October 2013OPENING POSITION
October 2013Without any doubt, the way we view charts today is different from the way we viewed them before the age of computers. Technological innovations have made it easier for us to use charts, but that ease has made us lose sight of what really goes on behind price movements. Drawing charts manually did have a big advantage — you were able to intimately understand the price movements. That’s not to say we can no longer understand price movements; we still can, but we have to make the effort to understand them. Even though price movements are still based on the principles of supply & demand, sometimes some strange movements can occur in the markets that leave us bewildered.
That shouldn’t come as a surprise, given that algorithmic traders or high-frequency traders have a huge impact on price movements. To see their influence, all you have to do is look at an intraday chart of the S&P 500 index to see how price reacted whenever Federal Reserve chairman Ben Bernanke made an announcement. You’ll often see that the price started moving before the announcement was made. Once you notice how price reacted to a specific news item, you can take it a step further and try to identify whether the price action coincided with things like Fibonacci retracement levels, support/resistance levels, or moving averages.
One interesting characteristic of price action I have noticed is the increase in the occurrence of gaps. You could try and see whether these gaps fade, and how quickly they fade. There are also a lot of “pump and dump” moves in the markets, many of which are due to the rumors that spread on social media networks. As we become more dependent on technology, be aware that anything can go wrong — whether it’s a fat finger error, a glitch in the code, or a false rumor. You don’t want to be caught in that mess.
The bottom line is that if you take the time to understand the dynamics of the market, you are making the effort to become a better trader. As society becomes more dependent on technology, people tend to rely more on having a computer do all the work for them. But you can’t rely on a service that tells you when to enter and exit your positions. There is no system that will work with 100% accuracy and there is no way to tell what the market will do at any given point in time. To survive as a trader, you need to understand the market internals and make your own trading decisions based on your knowledge.
Good trading!
Jayanthi Gopalakrishnan, Editor