Know Your Tools

[dc]A[/dc]s an author, sometimes you don’t realize what part of your work will resonate with readers. This is one reason that it is so gratifying to get feedback from readers—it’s always nice to know when the circle is complete and someone has found something of value in your writing. Reader Anthony sent me an email saying that this paragraph from The Art & Science of Technical Analysis, or rather the philosophy that I was advocating in it, completely changed his perspective on his trading:

It is critical that traders understand the subtleties of every tool they use. They should know how they react in every possible market environment, and furthermore, must understand the complex interactions between multiple tools. This may lead to an approach that disregards a lot of information that many traders assume to be useful, but, for instance, why would you use indicators that do not add to your analysis? Why would you listen to news that is old news and is already fully priced into the market? Why would you try to guess how complex fundamental factors might influence the price if you do not have the skills to fully understand those fundamentals? Why would you solicit opinions from traders who may trade with completely different styles and may be less competent and knowledgeable than you are? Traders do all of these things, but most of them do not make sense. Limit your scope to tools that truly add value.

I am setting the stage for a number posts that will expand on this idea. I’ll show you examples (like the Santa Claus post), and give you tools and techniques you can use to understand what’s happening in the market. We’ll also look at a number of very commonly used tools that show no quantifiable edge (maybe we’ll start with moving averages or Fibonacci retracements), and we will find some things that do.


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.