How Eating Bitumen Made Me a Better Trader
Trading is a fascinating activity.
There are so many layers to it. And so many paths that you can go down.
Soon after we first got interested in the stock market I became captivated by technical analysis. I finally felt that I was in control. It gave me great confidence to have all these tools to use.
We bought some expensive charting software and I started playing with the hundreds of indicators that it contained. Exotic sounding devices with impossible to understand mathematical formulas.
So, armed with all these new tools, I was sure we would be making a killing in no time. Because now we had science on our side!
And so I spent night after night, weekend after weekend trying to understand them. Backtesting. Trying one and then another.
But still we struggled to pick the winning trades.
I can remember buying this add-on to our software that gave us even more indicators. And I was convinced this would finally make the difference.
So I tried yet more indicators. Using different settings and different combinations.
But success still eluded us.
And it took us quite a long time before we understood why.
But before I explain what we discovered, let me tell you about eating bitumen.
My office is close to home. So some years ago I decided it was silly for us to have a second car. And so I traded it in and bought a scooter.
Now the only real problem with scooters or motor bikes [apart from getting wet in the rain] is that you are fairly likely to get hit by a car at some point!
It just stands to reason.
So I am always careful to watch cars to see which way they indicate they are going to turn or whether they are stopping.
But this one day I was in a bit of a hurry.
And as I approached an intersection a car was parked at the stop sign on my right. I was going straight through and the driver was indicating to turn left.
[At this point I should remind some of our overseas friends that we drive on the left side of the road!]
So I knew it was OK for me to keep going straight through the intersection. Or so I thought!
Next minute I am slamming on my brakes as the car accelerates across the street immediately in front of me. As my scooter hits the fender I go flying across the front of the car and land on the pavement on the opposite side.
For anyone who has experienced such an event you will know what I mean when I say that it was like the whole thing happened in slow motion. Quite weird!
I can remember looking at the car as it headed for me and not believing that this was really happening.
Because I was convinced it was going to turn left. The driver had indicated that he was turning so what was he doing on my side of the road?
But there he was. I couldn't believe my eyes but eating bitumen convinced me that this was indeed reality!
Ever since, I don't trust car indicators. Instead I have learned to look at the front wheels. Because this is the true indication of which way the car is actually going to go.
And you can't rely on looking at the driver, even if you can see them. Because they often don't seem to know where they are going, either!
But the wheels don't lie!
The car can only go in the direction they are pointed.
Now what on earth has this got to do with what I was talking about before?
You remember I was telling you about the problems we were having with technical indicators? Well what finally dawned on us was that we were not taking enough notice of price action.
And so we started to study the chart before adding any indicators.
And suddenly we saw what was really happening. It was like looking at the car's wheels instead of its blinkers.
You see, technical indicators are just what they say they are - indicators. Not reality. Not price action.
But an interpretation of price. A filter.
And so you need to look at a stock's price chart on its own to get a picture of what is really going on.
This is not to say that technical indicators are not useful. But the critical thing is to only use them after you have analyzed price action. Not before.
Just remember - the wheels tell the truth!
David Chandler
Ordinary People Making Extraordinary Profits!
For free mini-course on stock and options trading click the following link:
http://www.StockMarketGenie.com
Or visit our blog at:
http://stockmarketgenie.blogspot.com/
The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Why Change Funds?
On November 17 I bought 7 different mutual funds and went to a 100% invested position. One of the funds I bought was Robertson Stevens Information Age (RSIFX) and it has made money as have the other six.
Picking Mutual Funds to Outperform the Market
With over 6,000 mutual funds available, it may be tempting to pick funds from a popular star or index rating system. Savvy investors, however, balance multiple factors in their selection process.
Hill of Hope
Just about now everyone is confused as to which way the stock market is going to go - up or down. For the past 3 years it has been headed south, but the Wall Street experts have told us that the market never goes down 4 years in a row so this has to be an up year.
Invest, Be Wrong, and Make Money in the Stock Market
I have been trading for several decades and was an exchange member and floor trader for 17 years. You learn fast there or you go broke in a hurry.
Look Out The Window
Quick, look out the window. It's raining.
I Love You, Warren Buffet
Sometime around 1980, can't remember exactly, there was a flight of money from many countries to Switzerland. The clock makers had so much money pouring in that the banks took interest rates to zero and even for a period of time were actually making you pay ½% interest to them to put your money in their banks.
Defining a Long-Term Investment in the Stock Market
For some "long term" would mean holding a stock position over the weekend. For others, it may mean holding a security for at least 1 year for the purpose of declaring a long-term capital gain, thus saving on taxes.
Investing in Dividend Paying Stocks
I was recently interviewed for a press release through a financial question and answer format. One of the questions asked of me in the interview was:Where do you think the stock market is headed over the next five years?My Answer!Charles M.
The Surgeon General
The Surgeon General of the United States says that smoking cigarettes is harmful to your health. It is printed on every pack of smokes you buy.
Struggling Stocks, Booming Commodities
04/28/2005NASDAQ dropped -12.5% year to date in 2005.
The Stock Market - Part 1: Believe It Or Not, Its Always Been Your Best Friend And Always Will Be
Regardless of the fact that the world's stock markets have shown absolutely no growth between the date of writing this article (Late April 2005) and the late 1990s, they should still be looked at with more than just a sideways glance.Speak gently to them, speak well of them to your friends, learn to trust them, cuddle up close and get to know them - and they will reward you in a way that the banks, mutual funds (Unit Trusts in the UK), pension funds and insurance companies never can or will.
The Information Age
It is wonderful to be alive in the information age. We know in a matter of seconds the change in the value of gold in Switzerland, the death of a world leader or the birth of a peasant in Israel.
Commoditizing the world
Let's discuss commodities; with the latest Enron situation, it is important to understand the way things work. A commodity is anything useful, especially a transportable agricultural product or mining product.
Understanding a Stocks PEG Ratio
A PEG ratio cannot be used alone but is a very powerful tool when integrated with the basics (price, volume and chart reading). You must enjoy crunching numbers and have a calculator handy to estimate your own PEG ratio.
Market Globalization
Just 30 years ago the stock market was a shadow of what it is today. There were many fewer shareholders and the daily volume was a fraction of what it is at present.
Hold Em and Fold Em
When most analysts, financial planners, fund specialists and investors try to decide whether to buy a particular stock they immediately go to the financial statements to determine the growth potential of the company. Numbers and more numbers.
Stock Market Investing Odds
The greatest stock market myth is the idea that investing in stocks is a form of gambling!The financial markets are often compared to a casino. Put some money on X stock and you might as well be playing craps!If that's your impression, and it's keeping you out of the markets, consider this: If investing is organized gambling, it's one of the rare kinds where the odds are stacked in your favor!Why is that?Corporate profits are the key to understanding the investor's edge.
Fake Money
Reach in your pocket and take out that big roll of bills. Depending on how many of them you have you feel pretty good.
A Stock Market Investment Strategy
I feel that an investment strategy in the stock market can instill in the individual investor not only an assured confidence in all future stock market investments, but also an almost Zen-like sense of peace and well being. A stock market investment strategy spelled out, proven, and instilling within the investor the power to succeed in the stock market with an assured confidence.
Long-Term Investment In Todays Market?
The stock market is very unstable at this time going up and down while interest rates are so low you want to be a borrower and not a lender. Would you like some suggestions on how can you get the most out of low interest rates while being assured your principal will not disappear while you are trying to make some money? Of course, there is always the danger of borrowing the money and then spending it just because it is there.