I would say most newer traders come into the market with all kinds of preconceived notions, biases and misinformation. This comes from ingesting too much financial media and following too many self proclaimed experts. Newer traders lack confidence because of two primary factors: lack of experience and no perspective. Perhaps you need experience to gain perspective, but it is possible in my opinion to learn how to develop a perspective without having years of experience.
Perspective is simply a way to define factors in a market that imply the intentions of the majority of participants relative to numerous time horizons. You can have a intraday perspective which can come from information available on a 15 minute chart while simultaneously having a swing trading perspective relative to a 4 hour chart. This is where new traders become confused. Why? It seems that they cannot analyze their perspectives in isolation while at the same time relating that information to the larger time frame factors. It helps to know that larger time frames carry more weight than smaller time frames.
For example, let’s say you pull up a 4 Hour chart of the EUR/USD. Why 4 Hour? Because you know you are looking to take a swing trade which means you are willing to hold a position for a number of weeks. You notice the price has been making a series of higher highs and higher lows over the previous month. Let’s say it is currently sitting on a new high. This is enough information to determine that: it is strong, sell offs are buying opportunities. Within minutes of looking at your chart, you have gained perspective. This should shape your thought process and expectations for all of your trading strategies for this pair. As a swing trader, do you really want to buy the high and take more risk? Not really. Are you going to examine the potential support levels that this can retrace to and look for validation there to enter your swing trade long? That makes more sense.
How does this perspective affect your day trading or scalping strategies? Well if you spot emerging long opportunities on your smaller time frames, you can be more confident that they will follow through. It is more reasonable to expect prices to reach more aggressive bullish targets. What happens if short setups emerge instead? They will have much less credibility. They are less likely to reach aggressive targets. Perhaps they should be traded small or avoided altogether. This is one example of how a broader perspective can shape your thought process over various strategies.
Keep in mind, the perspective I am describing here is related to price action analysis and is simple compared to other perspectives like Elliott Wave and Market Profile. So which one is the best one? There is no best one. Each perspective will give you a different view of the market, and at times they can also align which should not be ignored. Do you have to know more than one perspective to be a successful trader? No, but it doesn’t hurt. Learning other perspectives can be confusing at times, and this is why it is so important to get trained by an expert.
To attempt to trade by learning on your own is what leads to all the mistakes and empty accounts that new traders face on a regular basis. Also realize that perspective is just the first step when it comes to spotting a trading opportunity. There are other important factors that must be addressed before a risk can be taken and the biggest one is money management. This is more important than any tool or analysis. Either way, if you want to do something on a professional level, you need to invest in an education no matter what it is. So if you are new to the trading game, or have not gotten any type of training, and you are stuck, research potential educators who can provide a sound framework for you to operate within. It will make a difference in your growth as a trader.
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Marc Principato, CMT,
*No Relevant Positions
