’s released. And this is impossible to do consistently.
Why? You ask… Well, like we talked about before - people are irrational.
So, how can we get around this?
Well, it’s actually pretty easy… We use Technical Analysis.
The Price Chart Is the Great Equalizer!
So, what do I mean by that? Well, the price chart shows us all market participants actions. And when you know how to properly read a price chart, you can determine: what price is doing, where it’s likely to go and how it’s likely to get there.
See, here’s the deal... When we’re analyzing a price chart, we’re analyzing…
The Language of the Market
And just like any other language… It can be read.
For example: I know, with statistically certainty - that if a resistance level is broken, when it’s tested again, it stands a higher chance of becoming a new support level than not. (See Below Image)
I also know that if the market is in a bullish trend, when it pulls back, it cannot violate the previous outside return (pullback) if the trend is to remain intact. (See image below)
These very simple concepts are all apart of: “Price Action Trading.” And this is where the movement of an instruments price, coupled with other technical indicators, are used to determine buying and selling.
You see, when we’re trading we want to be…
Predictive In Our Analysis
Reactionary In Our Execution!
Meaning: We want to read what the market is showing us, then based on our analysis, devise a plan to take advantage of what we think is going to happen next.
It works something like this:
We Recognize what the market is doing
We Predict/Project where we think price is going and how it is likely to get there
We then establish a plan of action
And if everything plays out the way we’ve predicted, we then look for entry confirmation and execute the trade.
Now after reading that you’re probably thinking, “that seems pretty simplistic.” And you know what… it is!
That’s because, trading doesn’t need to be super complicated.
Like Albert Einstein said:
“Simplicity Is The Ultimate Sophistication”
And this is no more true, than in trading.
So the next time a big news event is about to be released, try and predict what the data will be and how the market will react to that data. And, while you’re at it - identify the technical levels on the price chart and see what happens after that data is released. I’m guessing the technical's are going to provide you with a much clearer picture than the fundamentals will.
Now, if you’re someone who has listened to many of the talking heads on CNBC or the pundits on Bloomberg, you’re probably not completely sold on this.
Likewise, if you’ve tried technical analysis and price action trading but you haven’t seen the results you’re after, you’re also probably a little skeptical.
Well I know exactly how you feel. In fact, I felt the same way when I was trying to figure out how to become consistently profitable. But luckily for me, I came across a trader who showed me the correct way of reading a price chart and performing technical analysis. And that’s when I found the path to consistent profitability in the markets.
So if you’d like to learn how to predict market moves, correctly read a price chart, and never be caught off guard in the markets again… I’ve got an awesome FREE TRAINING Video called “The Power of Structure.”
And In this video, you’ll discover…
How to determine market direction
The Principles of New structure Highs and Lows
How Structure acts like a magnet
And much more!
So, if you’re struggling in the markets or you’re new to trading…
TAKE THE FIRST STEP TO BECOMING
A CONSISTENTLY PROFITABLE TRADER
And I’ll see you at the training
Thanks for reading this!
P.S. Just in case you’re like me, and you scroll through to the bottom of this post before reading the entire page, here’s what this is about:
How fundamental data doesn’t drive the markets, sentiment does.
How to determine market sentiment using technical analysis.