With the permission of a student, I would like to share a trade of her’s which I criticize as trading randomness. This was the scenario on a particular morning:
The DAX was about to break above a previous day’s high and the MACD indicator, which she loves referring to, generated an obvious buy signal. As soon as “resistance” (in fact, a mere random high of the previous day) was penetrated, she opened a long position and put the stop at a subjectively defined area. Goal was to exit at a risk to reward ratio of 1:2, an altogether discretionary target level. In about half an hour, the index rose several points, so she pondered if she should adjust her stop to break-even. She decided to wait.
Her predetermined target was now within 4 points reach, but the DAX started to tumble before it hit that level. Even the MACD was now offering a sell signal upon which she finally put her stop to break-even. She held onto the position. The market dropped until 2 points above her stop and rebounded slightly thereafter, leaving her a feeling of being on the right side of the market again. Eventually, the DAX performed another drop and stopped her out. She insisted that she had followed her “rules”, but wished she had listened to the MACD sell signal!
When I heard about this trade, I immediately knew that she was trading randomness. First of all, she was day trading. You won’t succeed in day trading, so why bother trying? It is not just my opinion, but it is statistical evidence.
Traders who are new to trading, frequently resort to magical indicators that can give them an answer in hope that they can overshadow their own incompetence. This is an entirely wrong approach. Furthermore, there were several mistakes with this trade:
- You don’t see a previous day’s high as resistance, but an obvious area determined by price action in which bulls and bears fought out a visible battle. Those are best seen in both the 4H and daily time frames and they are definitely not a random high or low from the previous day.
- You don’t adjust your stop to break-even. This is a subjective area which the market is not aware of. Avoid walking into that trap deliberately. A stop is put to the nearest high/low of significance where bulls or bears entered the market in large numbers. Think of it this way: The stop is placed where the original reason for your trade is no longer valid.
- You don’t listen to indicators. None provides consistent profits. They give false recommendations at best, and contradict each other at worst. They are what they are: indicating nothing. Learn to read price and interpret what is happening behind the price instead.
The case against currency speculation
Betting for or against currencies is a controversy regularly discussed in the media. Its argument is that speculation that is merely done to exploit arbitrage opportunities have an effect on currency devaluations and ultimately an economic well-being of a nation. Economists, including Milton Friedman, argued that speculations have a positive impact on liquidity and contribute to stabilize markets. The risk-takers perform the important function of providing a market for hedgers and transferring risk from those people who do not wish to bear it.
Gregory J. Millman has an interesting counter-argument to this: According to him, speculators help to “enforce” international agreements and anticipate trends in order to profit. In this view, countries that mishandle their national economies attract speculators who make the inevitable collapse happen sooner. A quick collapse is even preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.