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How And Why Technical Analysis Fails

Photo by Devon Janse van Rensbur

Getting Technical 

For those who have been following TRIN Café over the years know that I have put a lof of emphasis on using technical chart patterns to guide my trading. If you are a beginner trader or have years of experience with technical analysis, I wanted to illustrate how and why the popular trend line in technical analysis can be misused and potentially dangerous to your trading capital. The purpose of technical analysis is to be able to determine the direction of future price, most of us are looking to identify a trend in our perspective trading time frame of choice. Trading your own money is a thrill in the beginning, but when you are trading for an income, all the thrill needs to be removed from the equation. 

If you find yourself in a trade and your heart is beating faster, it's probably a bad trade. The not so secret to avoiding bad trades is by first identifying the trend in your time frame. In the below chart, the time frame is a 5 minute candlestick chart. The trendline drawn is clearly pointing downwards, the temptation to short CL could be also justified by how price broke below the area of support as indicated by the chart (R3).

As a technical trader, we need to take into account that as of 10:40am on the chart, CL is up 2.59%, is this a potential huge selloff, a prelude to a monster day that would be a chance too good to pass on...? These are some of the dangerous thoughts that pass through my head, they are only distractions to what is happening beneath the surface of the chart.

The Facts

CL is in the green, hoping to be the smartest person in the market by trying to short the tremendous bullish sentiment could make an impressive profit, unfortunately, that hope has nothing to do with good trading. Support & Resistance (S&R) are highlighted in the yellow zone, expect this range to be the area of congestion for the day, profits can be made in this area, however, trading in chop is not the same as trading with the trend. At 11:00am, the price is still trading in a congested range, hovering near R3. The justification for shorting anything below R3 support could have been made based on the downward trend line, and the previous lower highs and lower lows, you would have only found yourself trading in congestion hoping for a price breakout.

CL 5/15/16

What's Next?

Now that price is still moving sideways, what is left to do... try focusing on news and market fundamentals to determine why the market is sideways maybe? It doesn't matter, all that matters is what price is doing at the moment, we don't need to know the fundamentals of what we already know.
In the past, I have waited until the very end of the trading day waiting for an opportunity to put a trade on, sometimes with success, and often times leading to over trading and big losses. Mark Douglass, author of Trading In The Zone explains the four primary trading fears, my biggest trading fear is the fear of missing out.

“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”

I've learned that my zone of focus lasts from market open until lunch time; if I have not put a trade on, that means the market is congested. I am aware that after the NYC lunch hour, it's possible the market may have a monster move, but I have to be content with trading well within the limits of my own zone.

Update: I wanted to capture the entire day's price action before posting this analysis. The price remained choppy the entire day. Profit "could" have been possible, however, words to avoid when trading your own money are "could've, should've, would've" just to name a few, these kinds of words project regret that can sabotage the best intentions of trading well on the next trade.

CL congestion lasted all day.