Do You Question What You See?

by Rick Wright, Online Trading Academy

Online Trading Academy Article of the Week

Hello traders! In this week’s newsletter we’ll talk a little about the psychological theory of cognitive dissonance, and how I perceive that it applies to trading. Plus, moving averages!

Please share this article – Go to very top of page, right hand side, for social media buttons.

This past week I had the great opportunity to teach our three-day Market Timing Orientation class in a large town in North Dakota. One of the students had been trading for quite a while, but with limited success. She insisted that classical technical analysis works. In fact, even though she wasn’t making any money trading and had lost what would be the equivalent of a nice house, because it worked ‘sometimes,’ she felt with just a tweak or two she could make money like the market gods certainly wanted her too.

Now, cognitive dissonance is a theory in psychology defined by Wikipedia as ‘the mental discomfort (psychological stress) experienced by a person who simultaneously holds two or more contradictory beliefs, ideas, or values. This discomfort is triggered by a situation in which a belief of a person clashes with new evidence perceived by that person. When confronted with facts that contradict personal beliefs, ideals, and values, people will find a way to resolve the contradiction in order to reduce their discomfort.’

In our world of trading, and especially in our orientation classes, I meet people frequently who experience this. Here’s how it worked in this example: classic technical analysis works; I am not profitable using it. Therefore, I must be using it wrong.

During this class, we shared numerous examples of how classical technical analysis is either very late for entries and exits, or completely wrong about market direction. This particular student loved moving averages. Not those ridiculous, slow moving averages like the 50 and 200 mind you, but much faster, smaller, nimble moving averages like the 9 and 20 period. As many of you know from previous newsletters, the larger the number, the slower/smoother/further lagging the moving average is. Using a crossover of the faster moving average through the slower moving average generates buy and sell signals in this student’s technique. Here are a few examples of how late and wrong they can be:

The most important thing I can say about this chart is LOOK AT WHERE PRICE IS WHEN THE SIGNAL SHOWS UP.

So lets take a look at what using supply and demand trades could have looked like on this chart:

Before you OTA students pepper me with emails about all the zones I missed, I tried to make this as clean and easy to explain as possible! There were 3 entries between arrow 1 and 2, 3 more between 3 and 4, and another 3 between 6 and 7. Plus a couple more….

Back to the Market Timing Student. During every three-day class we show a few examples of how our core strategy works in action, via a short Extended Learning Track recording. (Extended Learning Track is our online classroom where you watch instructors trade in front of you.) In EVERY instance of an instructor using pure supply and demand for entries, this student would ask ‘which moving average were they using?’ or ‘what Fibonacci retracement was that?’ or ‘was the stochastics overbought or oversold? You get the idea. By being SHOWN profitable trades WITHOUT using what she believed were necessary analytics, she was having trouble accepting what was in front of her eyes.

As has been said hundreds of times before in our newsletters, trading is SIMPLE, but not EASY. Very often you will have to throw out some things that you thought were true to become a successful trader. This is why we often also say that charts are the easy part, between your ears is the hard part.