Thursday, April 17, 2014

Focus on what's important

A few weeks ago, one of my favourite traders I follow on Twitter, Jon Boorman (@JBoorman) tweeted a great question: "If you had to trade using only one piece of information, what would you choose?"



You could choose anything, but that would be your sole piece of information for the basis of your trading decisions. These could include:
  • Fundamental analysis;
  • Economic releases;
  • Oscillators or other indicators;
  • Volume;
  • Price.
I was reminded of Jon's question when having a conversation with another trader about the merits of tracking volume. Most traders look to volume to confirm some form of price move - they would argue that a breakout with higher than normal volume is better, and a pullback on low volume is desirable.

From reading some traders' views, this week's rise in the US indices has been on very low volume. As I write this, the Dow has risen 400 points in four sessions. Does the fact that its been on low volume invalidate the trade? If you were short the indices, and consequently have made a loss this week, do you get a discount on your loss because the volume was below average? Of course not.

What about the other possibilities - fundamental analysis? How many times has a company released good earnings, but the price fell? Or missed earnings, yet price has risen?

Or maybe oscillators? Yes they may have some value (depending on your trading style and timeframe), but what you will find is that, in a significant trend, oscillator readings are worthless. Trying to pick a top in a strong uptrend based on an overbought oscillator measurement will lead to continuous losses.

Trend followers tend to focus solely on price. Why? Because, unless I'm missing something, the only way to make a profit on a long trade is if price moves above your entry point, or if price drops below your entry level on a short trade. That can happen irrespective of what any indicator, fundamental analysis or volume measurement may say. Therefore, why focus on anything else?

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