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- The News (Fundamentals)
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The Millionaire Trader's Handbook Page 23 TECHNICAL ANALYSIS If you want to make millions from the market, then stay away from the following: The news (fundamentals) Trading indicators Signal services If your analysis relies heavily on any of these three methods, then you are subjected to more bad trading decisions. The News (Fundamentals): Unlike fundamental analysis where price moves are based on business results (the news), technical analysis relies on basic technical tools and past price movements (price action) to determine the next move in the market. It is hazardous to rely solely on fundamental analysis for any reason to justify your trade decisions. Why? Because during the news hour, the financial market can rally to the upside on bad news and the downside on good news (no matter how intense the news is). You also need to understand that many of the projections heard from the news are based on analyses done by other people, and their analyses, too, can be wrong. Rather than just taking their word for it, why not do your own analysis using the technical means you have? Here‟s a real-life example of the S&P 500. The Millionaire Trader's Handbook Page 24 Technical analysis helped me not to be swayed by popular opinions during brexit in 2014. It all began in September 2014 when I was in the living room with my mum, and the news came up. Bloomberg was talking about the S&P 500 index, which was collapsing. CNN had the same result, and every news coverage talked about the massive fall of the S&P 500, making everyone on Wall Street panic. For those who don't know, the S&P 500 index is a stock market index that shows the performance of the largest 500 companies in the United States. A crash in the S&P 500 index can cause a huge difference in the business world and negatively affect consumers, leading to a recession. The Millionaire Trader's Handbook Page 25 What I saw when I decided to open my charts took me by surprise. In trading, when the price collapses, it means there is a potential selling opportunity. As much as the market was collapsing according to the news, it was simply retracing on my charts. And we all know the market doesn't just move up or down in one direction like this. The Millionaire Trader's Handbook Page 26 It moves at a certain level, pullback, or retraces and continues its overall direction. For example, higher lows and highs (uptrend), lower highs and lows (downtrends). So, I pulled out the three technical tools in my arsenal: Support and resistance Fibonacci Trend line Price action indicated that the S&P 500 index is on a bullish trend. The Millionaire Trader's Handbook Page 27 I plotted my tools and did a quick analysis, and it all came into a confluence zone, highlighted in yellow. This is what I did: Drew trend lines based on the market's trend Looked for the next area of support Plotted Fibonacci from swing low to high It all came down to some form of confluence around the 50 and 60 fib region, which, from experience, is the most significant level on Fibonacci. The Millionaire Trader's Handbook Page 28 This led me to conclude that the price is just pulling back into that confluence zone (50 and 60 fib region) before heading higher. So, I stuck to my buyers and placed a buy order around that confluence region. Seven days later, the market triggered my buy order and rallied to the upside as predicted for 900 pips. Recall from the news that they were only saying the S&P 500 was collapsing, which was the opposite not from a technical standpoint. The Millionaire Trader's Handbook Page 29 So what am I trying to derive here? Don't follow the news. Then what should you focus on instead? "Price action" because price action always leads the news. Now, does this mean the news and fundamental analysis are all wrong? No. But this is to guide you to stay safe from the hype that may follow a financial instrument at a particular time. You can only use fundamental concepts to back up your technical. Why? Most often, the fundamental concepts often fuel and catalyze a correctly drawn technical analysis. For example, in the case of the S&P 500, the market was about to retrace to the downside before the news came on. It was after the news the market made the quick move. Therefore, fundamentals always support technical if appropriately drawn. How do you determine if a technical strategy works? It's simple. You can verify that by following these two steps: Backest the trading strategy on your charts for at least 6 months. I mostly advise that you backtest it during the 2008 recession because that was a defining year for traders whose strategy was solid. Forward-test your strategy in a live market or on a demo account. You cannot be a professional technical analyst without the following: a good trading strategy, standard risk management, and correct trading and market psychology. |