Why Technicals?

Boris Schlossberg

Those of you who’ve been reading me a long time, know how skeptical I am of technical analysis. Trading technicals in a void is like making medical decisions solely on the thermometer reading. At their core technicals are simply signals for sentiment or momentum. That’s all.

Given the funda context sometimes technicals can be an excellent forecasting signal and sometimes they can be a horrible one. One thing is for sure. With very few exceptions (such as major price milestones) technicals almost never drive price action -- they simply reflect it.

Pure technicians always get angry at me when I say that, but the proof is in their own actions. How many technicians will stand down ahead of a fundamental release of data? If price action was everything then you can you just ignore funda at will. Go ahead take that long ahead of NFPs. We all know how well that works.

You can, of course, trade off long-term charts and ignore the day to day noise but even there you are still subject to funda drivers. Tell me -- how did those weekly charts do on the Brexit vote? (Hint -- they walked you straight into a trap).

Anyway, my point isn’t to prosecute the case of what drives price action -- that argument has been settled a long time ago. Rather, I’d like to ask a simple question -- what are technicals good for?

Some die-hard fundamentalists will say -- absolutely nothing. Technical indicators, after all, are simply derivatives of price and therefore lagging by definition. But, as they say in the software business that’s a feature, not a bug.

Why would derivatives of price be useful to traders? Precisely because they can provide a visual narrative that can be difficult to see any other way. Indicators smooth out the randomness of prices and allow the trader to separate the signal from the noise. Take something very simple such as short-term moving average crossing a long-term moving average. Every major price regime change in the market starts with that dynamic. Now granted many of the moves fail to produce a sustainable trend, but by quantifying, standardizing and classifying each successful move you can sometimes tease out a meaningful edge and ride the wave to profit.

Technicals can also act as a check on your ego. If you are absolutely convinced that price should move one way, but technicals are actually showing the opposite chances are that you are wrong. One of my favorite setups is to have news print one way, but price action react the opposite. In that situation, technicals are almost always right.

Ever since our days on the savannah, we have been pattern seeking animals. It’s what kept us alive to the present day. Technicals are simply a unique manifestation of the same dynamic in a different environment. Instead of lion behavior, we watch price behavior and while that information is as incomplete to us as the herd movements were to hunter-gatherers, it is nevertheless valuable. It helps to inform our experience. It provides distinct knowledge which we can then try to turn into trading wisdom.

So even if you are diehard funda trader, you need to look at the charts. They tell a narrative that could be the key to your next profit in the market.

What’s Better – Technicals or Fundamentals?

Boris Schlossberg

If you are a diehard fundamentalist like I once was, than this recent piece by Morgan Housel from Motley Fool really makes you think twice. In a column published this week Mr. Housel noted a few inconvenient facts about investing.

“1. Coca-Cola is fighting 12 consecutive years of soda consumption decline. Its stock is at an all-time high.
2. Tesla is changing the world, and orders for its new car are off the charts. Its stock is lower than it was 18 months ago.
3. Cigarette consumption has dropped 44% since 1981. Altria stock is up 71,000% since 1981.
4. WalMart net income has tripled since 2000. Its stock has lost 1.5% since 2000.
5. Apple has earned almost a quarter trillion dollars of profit since 2012. Its stock has barely budged.
6. Amazon’s profits round to zero since 2012. Its stock has tripled.
7. 2009 was one of the worst years for the economy in a century. The market rose 27%.
8. 2015 was a good year for the economy. The market rose 1%.
9. Brazil’s economy is a disaster. Its stock market is flat over the last two years.”

To which I can add my own little tidbit.

The US economy is leading G-3 in growth, rates and monetary bias and yet the US dollar is down more than 1200 pips against the yen and 800 pips against the euro this year.

So much for the forecasting power of fundamentals.

But technicals are of course no better. How many failed Head and Shoulders, how many failed moving average breakouts, how many busted Fibonacci retrace patterns have you seen in your life? And if Elliot Wave was so great, name me one, just one money manager that runs a $1 billion dollar book using that technical philosophy alone. I will wait another hundred years and you still won’t be able to provide me with an example.

Technicals are just a shade better than astrology in their ability to predict anything with accuracy.

The reason both disciplines fail so miserably is that context is everything. Investing is not logical -- it’s psychological and once you understand that you can make much more intelligent decisions.

While in and of themselves fundamentals and technicals are often worse than worthless, taken together they can become trading magic because they can provide that most elusive and valuable property of the markets -- context.

The classic good trade is often described as one where technicals and fundamentals confirm each other -- and that is indeed a good set up. But such combinations are rare, precisely because markets are forward discounting mechanisms and reasons for the rally or the selloff are rarely evident at the time of occurrence

Instead my favorite setup is when the fundamentals go one way and technicals do not confirm the move. This week’s action in USD/JPY is a prime example. The data from US Retails Sales was horrid and the change of posture to dovishness from Lockhart one of Fed’s most hawkish stalwarts should have been good for 100 point sell off in the pair. But the pair did not budge, instead it rallied in face of all this negative news. When price action runs counter to the prevailing narrative -- pay attention. That is often a great signal for a move against the consensus view. That is when you often get the best possible glimpse of “context” in action.

So next time someone tells you that they only trade on techincals or that they have never looked at chart in their life -- run the other way from those people -- because those type of traders have basically completely misunderstood the game that they are trying to play.

Trade with us.

Key Trading Levels Forex Daily Technicals 12.18.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Trading Levels Forex Daily Technicals 12.17.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Can USD/JPY Hit 105? Forex Weekly Technicals 12.16-20.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Levels Forex Daily Technicals 12.12.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Levels Forex Daily Technicals 12.11.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Forex Trade Levels for 12.10.13 BK technicals

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Forex Levels 12.6.13 BK Technicals

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Forex Trade Levels Daily Technicals 12.4.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Trade Levels Forex Daily Technicals 12.3.13

Video


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.


Key Levels Forex Daily Technicals 11.27.13

Video

Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.


BK Forex Guide to Top 10 Most Tradable Events in the Forex Market

Download Boris and Kathy’s Free News Trading Guide

This Guide Will Teach You:

+ Which Economic Reports are Possibly Tradable

+ How Frequently the Reports are Released

+ Why we Believe these Releases are Important

+ Key Takeaways for the Forex Trader


Download the BK Forex Guide to Top 10 Most Tradable Events in the Forex Market Now!

Fill out the form and the Guide will be sent to you via email.