Intro to Technical Analysis Course: The Plan (1/2)

[dc]A[/dc]s I mentioned in a previous post, I have been planning to create a course that would serve as an introduction to the book. I have thought long and hard about this course: who is the target audience? What should it include? How should it be delivered? How should it be structured? How do I make it as universal as possible? Here is a rough outline of the material I will be expanding upon over the coming months:

The target audience for this course is, ideally, someone who is new to technical analysis. Obviously, this could be a beginning trader, but I hope it will also offer promise to experienced traders who wish to come to the markets with “beginner’s eyes” and see things from a new perspective. In addition, there are many people, whether they are analysts, portfolio managers, risk managers, or even some types of traders, who have a sophisticated understanding of some aspects of financial markets, but have not incorporated a technical discipline into their thought process. I hope that many of these people will find some value here as well.

I believe that beginners need a few things: ideas that they can immediately apply, minimal ambiguity, and as little emphasis on theory as possible. Unfortunately, it is going to be difficult to meet many of those needs in this course because we also need to look into many issues in considerable depth. As for the idea of immediately applying ideas or setups to the market, I believe that no such thing is possible. There is no price pattern, or indicator pattern, that can be learned and naively applied to the markets. Such an approach is doomed to failure, and that is not what we are pursuing here. My goal in creating this course is to build a deep understanding of the dynamics that shape prices, and to also explore some of the fundamental math behind trading and probabilities. Lastly, but equally importantly, we will take a quick look at some of the psychological challenges of trading, and see how mass psychology can drive markets.

This course will be divided into six parts, presented in order in the format of both written material and videos. I anticipate approximately 15 hours of video total, and, frankly, I do not know how much written material to support that. There will also likely be supporting charts and excel sheets. My plan is to post two installments each week for this course, always tagged with “ITAC” (Introduction to Technical Analysis Course), so you will be able to find them easily. I will also make an index page so all the material will be available and organized there. Here are the broad topics I plan to cover:

1. Price Discovery. There is a significant body of work on auction theory, and many readers will be familiar with Dalton’s Market Profile work. I want to begin at the beginning. Much of what happens in financial markets appears to be very complicated, but, at their core, the basic concepts are simple. The modern currency trader has much in common with merchants in Antiquity who brought their spices, fabrics or perfumes to a marketplace, met with buyers and agreed on value. I want to take a deep look at “the scales and the reckoning that weighs value against value”. We will first imagine the problems facing buyers and sellers, and will begin to understand how a bid/ask spread evolves. Next, we will try to understand how a market participant might attempt to profit in this very simple market. Traders who have not examined the price discovery process like this will learn some surprising things about market prices.

I was fortunate to be able to take some classes in market microstructure (if you are a college or graduate student, seek out this opportunity!) that really opened my eyes. I had been trading 10 years at the time, so I had a different perspective from many students. We operated simulated trading terminals, first in completely random, noisy markets. Gradually, other complications were introduced, such as the presence of a group of traders who had paid for information (and not always reliable information, by the way) about future prices. Seeing the patterns that evolved out of the interaction of these noise traders and informed traders opened my eyes. If you have this experience, you will never see something in the market and declare, as you will so often hear traders say, “that must be real.” So many convincing patterns emerge out of randomness and noise, which brings us to…

2. How Prices Move in Active Markets. Though this may seem like an ambitious section, I want to clearly define the scope. The first section will explain how the actions of buyers and sellers can drive very short-term price movements. This section will expand on that work, and will show how these movements can spin out over larger structures and timeframes. Though I am trying to make much of this course as universal as possible, this section will be the most personal and the most idiosyncratic, for one reason: I believe that virtually nothing in common practice technical analysis actually works.

Now, that may seem like an unusual claim for someone who just wrote a large book on the subject of technical analysis, but hear me out: I have been unable to find any quantifiable edge behind most of the tools traders use. Though some traders may use those tools and make money (in reality, there are probably far fewer profitable traders than most people believe), many profitable traders do not understand the reason for their success. It is not in their chart patterns, or their moving averages or indicators; it is in the way they have synthesized those into a whole trading system that is perfectly aligned with their personalities and risk tolerances. This is not only good, it is essential, for this is the only way to succeed in the markets, but this creates trading systems that cannot be transmitted or taught.

The patterns and ideas examined in this section will be high-level, conceptual patterns. Rather than focusing on pennants and heads and shoulders, we will consider things like what should follow a large price movement in one direction? When is a movement overextended, and more likely to reverse? What are the patterns that can show that buyers or sellers are losing control in a market? How can we judge the underlying psychology behind a move, and how sure can we be of the answer? Yes, much of this material is covered elsewhere, but I hope to offer a new perspective and to lay the foundation for a simple, robust and complete way to look at market action.

These are two of the three sections. Tomorrow, I’ll lay out the rest of the plan, covering:

3. Volatility

4. Expected Value and Random Walks

5. Relative Value Plays

6. Psychology


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 5 Comments

  1. Mark

    “…but this creates trading systems that cannot be transmitted or taught.”
    I absolutely agree that one has to make an approach her/his own before one has a chance to be consistently profitable.
    But what about robust systems like Momentum Strategies – e.g. the Turtle system?
    They can be told and are purely mechanic. For sure it is not easy for most of us to trade a system which sometimes genereate much more than a 50% drawdown but it can be taught and traded (if one tolerates the risk and believes in it).


  2. Adam Grimes

    A few thoughts… just kind of thinking aloud here:

    -The Turtles’ system was not purely mechanical. I have it on good authority that there were elements of pattern both in the early training and in the application of the system.

    Another obvious thing to consider is the tremendous divergence between the Turtles’ returns. Not all of them had rockstar performance records, yet they were all taught the same system.

    I think the Turtles are actually proof of my point… that even a relatively simple system (which actually wasn’t so simple in many ways) can give wildly different results depending on the application. Do some research on the Turtles and their performance records… it’s eye-opening.

    1. Mark

      I read the Curtis Faith’s book. He was the youngest turtle. He wrote that some trainees could not adhere to the rules. Some thought there was some magic formula hidden from them by Dennis and Eckhardt but Curtis wrote there wasn’t. I think the most important part was their risk and money mgmt rules.
      Well, system and personality have to fit as I wrote above. But I am sure that you can teach a profitable trading approach. E.g.: Futurestrader71 who has a prop trading firm claims that more than 90% of his traders have become profitable. And how did it work with SMB?

  3. Mark H.

    Really looking forward your “ITAC”. Thank you for your contributions to the trading community.

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