Market Myths That May be Sabotaging Your Trading

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Market Myths That May be Sabotaging Your Trading

Whether you trade binary options, forex, stocks or commodities there is a load of information passed off as truth, and accepted by traders, but which is actually total bull. Here are some market myths circulating around the financial industry…and the real story behind them.

Myth: Complex is Good

No, simplicity is good. Complex strategies and trading methods just don’t work for most traders. While it’s tempting to add more indicators to find more trades, or attempt to filter out some bad ones, such endeavours are likely to be fruitless in increasing overall profitability. Price is the ultimate indicator, and heaping on a bunch of rules or indicators won’t change which direction the market is going. Almost all indicators are just manipulated price data. Keep your strategy simple; base it on price movements, with one or two indicators tops (if required) which provide an entry and exit for each trade and keep the risk on each trade very small relative to your account value.

Myth: Trading is an Art

Have you heard the saying “Trading is an art, not a science?” Don’t believe it. If you want to be successful in the markets, you need to develop scientific like tendencies. Your trades need to be executed with precision, and your position size managed exactly to control risk. Winging it or getting “creative” with trading simply means the time hasn’t been put in to come up with and test out a viable strategy. Good traders hone their techniques by writing down their plan, then executing it exactly, recording results and then looking for ways to improve, all the while keeping it simple.

Myth: More Trades, Equals More Money

If one trade makes you money, then three should make you even more, right? Possibly, but not all the time. There is a tendency called “over-trading” and it involves making trades when there is no real market based reason for doing so. One tell-tale sign of over trading is when you trade based on emotional impulses–you feel bored so you make a trade, you want more money so you make a trade, you just had a losing streak and want to make it back, you’re afraid you will miss an opportunity, or any other reason that pops into the ol’ noggin which is based on emotion and not a sound pre-defined trading strategy. Trade on emotion, and you’ll likely abandon all your strategies and ruin the hard work you have put into finding a logical way to trade the markets. Only trade when there is good reason.

Myth: There is a Perfect Strategy

Ever fantasize about the perfect strategy, or being able to trade with slight foreknowledge of what the market will do? I have, but it’s totally fantasy. Despite what advertisers, authors and people trying to sell you something will tell you, all the best and wealthiest traders in the world have losing trades…lots of them! Losing trades are part of the trading game. Don’t try to eliminate them, because you can’t. Find a strategy that wins more than loses, manage your risk, and your account will slowly growing allowing you to take larger positions and create more wealth. Success doesn’t come from a 100% win ratio; it comes from sticking with a strategy that provides you a slight edge, being patient and sticking to it so that edge can bolster your account size over time.

Myth: You Can Get Rich Quick

There are stories all over of how someone bought a penny stock and became a millionaire over night, or a trader who had an epic run over the course of a year and grew a $500 to a cool million. These things do happen, but they don’t happen often. For every one of those people that hit it big, thousands upon thousands of traders lose every day, and thousands upon thousands of others break-even or make a slight profit. Trading to get rich quick will leave nearly all of those who attempt it with less than they started with. Instead, realize the true odds of trading. It takes work and you’ll only ever get a slight edge, which then must be leveraged with patience and discipline in order to grow your account over the long-term. In this way, you have best chance of getting rich (hopefully, but there are still no guarantees), but it isn’t quick.

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Myth: If Your Strategy is Good, Money Management Doesn’t Matter

I view money management as how much you risk on each trade–your position size–relative to your account size. It can involve more than this, but that is one the biggest factors in managing trading capital. As a generally rule no more than 2% (preferably less) of the account should be risked on a single trade. If you have a $10,000 account, don’t take trades where you can lose more than $200. Why? Because even a great strategy can have a string of losses. If you risk 10% of your account on each trade, you can be wiped out in a very brief time frame. No matter what the track record of a strategy is, it’s fallible. Don’t risk too much of your hard earned money on one trade. Risk a small amount and you’ll never have to worry about losing all your capital. A loss means nothing when you risk only a small percentage of your account, yet your account can still grow over time if you have a good strategy.

Trading is a long education process; mainly because there is so much information out there that shouldn’t be trusted. Don’t accept what experts say (including myself) without doing a little a digging yourself to find some verification. The markets can reward stupidity, and punish cleverness, which is why I can be so hard to find or create strategies that stand the test of time. But if you put in the time, and combine your own research with the research of others, I firmly believe anyone can become a successful trader with patience and discipline.

