Today, I want to share the conclusion of the plan I began in this post. The Introduction to Technical Analysis Course (ITAC) will be presented here, in a freely available blog format consisting of both written material and video over the course of the next several months. I will try to be as responsive to questions and comments as possible, allowing for the possibility that those comments could spiral out of control. I may try to continue to drive through, presenting new material, rather than getting involved too deeply in discussion. The first two sections will cover Price Discovery and Price Behavior. The remaining four sections are:
Volatility is one of the most misunderstood and abused concepts in market analysis. Too many commentators go straight to the VIX, which is a specific measure of a specific type of volatility, ignoring broader concepts and implications. This section will take a deep look at volatility: What is it? How do we measure it, and what are the limitations of those measurements? How can we trade it? (A brief excursion into some non-direction option spreads.) Most importantly, we will look at the implications that volatility has for directional traders; one of the key tasks of technical analysis is to quantify the most likely emerging volatility regime.
4. Market Math
Yes, it may seem to be hard to get excited about a section on market math, but there are critical lessons here. Many traders struggle because they do not understand basic rules of probability. What is the ideal risk:reward ratio for trades? What is the ideal win ratio? (Both of those questions are meaningless.) How can we create a positive expectancy in trading systems? These and more questions will be explored.
One of the cornerstones of my work, both in my actual trading research and in my writing, is that few traders understand randomness. One of the best ways to understand actual trading edges is by exploring the implications of trading in random markets, in which no edge is possible. We will take a look at many of the common ways in which traders can be deceived by randomness.
5. Relative Value
In many ways, simple, directional trades are the most difficult. There is much information in the relative performance of different markets, whether they be sectors, regions, commodities, or individual stocks. We will explore different ways to quantify and to track these relative performance measures, and will consider some basic techniques to trade them. Even if the trader does not wish to incorporate these trades per se into the trading plan, this analysis can provide another layer of information in your market analysis.
6. Psychology and Practical Trading
Though it is not possible to explore all the issues different traders will encounter, I want to share some of my perspectives on trader psychology. Be aware that these are very different from much of the prevailing wisdom; I’ve hit on some of them in previous blogs, but a brief preview is that I believe most traders who fail do so because they do not understand that the process of becoming a trader is about transformation. It has more in common with mythological stories than with skill development and competitiveness. Most traders struggle with fear and greed because they do not understand the true nature of risk, and are not able to think about their results over a large sample of trades. (This is in precisely the point Mark Douglas makes in his excellent Trading in the Zone.)
So, there’s the plan. This should be a long, strange trip, with some diversions and modifications as we go along, but I think this rough outline will survive intact. It will probably be easier to absorb the material step-by-step, as we go along, so please bookmark and return often. I’ll get started, at the beginning, in the next few days.