Ironically enough, I’ve always been a huge fan of keeping trading as simple as possible. Many of the people I coach are somewhat stunned that I think that way considering I am such a big student of technical analysis. My experience has been that the more I learn about the complex, the more I am attracted to the simple.
Have you ever heard of Occam’s razor? It is the principle that “entities must not be multiplied beyond necessity”. The mainstream interpretation of this principle is that the simplest explanation is generally the correct one. That is essentially my belief in trading: Keep it simple.
Unfortunately, simplicity is just not how we are conditioned nor marketed to these days. We are flooded with indicators, signals and software programs in every way possible: TV, Internet, newsletters, etc. Let’s be honest, it’s what sells!
Well, I was coaching a student earlier this week that was struggling to put the trading pieces together. When I asked this student to show me one of their trades, and tell me why they made that trade, their reasoning had so many parts to it that it actually left me stumped. Since I always focus on a very straightforward approach, I asked the student to tell me what they were looking at on their screen. I found out that they were looking at something similar to what you see below:
Looks like a couple of elementary kids colored on it, doesn’t it? Now, don’t get me wrong; I will never claim that some of the more advanced technical tools available couldn’t add some “icing on the cake”. But, should it be the cake? My understanding of the markets has always been, “Price is King”, and “Price discounts everything”. So, shouldn’t price be the central focus, or the cake?
I asked the student to clear off all the squiggly lines and just simply look at the price. When everything was removed, this is what was left:
I’ve obviously added my own comments, but notice how easy this particular stock has been to trade over the last year. First, by simply identifying the $45 support level you could have made a nice trade in November. If not, a support buy could’ve been executed at $50 in January or February. Let’s say you are more of a break-out trader. Wouldn’t the break to a new 52-week high, through the $55 resistance, have been a great break-out trade? And finally, $60 has demonstrated its importance as both resistance in March and then support thereafter. Wouldn’t a buy at the $60 support near the end of June have made sense? By simply focusing on the price, would you have needed any of the indicators shown on the first chart? No.
The Tale of the Tape: There’s a lot of great information and trading tools available to you that can certainly help you in your trading. You just want to remember the pecking order: Price first. Price never goes out of style, and at the end of the day, it may be the only “indicator” you truly need.
Waiting for the most opportune times, such as I have outlined above, could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT