Before I get into the topic of context in trading, I want to make sure you know about the great resources available to you. You can learn a great deal about our methodology and concepts from the educational videos that I produce on my Youtube channel.
As I coach less experienced traders through our methodology, a big part of my job is to open their eyes to what matters in the market. The less experienced traders are usually full of conventional concepts and have no well defined process to guide their decision making. One of the biggest points newer trader miss is that analysis of price action is not about specifics like a particular support level or oscillator reading, it is more about how these measurements relate to the context of the situation.
As a trader we depend on information to guide our decisions whether we are trading for the minute, day or week. Very short term traders like the ones we education tend to focus on a very narrow view of the market, naturally because they are attempting to profit from very short term price fluctuations. By doing this, they ignore or are not aware of the environmental factors that can be having a major effect even on their short term price action.
For example, let’s say you are scalping the forex market. As a scalper you are watching for setups and confirmations on 5 and 15 minute charts. These charts can be giving you a short signal at what looks to be a support level break on your 15 minute chart. As price pushes to a slight new low, you go short because that is the trend. Next thing you know, it hesitates a bit and reverses so quickly and stops you out that you shout at your monitor “it’s a conspiracy!” among other things. It’s not a conspiracy, it’s lack of recognizing that this short was taken as price tested a major support area on a larger timeframe of an instrument that has been clearly bullish for sometime. The trade was taken without considering the context of the situation.
Short-term traders have a habit of focusing too much on information that is irrelevant or of low importance. And when they do understand or are aware of the variables of greater importance, they do not know how to weight all this information in a way that can help shape trading decisions. Instead of taking a trade because some support or resistance level has been reached on small time frame, you should ask how does this relate to the bigger picture? Is the broader trend bullish or bearish? Are you buying something that is strong or generally weak? These questions shape your expectations as the trade unfolds. This is how you become aware of the context of your market conditions and not become distracted by noise.
Marc Principato, CMT
*No Relevant Positions