How to “See” the True Message of the Markets (Part 1)

People “see” things all the time. We see a face on the shadowy pockmarked surface of the moon. We see horses and dragons and fairies when we look at the fluffy clouds in the summer sky, and we see crabs and horses and bulls when we look at the pinpricks of light standing out from the pitch black night sky. The problem with seeing things is that we may be projecting what we want to see instead of what’s really there.

Because I deal mainly with technical analysis of the markets, it is important that I do not project my feelings and opinions onto what I see when doing analysis—though that’s often a difficult task. There is real value in the results of objective technical analysis, but there can be great danger if a trader sees what they want to see in their technical analysis.

When I teach students to be better traders in my mentoring programs, one of the things we work on over and over is keeping objectivity in our analysis. I find this is best accomplished by always using a set of tools that you have mastered and know inside and out. And to keep emotions out of the analysis and trading, I find it’s best to develop a step-by-step approach. You’ve heard of “paint by the numbers?” Well, I try to help each of my students develop their own “trade by the numbers” routine; one that plays to their own strengths and avoids their weaknesses.

By laying out a detailed, step-by-step trade plan in writing before the trade begins, each trader has a market map in front of them, and if their emotions start to creep in, or if they lose their focus, they can easily get back in step with their original trade plan because they have it right in front of them on their desk.
The hardest part of any trading plan is keeping your head free from emotions and opinions until all the pre-trade analysis and planning is finished. Think about it: If you begin with an opinion and you are like most of us, you are much more likely to pay attention to the analysis that supports your pre-trade opinion. But opinion-free analysis is a learned habit, so I often spend a good deal of time with traders that are new to the mentoring process going over their analysis while they are still stalking a trade. Let me show you just what I mean:

chart


Here is a chart of the daily gold futures from one of my newer students. You can see that he added a red, down-sloping Median Line to show what he feels is the most probable path of price. If he is correct, price should run out of upside directional energy at the red, down-sloping upper Median Line parallel—and that would be an area where he might look for a high-probability trade entry set up to enter a short position in the gold futures.
Let’s look at the second chart he presented me as part of his pre-trade analysis:

chart


Before drawing in what he considered the likely path price would take, he took the high at Pivot C and the low at Pivot D and calculated the 61.8% geometric retracement (what many traders call the 61.8% Fibonacci Ratio.)

What actually happened?