Friday, February 19, 2010

Do not ask ....

To ask which is better -- fundamental or technical analysis -- will only take you down a path of confusion. Why? Because it takes away the focus from what really makes a trader consistently profitable.

Behind every profitable trader, technical or fundamental, is a great tape reader.

The best traders make money not by reading 10-ks or looking for head and shoulder patterns but from being able to sense fear and complacency, knowing when to push in an easy tape, when to anticipate and when to wait for confirmation, knowing how to find discrepancies and how to monetize them.

Often the difference between a consistently profitable trader and a churning one is the level of conviction in the plan: The best traders know when to push the envelope and when to wave the white flag. All this will help develop what years later will be called "natural instinct" -- the "edge".

Profitable traders constantly create new strategies and methodologies to stay ahead. For us this has been our "base and break" pattern strategy, or the idea of only pulling trigger when daily, AND intraday set-up/ or our constant comparative analysis against market "tells".

Every year mutual funds with deep pockets and vast research teams at their disposal underperform the market. Compare this against The Fly who we've watched for years maneuver admirably around the market riding the meaty parts of many a momentum stock. Or take the example of one of Stocktwits heavy-weights Jim Gobetz (aiki14) who has a great feel for the market and knows when to buy fear and sell into greed.

There are traders who recognize all the chart patterns, can quote verbatim from Gann studies and dream about Fibonacci retracements, who know dozens of technical indicators that we've never even heard of, and yet who can't trade their PnL past the poverty line. Compare this against the number of active traders with seven figure incomes who look at nothing else but price and volume. Charts are nothing but visualizations of price action. If we had super-human memory we wouldn't look at charts. But we don't, so every night we look through charts to remind ourselves of the previous days price-action.

On a personal note we've made our income from the market for over a decade now not because we can read charts well but because we're constantly looking for new things, for market tells, always trying to stay one step ahead of our competitors. We've proven ourselves over the four years we've posted on this blog; from our first call to start buying one day before the March 2008 low or on a more recent example of going long within minutes of the last bottom on February 05. There was no indicator nor technical pattern that told us to buy when we did -- it was developed instinct through years of watching price-action.

And to conclude we'd like to add a note about Stocktwits and new traders.
We wrote back in 2006 that the first step to becoming a professional trader is to find a type of system/trading method that you're drawn to -- one of the biggest mistakes of new traders is wandering into different methodologies simultaneously. For example they decide to give break-out trading a try and buy a new high, the stock reverses and they hold it, and then hold some more, until they convince themselves that it's a good value. Thus they started out as momentum traders (who couldn't care less about value) and ended as value traders (who couldn't care less about momentum). Mixing up such strategies is usually the beginning of the end.

As humans we define ourselves against others; good cannot exist without evil; the First World means nothing without the Third; and prey can only exist in the presence of predators. Traders can help define themselves and find what they're drawn to with the help of the Stocktwits community -- be it premium sellers, momentum traders, value traders, or currency traders. Stocktwits puts what before was abstract for a new trader into a convenient visual map. Do you want to live in the Bronx or Queens? Before a trader had to walk through communities for days in order to make sense of it all. Now it's simply all on the map.