7 Myths Traders Have About Systems

If professional traders tend to underscore any one thing, it is that you must have a trading system. Despite this, many binary options traders seem to resist getting one and taking it seriously.

Perhaps this shouldn’t come as a surprise. Finding, learning, testing, and adapting a trading system is a lot of work. It requires research, discipline, and ingenuity. Not everyone is up for that kind of journey.

But what about traders who potentially are up for that kind of hard work, but still refuse to do it?

There are a lot of reasons why otherwise smart, disciplined people resist trading systems. Sometimes I think these myths and misconceptions really are justifications for avoiding hard work, but other times, I think that traders really believe them. Here are 7 common reasons traders give for why they are still placing their trades arbitrarily. All of them may sound reasonable on the surface, but they are all mistaken beliefs.

All too often, newbies who rush into trading are rushing because they are already in trouble. They need cash, and they need it fast. They see binary options as a quick fix to their financial problems. But that means they do not have time to research and test and train. They need to get started trading right away. They cannot spend years slowly accumulating a small bankroll into a big one.

This is not entirely their fault. You can blame the questionable marketing tactics that are so rampant in the binary options world. Even good brokers sometimes market this way. This is understandable—they need the customers, and they know that if they do not snag them, someone else will.

But this does not mean this is the right way to trade. If you are in financial distress, binary options are not an overnight solution. You must look for an alternative in the meantime. You need a day job. And while you may not like it, you need to be prepared to do it for years.

The truth is, you do not have time not to find a system. Any time you spend trading without one is time wasted.

Remember that every dollar that goes down the drain (as is inevitable, if you are trading with your gut) is one you have to recover before you can make another dollar. You have to work twice as hard and twice as long to get ahead.

That is what you do not have time for!

This is a complaint I have read from some pretty intelligent people—many of whom actually do trade with systems. Only they usually choose not to call them that. Instead, they generally refer to them by some other name such as “methods.”

I actually prefer the word “method” as well. It is true: sometimes systems do get too rigid and restricting. If you have no wiggle room for innovation, intuition, or discretion, you might as well be a trading robot.

Trading robots are useful, but they will all eventually fail if a human does not eventually tweak them as needed. The market changes over time, and as a trader you are taking advantage of some of those fluctuations—your system is designed for that purpose. But when the character of the market changes, not just price, systems stop working.

So even if you are a mechanical trader and you follow your rules exactly most of the time and try to keep your discretion out of trading as much as possible, now and again it will come into play.

None of this is a reason not to use a system.

It just means you need to broaden your definition of what a system is, and figure out the best way to manage yours. For some traders, that may mean a little discretion. For others, it may mean a lot. Either way, a rigid definition of a word is not an excuse. A trading system (or method) is your tool for weeding out chaos and bringing order, predictability, and profit to your trading.

This complaint is very much like the one above. You may worry not only that using a system will restrict your ability to make decisive calls about your trading, but that it will also suppress your creativity as well.

Nothing could be further from the truth. It actually takes a great deal of creativity to create a system to begin with. And even if you choose to use a system created by somebody else, you probably will not end up using it exactly as that person did. You are not the same person, and you will need to adjust the system to fit your trading style. That also takes creativity.

On top of that, on an ongoing basis, most successful traders are constantly striving to research and develop new trading techniques. Once more, if you are not creative, you will have a very hard time doing this.

So will a system restrict your creativity? Definitely not. You need creativity to work with systems to begin with. And of course a legit broker to trade with.

“Trading with a system will be too boring.”

This complaint does not have a rational basis at its root. Its basis is emotional. There are many people who get into trading because they believe it is an exciting, fast-paced, action-packed adventure, that they will be riding the rollercoaster of asset prices on the super speedway to success.

In real life, trading does not look like that at all. That really should not discourage you. Think about other occupations, like doctor, lawyer, or advertiser. It is not as if you will be living out the drama of House, Law & Order, or Mad Men. If you have one of these occupations, your own life will be a lot more sedate. Arguably all careers are “boring” when you are doing them right.

