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Back to Basics

Back to Basics

The Next Generation Platform offers a wide range of indicators, studies and drawing tools for traders to customize their charts. This plethora of technical studies is necessary to cater for every trader’s requirement however with more than 80 functionalities to choose from, it can sometimes be easy to lose focus on what is truly important. Do your charts sometimes look like a Christmas tree on steroids with half of your indicators firing frenetic buy signals while the other half is signalling that it’s time to sell? If so, then you may be causing paralysis due to over-analysis in your trading.

Personally, I have experienced this contradiction and over-analysis at least once in my trading career. The funny thing is, I didn’t notice this situation at first, as I was completely submerged in my usual chart reading habits. At this point, my mentor asked me to describe what I saw on my chart. As I confirmed his initial assumption of my problem, he gave me a simple but very powerful homework for the next few weeks: back to basics. This technique has helped me tremendously in becoming a better trader and so I want to share it with you today.

Open any chart on the Next Generation Platform. At the bottom of the chart window you’ll find the toolbar for chart customization. Now have a look at the second symbol from the left:  “clear everything”. And with one small but daring ‘click’ on this icon we are back to the basics: price action and nothing but price action.

Now apply your chart reading skills: what is it that you can see on this chart? Pay attention to the overall trend, to pullbacks and the individual candles that form them. Are those candles large or small? Bullish or Bearish? What is the market telling you? At the end of your trading day, take a screenshot of this basic chart and paste it into some kind of document. Next to it write a short analysis (what can you see on the chart?) and forecast (what price will most likely do next?). Come back on the next day and check how accurate your forecast has been; rinse and repeat. I did this exercise myself for about ten different markets over several weeks and it helped my understanding of price action tremendously.

The next step is to think about our indicators. What will the effect of a rather deep retracement in price be on your moving averages? How will MACD and RSI react to a sudden pause in momentum that results in a sideways phase?

Indicators are just a second level of confirmation. If you think about it: most of the indicators take price data and only price data as their input before they perform their magic. So in the end they can always only show price action. Once you understand how to read price action without any help of indicators you are in sync with the market.

So why use indicators at all if everything is already contained and visible in price action itself? Efficiency! With more than ten thousands markets available for our trading we just can’t spend too much time on reading and interpreting price action on its own. A short glimpse at a chart where we can see our moving averages fanning immediately suggests a strong trend and I’ll have further look. If not, I can move right to the next market on my watchlist.

Give it a try! Trading is a craft and like any other craft, practice makes perfect. Good luck & happy trading!

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