Lessons from the Pros


Testing the Tools

Hello traders! I am currently enjoying the fantastic weather of southern California, enjoying my last class of the year in our Northridge office. I am taking the next few weeks off from teaching until mid-January. This week I am teaching a futures class, and today the topic of additional “things” on your charts came up. By things I mean any indicators, oscillators, etc. that you may add to your charts to help with your trading decisions.

In the first few hours of every Online Trading Academy class, the subject of supply and demand is brought up. The basics are we buy in demand and sell in supply. Easy enough, right? As we move on through the class, more “classic” technical analysis tools are discussed, and the individual instructor may emphasize his or her personal favorites. Some of us like moving averages, some like Fibonacci, etc. etc. Usually by the time the fourth or tenth technical analysis tool is presented, a new student’s head is spinning! The purpose of this week’s newsletter is to give you a list of how and when to add these tools, and when to get rid of them.

First of all, you must use our qualified supply and demand zones; if all you did was use classic technical analysis tools, you would probably suffer the same fate as tens of thousands of untrained traders before you: failure. If you want the same results as them, please, use the same tools just like they use them.

The next piece of technical analysis I recommend traders to experiment with is a tool to help define your trend. The most popular tools for this are moving averages and trendlines. While there is not room to discuss these fully here, several excellent articles have been written about these tools in our archived Lessons From the Pros newsletters.

The next tool to consider adding would be an oscillator to measure overbought and oversold readings, perhaps a Commodity Channel Index (CCI), Stochastics, or even the Relative Strength Index (RSI). The next type of tool you might add would be perhaps Fibonacci levels, maybe Andrew’s Pitchfork or other regression analysis tools, the list is seemingly endless.

This is a very short list of the things that you could add to your charts. But which ones actually will help you make more money trading? Here is where it gets a bit trickier. My recommendations in class are as follows:

supply and demand

  • Add one new tool at a time
  • Keep track of your next 30 trades using this tool
  • Record your win:loss ratio with this new tool
  • Record your average gains and average losses

Now, the big question: Is this tool helping you make more money or not? One trade isn’t enough of a sample to decide that question! This is why you should use this tool on several dozen trades. If the tool makes you more money, then you should probably keep it. If the tool makes you less money, obviously get rid of it! What happens if it makes you the same amount of money? I still say get rid of it. Does not make sense to make your trading plan/trading decisions more complex, yet receive no additional reward for that extra step.

The reason you should only add one tool at a time is as follows: if you add ten things to your charts, which are helping, and which are hurting? There is no way to tell when there are so many new variables to your trading equation. By adding one variable at a time and “solving” for it, you will easily be able to tell if your performance is improving or worsening with each new tool on your charts. Eventually, you will probably settle on a trend tool, perhaps one overbought/oversold indicator, and obviously supply and demand.

Now, I do want to step back for a second. You don’t need any of these extra tools. If you are proficient at recognizing high quality supply and demand zones, you should be able to trade with just those! These tools can help you, especially in the beginning of your trading journey until you can find levels with ease.

One final note. This extra step of “accounting” or keeping track of your latest performance is a bit of a pain. Guess who chooses to not go this extra mile? Those traders are the ones who don’t have the discipline or determination to make it over the long run. Anyone can make money trading in a lucky week. But to trade for years, you must be disciplined and determined. I love meeting people who treat trading as a hobby! They are called “donors.” If you want to do this for a living, you must take this extra time to properly format your trading strategies and trading plan.

Hope to see you in class next year! Until next time,

Rick Wright


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.