Ask yourself instead: “Is making money really boring?” True, your day-to-day life may involve a lot of sitting, waiting, staring at charts, and predictability according to your system, but you will make far more money doing this than riding a rollercoaster of emotional highs and lows.

You need to ask yourself what is really important to you. If emotional excess is more important to you than making money, then maybe trading would be a tedious career. But if you are serious about making bank, you will not mind when trading is “boring.”

“I perform my best when I am under stress.”

For a lot of us, this starts in high school and never really ends. Your teacher gives you three months to get ready for the science fair. For three months you are clueless what to do for your experiment. Then, in the last week before the due date, you suddenly get dazzling insights and spontaneous bursts of creativity. You run your experiment, turn in your project, and walk away with an A.

From that moment on, you conclude that there is something about pressure which leads to results. Maybe it is the old bromide that necessity is the mother of invention.

If you take this thinking and try to apply it to trading, you might come up with the idea that you will get the best results while trading if you likewise toss responsibility and planning to the roadside.

The big difference here is that you did not actually have to get your science fair project done or get an A on it to survive. At the time it might have felt that way, but it simply wasn’t the case.

You do have to make every trade an “A” trade if you want to trade for a living. This is real life, and that is a very different kind of pressure. It is not something you want to mess around with. If you get it wrong, you get it disastrously wrong.

To some degree that pressure is always there in the background of your life (or the foreground, depending on how broke and/or anxious you are). If you are aware of it, you realize you already have enough motivation in the form of stress to stoke the fires of your creativity and fuel your will to succeed.

If you pour gasoline on that fire, you will not perform better, you will simply explode. Trading without planning is just asking to blow your account.

“A system just isn’t my style—or rather, my un-system is my system!”

Like the “trading with a system is boring” myth, this is another one that has an emotional basis and not a rational one. It may sound logical to you if you believe it, but it all comes down to your self-perception. For whatever reason, you have tied your ego to your system-free trading.

It is fine to have a personal style as a trader—in fact, the more you know about your personal trading style, the better.

But something that does not actually generate profits cannot be your style. Why? Ask yourself what your goal is. Your goal is to make money, right? If so, then any truly valid personal style will be something that supports your goal. A style that does not help you achieve your goal is linked to something else, like an urge to self-sabotage. That has nothing to do with your true self.

If you do not trade with a method of some kind, even a highly discretionary one, you are doing nothing to bring reliability and focus to your trading. There is already enough chaos in the market. If you choose to add to the chaos instead of subtract from it, you will just blow trade after trade.

Whatever it is that is really holding you back, try to identify it and let it go. Maybe for some reason you are sabotaging your own success. It is an incredibly common thing, but it is something you can move past. Making the decision to discover your true trading style and finding a method which supports it—however discretionary—is a big part of that.

“A system is not going to save my trading. I have too many other problems.”

There may be something to this, depending on your situation. A system alone will not be enough to save a lot of traders’ accounts. But that does not mean that it is not a huge step in the right direction. And while you are finally taking the time and effort to get a system, test it, and make it work for you, you could end up addressing some of those other issues along the way.

For example, it could be that what is standing in your way is a lack of discipline and follow-through. You might set out with the best of intentions, and repeatedly blow you chances by giving up before you really get the ball rolling.

It is true that simply finding a system will not cure this problem, since you can have a system and apply it inconsistently and still lose money.

But trading without a system altogether is probably the most undisciplined thing you can do. So getting a system at least is one big positive step. There may be many other steps you need to take to save your account, but that just makes you a typical trader. We are all on a long journey with many obstacles and challenges facing us.

Once you have a trading method, you will be empowering yourself to succeed. The right system is like a roadmap, steering you around obstacles, helping you avoid pitfalls, and giving you enhanced vision of where you are, where you were, and where you are going. Without it, you are stumbling around blind in the dark.

There are hundreds (maybe thousands) of free trading systems online. Join a popular trading forum and you will get access to more systems than you know what to do with. Just pick several and try them out (always demo test before trading live!). If you do not like any of them, pick several more, and so on. When you find one that calls to you, run more extensive tests.

Eventually, when you start seeing your win percentage climb—when your 46% becomes 64%, when your 64% becomes 79%, you will see that all of the hard work was worth it. Many people believe that systems are too restrictive, but look at the ways in which you are currently restricting yourself. The right system will not dampen your creativity or cramp your style—it will liberate both to soar.

