10 Commandments in Technical Analysis: Heed Them to Succeed in Trading!

technical-analysis

Growing up in the 1980s, I found myself fascinated with the idea of becoming a high-stake, high-finance trader like the character of Gordon Gecko in the 1987 movie Wall Street. At the time, it seemed to me that traders led the perfect life: nice suits, hot women, fast cars, and tons of money. I was in college when Wall Street came out; I was then majoring in Economics and thinking of a career in banking and finance.

Immediately after college, I was offered a job at a multinational investment company. I was part of the sales team, and we were tasked to solicit accounts for investments in commodities trading. The research department trained us in both fundamental and technical analyses. Fundamental analysis is the method of evaluating the value of an investment by studying qualitative and quantitative factors, such as financial statements, economic indicators, industry trends, and company management. Technical analysis is the method of using statistics, charts, and other tools to identify investor behavioral patterns and trends to forecast activity.

After two quarters of hitting sales quota, management promoted me as section manager, which meant I could trade my accounts assuming I get licensed. I passed the SEC (i.e., Securities and Exchange Commission) licensure exams for traders, and my dream of becoming Gordon Gecko was becoming reality. Little did I know that the dream would eventually become a nightmare.

My first trade was in coffee. It was not a volatile commodity. Philippines only exported 3% of its production to the world market, volume of trading was not heavy, and it had been playing near current lows. There appeared to be more upside to coffee. For several weeks, coffee was range trading. Losses or gains on paper were not significant to justify any decision to cut my position.

And then it happened. The coffee market crashed.

The second trade was in sugar. The market had been on a bullish trend. Moreover, there were reports that Brazil’s unpredictable weather was damaging its production of sugar, and prices of world sugar or Sugar No. 11 was projected to soar. Brazil is one of the world’s leading producers of sugar. The volume of trading in sugar was heavier than that in coffee. Liquidating adverse positions should be easy.

And then it happened again. The sugar market crashed!

These losses were a reality check. Every Monday morning, the entire sales department conducted a market review, and for the most part, I presided over it. My background in Economics made news reports and data for market analysis easy to understand and to interpret. In theory, you invest in securities with strong fundamentals. It should be as simple as that, but it wasn’t.

“The problem with commodity trading is its thin volume; it’s easy to get in but it’s difficult to get out. Just because you post an offer to sell doesn’t mean you’re guaranteed a buyer. In the end, it’s still about supply and demand.”

That’s how I rationalized my losses. So when foreign exchange was included, I was elated because currencies move fast. You can’t argue the amount of money that is traded every day. But the same thing happened. I placed a client’s money on British Pound because nonfarm payroll data on the United States was expected to be below targets. It was but the US Dollar soared, and the British Pound crashed. I kept losing client investments even though the plans were based on solid fundamentals.

Shortly after the British Pound disaster, my department manager introduced me to an industry colleague of hers. His name was Andrew, and he was the vice president of another trading house. In addition, he was reputed to be one of the best traders in the industry. We were having coffee, and he asked me how I approached trading.

After I poured out my frustrations, Andrew smiled and said, “Fundamentals don’t work in trading.”

He explained that the news that comes out has already been digested by investors. The trend has been determined by the market, and the focus shifts to positioning, which is a function of investor behavior. The key to market positioning lies in understanding market psychology, and this is what technical analysis is all about.

I made a deal with Andrew. I would move my team and our accounts to him if I became his understudy in technical analysis.

That partnership was the start of my second lease on life as a trader. And I would never lose in the market again!

Andrew gave me his “10 Commandments” in using technical analysis for designing trading strategies.

 10 Commandments in Using Technical Analysis

1. Remove all biases

Andrew advised me to read news reports only for the purpose of presenting to clients. Technical analysis is a separate and distinct discipline from fundamental analysis. You must not be influenced by the news.

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