Wednesday, November 18, 2009


How often have we traded based on what we think are tried and true technical indicators? Often I suspect.

But here's the thing, most technical patterns that we think of as highly sucessful actually are not. Rememeber the market will eventually discount every system. 

Just as an example, how many of you think that buying breakouts or selling breakdowns is, if not a fool proof system, at least one with pretty high odds of success?

It does seem logical doesn't it? Just about any book you read will tell you that is the correct strategy.

However the truth is that most breakouts & breakdowns fail.

Smart money knows that for the most part these tried and true patterns no longer work.

Just as one example look at the top of the last bull market.

In mid 07 the market traded up to the 2000 highs. Most technicians spotting that resistance level sold. Bears probably sold short.

That started the move down, which of course reversed. (bull markets don't typically just die, they roll over gradually over time) Soon the bears began to get nervous about their shorts. At the same time the people who sold started to reconsider selling.

Then the market broke out to new highs. Now any self respecting technician knew at that point the market was going much higher. So what happened? Bears panicked out of their shorts and dumb money bought into the breakout.

But the market reversed. How could the market reverse unless there were sellers? Who in their right mind would be selling this breakout?

Smart money of course. Smart money knows that these patterns no longer work and they don't trade off these outdated patterns. They are trading off of fundamentals and new patterns.

This is just one of the many patterns that traders fall victim to.

I would be careful trying to trade patterns that you think give you an edge. Most of the time they do not.