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Key To Trading Success

Key To Trading Success: Ignore Nature’s Laws?

The following is excerpted from Robert Prechter’s Independent Investor eBook. The 75-page eBook is a compilation of some of the New York Times best selling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.

By Robert Prechter

…The natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills. There is no such thing as a “born trader” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you.

Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich.

Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t. The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.

Robert Prechter’s Five Tips for How To Trade Successfully

September 15, 2009

Take it from the person who won the United States Trading Championship with profits of more than 440% in 1984 – there are five things that every successful trader needs to know how to do:

  • Have a method to trade.
  • Have the discipline to follow your method.
  • Get real trading experience, instead of only trading on paper.
  • Have the mental fortitude to accept the fact that losses are part of the game.
  • Have the mental fortitude to accept huge gains.

That trader who won the championship in a record-breaking fashion is Robert Prechter, the founder and president of Elliott Wave International. Once you think you’ve mastered his 5 tips for how to trade successfully, then the best thing to do is to find a mentor. In this excerpt from the book, Prechter’s Perspective, Bob Prechter discusses how sitting at the elbow of a professional trader can make all the difference in learning the trade of trading.

Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.

(The following Q&A is excerpted from Prechter’s Perspective, revised 2004.)

Question: Has any specific trading experience decreased your trading success?

Bob Prechter: Yes. My first trade in 1973 was wildly successful, and I was hardly wrong in my first six years at it. Then I had a big trading loss in 1979, and that taught me more than the wins. The best way to develop an optimal state of mind for trading is to fail a few times first and understand why it happened. When you start, you’re better off speculating with small amounts of real money. Using larger amounts of money will bankrupt you early, which, while an excellent lesson, is rather painful. If you want to be a trader, it is good to start young. Then when you lose your first two bundles, you can gain some wisdom and rebound.

Q.: It sounds painful. Is there any way at least to reduce the hard knocks?

Bob Prechter: There is one shortcut to obtaining experience, and that is to find a mentor.

Q.: Did you have a mentor?

Bob Prechter: In 1979, I sat with a professional trader for about a year. The most important thing he taught me was to keep trades small relative to your capital. It reduces the emotional factor.

Q.: How would one select a mentor?

Bob Prechter: The best way to select one is to find a person who is doing exactly what you would like to do for a living, then get to know him well enough to ask if he will tutor you or at least let you watch while he works. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. Listen to him. Sit down with him, if possible, for six months. Watch what he does. More important, watch what he doesn’t do. Finding a guy who knows what he is doing is the best lesson you could ever have. You will undoubtedly find that he is very friendly as well, since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled, matured by the experience of trading. He will usually welcome the opportunity to tell you what he knows.

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Are These 4 Emotional Pitfalls Sabotaging Your Trading?

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 17, Elliott Wave International is offering a special45-page Best Of Traders Classroom eBook, free.

To be a consistently successful trader, the most important trait to learn is emotional discipline. I discovered this the hard way trading full-time a few years ago. I remember one day in particular. My analysis told me the NASDAQ was going to start a sizable third wave rally between 10:00-10:30 the next day… and it did. When I reviewed my trade log later, I saw that several of my positions were profitable, yet I exited each of them at a loss. My analysis was perfect. It was like having tomorrow’s newspaper today. Unfortunately, I wanted to hit a home run, so I ignored singles and doubles.

I now call this emotional pitfall the “Lottery Syndrome.” People buy lottery tickets to win a jackpot, not five or ten dollars. It is easy to pass up a small profit in hopes of scoring a larger one. Problem is, home runs are rare. My goal now is to hit a single or double, so I don’t let my profits slip away.

Since then, I’ve identified other emotional pitfalls that I would like to share. See if any of these sound familiar.

Have you ever held on to a losing position because you “felt” that the market was going to come back in your favor? This is the “Inability to Admit Failure.” No one likes being wrong and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I know now that being wrong is much less expensive than being hopeful.

Another emotional pitfall that was especially tough to overcome is what I call the “Fear of Missing the Party.” This one is responsible for more losing trades than any other. Besides overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend? The solution is to use a time filter, which is a fancy way of saying wait a few bars before you start to dance. If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much. Anyway, I would much rather miss an opportunity then suffer a loss, because their will always be another opportunity.

