What is the most important thing you should be looking for when you look at a chart of a market? What is the No. 1 thing to look for in a chart?
Did you say what the market is going to do next?
If you did then you are wrong. Very wrong.
That should be pretty obvious. A chart is a diagram of data on the price of the security in the past.
The chart contains no data in relation to the future. None at all. How could it?
So if you look at a chart expecting to see something on what the market is going to do tomorrow or later today you are certain to fail.
In life, you should never get into a fight you cannot win. People sometimes try to justify doing so by arguing that they are standing up for a principle.
Fine, but at what expense? And what’s the point if you are going to lose? Similarly in trading.
Don’t ever try to achieve something where you know are going to fail.
Looking at a chart expecting it to tell you what is going to happen next is an exercise that is certain to fail.
But so many people approach technical analysis, also known as charting, in this way.
But hold on you shout: if the chart is not going to tell me what will happen next then what is the point?
To try to answer that, here are two points on which I think we can all agree.
First, a chart shows you what has been happening in the market in the past. If we have a very short term chart then it’s the very recent past so we can say it shows us what is currently happening.
Second, our objective is to work out what will happen in the future. More accurately, it is to decide what is most likely to happen .
We can simplify this objective further to deciding between two alternative outcomes in some time period: the market will rise or will fall. Staying exactly where it is a theoretical possibility but we can generally discount that as unlikely.
So, we see that there is a gap to be bridged between what information we have and our objective.
Bridging this gap is challenge we face. To achieve this we make some assumptions.
Some people describe these as beliefs about the market. However, I always think of a belief as something you accept without proof whereas the assumptions are based on back testing of ideas.
In other words, they are more akin to a hypothesis or a reasonable expectation given previous observations and experience.
These assumptions all take the form of statements that when we see one thing happening then some future move is more likely than an alternative. So we assume it will happen.
These assumptions are key parts of every trading plan.
In the BOSS trading system they appear in two forms. The first is in the trend analysis. All this can be boiled down to a statement that a trend is more likely to continue than to reverse provided certain conditions are fulfilled.
Notice that implementing this in terms of the analysis is fully possible based on the information we have because we can see if there is, or has been, a trend and we can see if the necessary conditions are present.
The second form where the assumptions appear is in the rules that comprise the setups. For example, a setup may conclude that a call options should be entered when the signal line crosses the MACD line provided an uptrend is in place and is not overly extended.
If we adopt this setup in our trading plan then it is because previous observation has taught us that when this happens the market is more likely to rise over the next period than to fall.
Can you see how this works? We apply the assumptions or beliefs – perhaps rules is a good word – that are in our trading plan to the information that is contained in the chart to draw conclusions about the likely future direction of the market.
The essential point to grasp is that without the trading plan – without the rules – looking at the chart is a worthless exercise.
It will just show you what has happened. You need the plan to work out what is most likely to happen next.
Putting the two together is what changes an exercise that is doomed to failure to one where you have a fighting chance of success.
If you have not done so already you should download the free Introductory Guide to Trading Binary Options to see how you can use these ideas in your trading.
So, what is the No. 1 thing to look for in a chart?
You look for what has happened. Because that is the information the chart contains.
Now, what does your trading plan tell you is likely to happen next?