In case you don’t know, I am writing a book called “Unconventional Forex Trader” and I want to hear what you think as I write it.
When I conduct webinars that feature examples based on our methodology for the trading community at SMB, I am often asked, “Does this work for stocks too?”. As long as the market you are analyzing is made up of participants who have a tendency to overreact, then yes stocks would fit this criteria. When it comes to technical analysis, you are looking for particular patterns and data points that offer clues about the intentions of the market crowd. This applies to any emotionally driven market. The key to trading our methodology is not in the analysis, but in the trade management.
Many traders get caught up with irrelevant information or they do not know how to properly measure and weight relevant market information. More importantly, less experienced traders seem to invest a great deal of faith in indicators that carry little relevance in terms of measuring the intentions of the market crowd. Keep in mind, whether you are trading stocks, futures, forex, or bit coins, the majority of participants have a tendency to react in more predictable ways during certain situations within the market data series. What does this mean you ask? It means you can identify particular support and resistance levels where price reversals are more likely.
A methodology is about applying tools and techniques to your analysis and trade management that are based on some market theory or concept. When you understand and embrace the concepts of your methodology, you have enough confidence to take risk when opportunities present themselves. The core concept of the methodology that we use at SMB to trade forex and futures is based on the idea that the market crowd tends to overreact at certain points. Price pressure and momentum usually result and this creates high probability trading opportunities. Ever try taking a break out trade as price penetrates a support in a bearish trend only to get stopped out because it faked you out? Our methodology allows us to take the other side of those. You can read more about when these situations are more likely in an article I wrote here.
This psychological concept that tends to present itself in the form of false breakouts applies just as well to stocks as it would anything else. The key to participating in these situations is not the setup itself, it is how you validate the price action at the time. This is a process that is not dependant on some lagging oscillator or other irrelevant charting tool. It is about price action and volume, which are the most relevant variables you can consider when validating a possible opportunity.
So the next time you are wondering if a methodology applies to multiple markets, the question you need to ask is, “What is the core concept of this methodology?”. If it is based on something relevant to a financial market system such as crowd psychology, then you have something worth exploring. On the other hand, if the answer you get is based on something mathematical or unnatural to the market, then you are just dealing with another piece of random content that is probably attempting to monetize itself.
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Marc Principato, CMT,
*No Relevant Positions