Price, our best indicator
Welcome my friends – to the Advanced Course!
Here we will go through the information that step by step will allow you – with hard work and perseverance to become a consistently profitable trader. This experience will be optimised if you have already studied the Basic Course as the Advanced material contains information building on concepts introduced in those lessons.
Make no mistake – this is a difficult journey requiring hard work, discipline and patience. The course is laid out to make the learning experience as pleasant as possible but is no substitute for applying the information contained within to the cold hard world of trading. We recommend you have a charting package open in the background as you study and refer back to the charts as we explain key points. This will help give some relevance to our lessons.
If you are an experienced trader we still recommend you browse the contents of the Basic Course in order to refresh your memory and at the very least we still advise you to read the introduction as that will explain how to make the most of the course material.
Additionally – Lesson 5 – Technical Analysis PART II contains some principles on which we shall be expanding. Therefore we recommend you take some time to go through those sections please.
So… what is the big deal about price action?
Price action is one of the key factors in our trading systems and one common mistake traders and investors are likely to make is to totally forget about price action and instead rely solely on technical indicators.
As we have discussed in Basic Course Lesson 5, a technical indicator is no more than a series of data points plotted in a chart. These points are derived from a mathematical formula applied to price of any given instrument. In other words, it is a price chart plotted in a different way.
What is the objective of technical indicators? Well, most of them are designed to forecast the probable direction of price, after all that is what we are interested in right?
But the last paragraph has two important implications, first “derived from a mathematical formula applied to price”. This implies that in the end, price has the last word, technical indicators follow the price action, not the other way around.
Secondly, “forecast the probable direction of price”. Developments of such indicators are based on statistical probability. In other words, there are no certainties. For every signal generated by technical indicators, there is a possibility of failure.
But, how high are the odds of each trade? We don’t know until we trade it.
Sometimes indicators fail, this is a fact. Take for instance, the RSI measures the ratio of “bull” and “bear” candlesticks, if the last ten candlesticks are bull, all of them with an average of 5 pips, and the next candlestick is a bear one measuring 80 pips, the RSI will still indicate an overbought condition, when the market is far from being overbought. Take a look at your charts; you will see plenty of examples.
This leads us to an important conclusion, technical indicators just show us certain condition of price that is difficult to see without them and price itself has always the last word on market direction regardless of the condition that any indicator can show us.
This lesson is structured in the following way:
A trading system where all signals are taken based on what the actual price action tells us about its most probable direction in the future.
We should never forget about price action.
How to combine technical indicators with price action to get more accurate signals.
A few rules based on price action that will help us generate higher probability trades.
A brief summary of the chapter.