The weakest link in trading

A chain is only as strong as the weakest of its links… it doesn’t matter if most of them are made of titanium… if there is one of them that is made of lead, the chain will break there and the others will have been useless.

In trading and in the stock market the same thing happens: There are several areas in which the trader has to have competence and skill, and consistency is achieved when all of them are aligned and contribute to the whole. It is not much use to dominate some but fail in others since they all go hand in hand.

The area where most traders focus their efforts is the Technical analysis. With this they intend to “predict” what the market will do and find “good” investment opportunities, and to achieve this they have many tools and possibilities.

You can start with the most classic and study traditional figures and patterns, triangles, pennants, double arrivals… then you can incorporate the trend lines and their breaks, and then the channels. All of this can be made more dynamic by adding moving averages, and wrappers like Bollinger bands or the Keltner channel. There are also the mathematical oscillators, the identification of fractals, the analysis of volume and momentum, volatility breaks… You can do a cross study of sectors, or of correlated or inversely correlated underlyings, you can cross time frames and representation, you can use candlesticks, range bars, renko charts, in ticks, in time… the possibilities are limitless.

This makes technical analysis a titanium link…

Of course, for win consistently it is just as important to identify investment possibilities, as knowing how to act on them with discipline, or with the appropriate amount of capital, or knowing how to exit in the right place… These other areas are usually much weaker links.

For example the ruin risk management it is often a neglected factor in novice traders. Many of them do not know how to answer clearly what risk factor of ruin the systems they use to operate have.

Another very neglected factor is the statistical validity of their systems. To the question: what percentage of winning trades does this signal give, most novice traders cannot answer with data.

Another weakness is in the ability to act in a disciplined manner, that is, doing what is best at all times to achieve the goal they have set for themselves. Without a disciplined application of your system, results will not come…and without specific training to develop this ability, discipline will elude you.

The bottom line is that it is all very well to dedicate resources to learning Technical Analysis, but one should not overestimate the ability of this tool to help us be consistent. To achieve success we need to combine all the variables in a balanced way.

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