The other side of technical analysis

I don’t need to explain how big technical analysis is for trading, we all know. What separates old duffers like me from the less experienced traders is that I had to learn to trade when it didn’t really exist.

Over the years I came to use it as it enhanced what I already knew, and at first I went potty with it, drawing lines hither and thither, using this indicator and that indicator, and all I ended up doing was making my screen a mess and not understanding exactly what was going on. So I stripped it all back and, as you now see, I keep it very simple, and that suits me fine.

As I mentioned at the start technical analysis didn’t really exist in my world. You learnt where the levels were by price action and orders. To that end I trust my experience more than I do the techs.

Unfortunately there’s many many traders who don’t have the experience I have and so have grown to rely exclusively on T/A to trade. Something physical like a line on the chart is very enticing to inexperienced traders who can’t read price action. It’s almost a flashing pound sign saying “You will make money here!”

That’s not the case at all and it leads me to my point.

Recently, came across this chart which tickled my fancy;

GBP/AUD daily chart 13 07 2014

GBP/AUD daily chart 13 07 2014

Here’s the analysis at the time.

So, my perspective was to enter longs against the 55 & 100 dma’s and finally the 200 and lower support line. The pound was still looking solid and the aussie was going nowhere.

Let’s see what it looks like today.

GBP/AUD Daily chart 24 07 2014

GBP/AUD Daily chart 24 07 2014

All that juicy looking tech was smashed to bits, and here’s my key point. I didn’t trade the levels because of the picture that developed in the prices at the time. The pound was starting to struggle topside and the aussie was starting to bounce and had the inflation data coming up. The signals were telling me to leave it alone. As I am a very cautious trader naturally it was enough to make me scrap my plan.

The tech levels were a useful guide to help give entry points, they were not a get rich quick scheme and that must be at the back of your mind whenever you use technical analysis. They don’t predict the future but if enough people are invested in it it can act as a self fulfilling prophecy. Even that isn’t a strategy though.

Technical analysis should be used as a tool to lower your risk of losing on a trade, not for a direct way to make money. I’ve no gripe with all the tech traders who go into great detail and analysis but that’s not for me and sometimes simple is best.

T/A is a very very useful tool for traders to use but it should be one of many that can help compliment your ideas and strategies and the most important task of not losing money.

I’d also like to tip my hat to those in the comments of the original post who saw an opportunity trading the other way and I hope they made shed loads of money doing so.