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.This leads to the next paradox.Paradox 3The vast majority of traders use long-term global economic trends.Beingdeliberate or forced proponents1 of short-term speculations, they are un-able to benefit from their own long-term forecasts and analyses.A trader wants to know exactly why the various events and marketmovements occur, but this knowledge cannot help him much.I think thequestion Why? is of less importance to a trader, and cannot be comparedto the importance of other questions that traders should answer beforemaking their decisions.Questions like Where? When? and How many?should be of more importance for a trader especially those who tradeshort-term positions or are involved in daily trading.In many cases, infor-mation about various market movements is not important.If the traderwas late and did not take part in the previous movement, knowledge ofthe exact causes of the rate fluctuations does not help.Even if the prof-itable or unprofitable position was open at the moment of the marketmovement, the knowledge of the exact causes cannot help to reimburselosses or threaten the profit.Sometimes, there could be certain exceptions to this rule, and theseexceptions do not upset the generally secondary importance of the ques-tion Why? Exceptions include situations in which the long-term influenceof news events on the market should be evaluated.Even in these rarecases, the trade operations based on the common sense method are possi-ble and preferable.Paradox 4Many traders, whom I know personally, usually spend much time discov-ering and discussing the causes of previous fluctuations in the money1I call forced proponents of daily and short-term speculation those traders whosimply cannot afford long-term trade, despite their inclination to the positionaltrade.Their investment capital is not large enough to open and keep strategic po-sitions.In the positional trade, stop orders should be fixed at a considerable dis-tance from the initially opened position, and a single loss can completely ruin thetrading account if it s a small one.Such traders often dream of multiplying the sizeof their trading account, so that they can switch into longer-term trading. ccc_beat_037-050_ch06.qxd 6/8/06 2:35 PM Page 4040 DEVELOPING A TRADING METHODmarket.This knowledge has no practical value because by that time thetrain has gone and the market has already reacted to certain fundamentalstimuli and the exchange rate is adjusted accordingly.ADVANTAGES AND DISADVANTAGES OFTECHNICAL ANALYSISThe proponents of technical analysis and technical trading methods arenumerous even though this science is relatively new.Their numbers growevery day, along with implantation of these revolutionary ideas into thearsenal of the vast majority of currency speculators.The founders of tech-nical analysis (such as John Murphy) stated that technical analysis couldbecome the only tool to forecast market movements and completely re-place fundamental analysis.The number of publications on this subject hasevolved, and now, even beginners can freely discuss head-and-shouldersformation.Technical analysis enjoys wide popularity among traders.Anycomputer software dealing with financial markets includes lots of indica-tors and other tools for technical analysis.Technical indicators are used as the basis for the development of themajority of trade strategies and systems.Many traders skilled in mathemat-ics try to optimize existing indicators and oscillators, as well as to developnew ones.The so-called black and gray boxes, which are, in essence, soft-ware with input trade algorithms, are based on these technical elements.However, not everything is so clear and unclouded in technical analysis.The main difficulty of technical analysis is an uncertainty that allows inter-pretation of almost each specific market situation in several different ways.Besides, the basic elements of technical analysis widely used in every-day work do not behave the same way as they were described in textbooksand publications.See Figure 6.1.This way, the market prevents everytrader (who has read the textbook and learned the scientific fundamentals)from profitable trading on the financial markets.Difficulties arise whentechnical analysis is used in daily short-term trading because of minor mar-ket fluctuations that, in essence, are just the market noise.This noise canbe compared with radio interference hindering clear reception.Unfortu-nately, the amplitude of this interference is too high to be ignored in short-term trading, and it disturbs the market harmony.See Figure 6.2.Paradox 5The forecast on markets with a minimum number of technical tradersamong other participants is much easier.For example, daily plots of theDJIA, NASDAQ, and S&P indices often provide a technical picture that is ccc_beat_037-050_ch06.qxd 6/8/06 2:35 PM Page 41Technical and Fundamental Analysis 41FIGURE 6.1 According to technical analysis textbooks, a triangle should be areversal formation.As you can see on this picture, it s not always like that.So, toavoid being caught with the wrong opinion, the trade should rather be based onactual market behavior than on views, opinions, and projections.FIGURE 6.2 10-min USD/CHF chart shows how fast and volatile the market canbe, sometimes making crazy swings in both directions.Despite all this craziness,the picture still makes perfect technical sense.Take a look at the formation.It is abroadening triangle we can clearly see on the chart. ccc_beat_037-050_ch06.qxd 6/8/06 2:35 PM Page 4242 DEVELOPING A TRADING METHODclose to ideal and easy to understand.However, stock-market traders tra-ditionally prefer fundamental analysis, and the percentage of technicaltraders is still not sufficient.The FOREX market, filled with technicallyskilled speculators using the classic technical analysis tools, becomesmore and more difficult to forecast [ Pobierz całość w formacie PDF ]