Don’t Believe the Myths

Like many of you, I started trading by picking up pieces here and there through books, internet and the many forums that populate cyberspace. The absolute worst were the forums. I admit there were a few good things but overall, it was fluff and those that wrote it, usually were changing their systems/strategy/method after someone would post their own trading information.

Trading books, in general, were simply a rehash of the basics with a little twist tossed in. Actually, some had no twist but just the basics explained a little differently.

Trading Is A Profession

If you are going to enter a profession, don’t you owe it to yourself to at least arm yourself with proper knowledge? Look at it this way (this is how I did anyhow):

  • You are entering a profession where you can make a lot of money.
  • You are entering a profession where some traders trade 10, 20, 50 million dollars at a time!
  • You are entering a profession where the weak and uneducated are culled from the herd.

I can remember when the shoe dropped for me and I decided that I needed to think and act like a pro. Before I share it let me just say that it was not something that turned me into a mega profitable trader (still working on that actually).

You have seen those ads, right? The ones where some “ex-banker” has: “Designed A Trading System A Monkey Can Trade

The realization that this is a profession that does not come easy and that the promise of easy riches is an absolute myth, made me rethink my course of action. It was a revelation that most have no clue what they are talking about and seeking out trading experience and knowledge from a professional and from what works in the markets, were crucial to any advancement.

Moving Averages

Let’s look at a very popular indicator that often times gets slammed in trading forums. Are moving average lagging indicators?

Yes? No? Depends?

The common answer you probably see on the forums is yes; they are lagging and moving averages are useless because price has already moved by the time the MA catches up.

If you gave that answer you should be front of the line for trading education from reputable sources because you have bought into a myth.

I am going to answer the question with a chart showing a currency pair in a downtrend.

Currency Pair in Downtrend Chart

This is a moving average crossover system and as you can clearly see, yes moving averages lagged price because they need past price to calculate their current position.

As a matter of fact, the M.A. crossover method got you in the market at horrible times as the market makes a lower high and then rolls over! It gets you in long after the move has occurred and you suffer through a retrace.

So yes, they certainly are lagging. But are they useless? It depends on how you use them as a part of an overall trading method.

Moving Averages Chart

This is the same chart with the same moving averages. Instead of using a crossover system, I am using the moving averages as dynamic support and resistance.

Before I go on let me say that moving averages are NOT barriers to price but only work if many eyes are seeing the same thing. For me, they frame the market as opposed to being a standalone trading system.

You can see how price respected both of the averages. Depending on how you play these, there are at least 4 opportunities to short this market as shown by the boxed area! Could you have traded this? You bet you could have. So in this case, that trader who said with a definite tone that moving averages were lagging and useless did you a great disservice as they are only partly correct.

For those that are looking for an entry using this type of pullback framework, they are a few you can use. You can look for the break of mini ranges or failure tests of a range. Whatever you choose to do for a trade exit, the key is to ensure you do it consistently.

Trust. But Verify In Trading

Not everything you read will be useless and due diligence in testing whatever you read is extremely important. What you read can actually open a door to a different method of trading for you because you learned something new about market mechanics during your testing phase.

But you have to know upfront that there is nothing easy about trading. The act of trading is simple and so are many trading systems that have an edge in the market. It’s all the extras where people run into problems:

  1. Risk
  2. Consistency
  3. Emotions

One piece of advice I would offer to you is, yes, you can learn all of this on your own through trial and error, but shorten the learning curve. If you are able to locate someone who makes this their living and is willing to cover “what they know”, take them up on their offer. You could also invest in a trading system with a proven track record and a strong support team to help you carve out a place in the trading world.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.