This emotional pitfall has yet another symptom that tons of people fall victim to chasing one seemingly hot market after another. For instance, metals have been moving the past few years so everyone wants to buy Gold and Silver. Of course, when everyone is talking about it is usually the worst time to get into a market. To avoid buying tops and selling bottoms, I have found that it’s best to look for a potential trade where (and when) no one else is paying attention.

My biggest, worst emotional monster was being the “Systems Junkie.” Early in my career I believed that I could make my millions if I had just the right system. I bought every newsletter, book and tape series that I could find. None of them worked. I even went as far as becoming a professional analyst guaranteed success, or so I thought. Well, it didn’t guarantee anything really. Analysis and trading are two separate skills; one is a skill of observation, while the other, of emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.

I am not a psychologist or an expert in the psychology of trading. These are just a few lessons I’ve learned along the way… at quite a cost most times. But if you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one. What you discover may surprise you.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Traders Classroom eBook. Normally priced at $59, it’s free until August 17.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI’s premier commodity forecasting service.

The Three Phases of a Trader’s Education:

Psychology, Money Management, Method

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special45-page Best Of Traders Classroom eBook, free.

Aspiring traders typically go through three phases in this order:

Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.

Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.

Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Traders Classroom eBook. It’s free until August 10.

Spot a Pattern You Recognize: One Simple Tip for Becoming a Better Trader

The following article is adapted from market analysis by Elliott Wave International Chief Commodity Analyst Jeffrey Kennedy. Now through July 22, Jeffrey Kennedy’s daily, intermediate, and long-term forecasts for up to 18 markets are free via EWI’s FreeWeek. Learn more here.

Wave patterns are like beautiful women, classic cars and great art – you know them when you see them.

EWI analyst Jeffrey Kennedy drives this point home during his live Elliott wave trading tutorial. It’s my favorite of his tips for trading with Elliott waves.
“Trade the pattern not the count,” Jeffrey says.

If you don’t recognize a pattern at a glance, don’t trade it – plain and simple. After all, your wave count can be wrong; the pattern cannot.

Does that mean you must know the exact wave count at a glance, as well? No. Simply spotting a pattern you recognize is where you should start.

Jeffrey scans hundreds of charts, clicking through them one by one, spending mere seconds with each. If he doesn’t spot a pattern he recognizes, a click of his mouse takes him to another potential opportunity.

Does price action look extended or choppy? Is it trading in a channel? Is it forming a wedge or triangle shape? These are some of the signals Jeffrey’s looking for. Each could help him identify – at the quickest of glances – whether price action is impulsive or corrective. This is the first critical step, Jeffrey says, to spotting high-confidence, Elliott wave trade setups.

That brings us to the following chart. Do you see a pattern you recognize? I do.

Look at the downward price action; the moves look decisive, almost in straight lines like impulse waves. Now look at the upward moves; they look indecisive and choppy like corrections. There’s also one down move that is clearly longer than the others – that’s almost certainly a third wave of some degree.

At just a glance, here are a few things we can determine:

  • This is a bearish market pattern, because downward impulses are interrupted by upward corrections.
  • The price action from September to November seems to be a pretty clear wave 3 down, followed by waves 4 up then 5 down, completing what appears to be a larger degree wave 1 in early March.
  • Wave 2 follows wave 1, so the upward move starting in early March is most likely a larger degree wave 2.
  • Wave 3 follows wave 2, so that’s what we can expect next.
  • Wave 3 is never the shortest and often the longest of all five waves, so we can expect the next impulse move to take prices to new lows.

You see, with just a quick glance, we’ve put a finger on the pulse of the market. Negative psychology pulls prices down, and brief reversals of mood result in upward corrections – this appears to be a long-term bear market.

If you can gain this much insight simply by glancing at a chart, just think of what else you can glean by spending more time with it. Look at this pattern within a longer time frame, and you can determine the degree of trend (this one appears to be primary). Formulate Fibonacci price and time targets, and you can be confident about when and where prices will most likely turn.
There are literally hundreds of things you can do with a good chart, but none of them mean much unless you can first identify a pattern you recognize.

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