You see, when I started trading, I read every possible trading-related book I could find. One of these books, whose title I no longer remember, had a story ending that I will never forget.
The story went something like this:
A long time ago, traders and investors did more fundamental analyses. They looked at company earnings and other things to make buying and selling decisions. They didn’t draw fancy art on the chart like many of us draw today. But when technical analysis started to gain more attraction, a fundamental analyst got curious.
He was already doing pretty well with fundamental analysis and had generated millions in profit. But he wanted to learn about this new thing called technical analysis to see if it was something he could use to make more money.
So he looked up an expert technical analyst and hired him to see what this new technical stuff was all about.
The technical analyst went on and on about the previous price structures and how they could predict future price moves.
If I remember correctly, at one point, the technical analyst drew a support line on a chart and said to the fundamental analyst that it was a good time to buy and the price won’t go below the price level he drew.
“You are wrong”, said the fundamental analyst.
The expert technical analyst obviously disagreed and showed how the price has reacted from that support level before.
The fundamental analyst then picks up his phone and sells around 2 million quantity of the security they were analyzing.
As soon as the big sell order was placed, the price made a big move in the downward direction and easily crossed the support level that the technical analyst so confidently drew.
The expert technical analyst was left in shock and made a complete fool of himself in front of the expert fundamental analyst.
As a beginner trader, I loved this story. And the reason I think why it stuck with me for so long is that it was the first time someone had argued about if the technical analysis was even right or a complete joke. Beginner me definitely wanted technical analysis to work as he was spending 8 hours a day learning it.
Think about it, if you are in the trading business, your trading story is probably not much different than mine. And if you are spending 1000s of hours learning something new, you obviously don’t want to end up realizing that everything you learned was worse than a horoscope.
Fast forward many years, and I can confidently say that technical analysis works. After all, I made 100% profit in a year as a technical trader and even tested part of it 100 times to show its win rate.
But the interesting thing is, some of the positions I have running as of writing this video are most likely going to make around 100% profit again, not just because of the technical but more because of the fundamental reasons.
And this is the most important thing that most technical traders get wrong that keeps them away from getting profitable in the long run.
You see, the reason why I say the next 100% profit I’m going to make is most likely because of fundamental reasons, has to do with why technical analysis actually works.
Recently, a member of the trading rush discord server asked why it is better to use default settings while using an indicator. Another member replied, for the same reason we draw obvious support and resistance areas on the chart. If most people will see the same thing, the higher the probability of people reacting the same way. This is the same reason used by many traders, including me, to answer why technical analysis work. This answer is correct, but there is a big flaw in it.
You see, what technical analysis is really showing is the psychology of previous traders and investors. Take this chart, for instance. If a technical analyst draws a resistance area on this chart and says the price will have a higher chance of reversing from it, what he is really saying is that most people will have the same selling mindset that they had last time near this area. The analyst is betting his hard-earned money on other people’s psychology.
In many scenarios, trading like this will work, and we even have data that it will work around 60% of the time.
But if some important fundamental event appears in the financial markets and most traders and investors move their focus on that, the probability of most people thinking about selling at this resistance will no longer be higher like before. It will be uncertain, and if this new event has a positive impact on the market, the probability of the price moving higher will actually be higher.
With this perspective, technical analysis does sound more like it shouldn’t work as there are too many variables that can affect the psychology and, therefore, decisions of other traders. But the thing is, this statement is almost true, and for around 90% of traders, it will be 100% true. Now hold on a minute, didn’t I just say that we have data that says technicals such as support resistance have around a 60% win rate? Yes, but the thing is, when most traders start with technical analysis, they trade like a bot. And when they get results like a bot, they complain about technical analysis not working.
But if you look at experienced traders, such as Jim Simons we saw in the previous video, even though his Medallion Fund made billions using algorithm and pattern trading, one of the keys to their success was adapting to the new events and new market as quickly as possible. Even though they were trading using technical strategies, their trading style changed as the market changed.
You see, the most important thing you can take away from the earlier fundamental vs technical analyst story is the way the expert fundamental analyst was adapting to the new market.
Because if I look back at my past, I can tell you that almost every year, I have traded slightly differently, especially in the past three years after the market started crashing. If I hadn’t adapted to the changing market, I would have gotten results like a bot.
The strategies I used always remained the same, but the way I used them changed with the market. Before the 2020 crash, I made most of the profit by trading smaller timeframes. But when the market crashed, I switched to long-term trading and made most of the profit from there.
After the crash in 2021, when the market started to trend again, I made most of the profit by trading both smaller and higher timeframes. And when the market crashed once again in 2022, and the psychology of most big players changed, I once again adapted to the new market.
But how in the world do you know if the market is changing, and more importantly, how do you adapt to the changing market as a retail trader?
Well, the secret lies in your profit graph. You see, when you take trades in the live market, you are also forward-testing your trading strategy. So, if you see abnormalities in your profit graph data, for example, the win rate suddenly dropping below the expected level, it’s time to check if something has changed in the market. A good example of changing market can be seen during market crashes. In both of the recent market crashes, the win rate of many technical strategies dropped as the price and traders were anticipating and reacting more to the important fundamental events.
Using the same profit graph and recent trades as the data, you can also adapt to the new market by simply repeating what’s working and slowing down on things that are giving abnormal results.
If you put all successful traders in a room together, even though their strategies will be different, one of the keys to success you will find in common is that they adapted to the changing market when needed.
Once I book profit on the running positions, I will make a video on how I adapted and what I traded in the current markets to give you a detailed example. So subscribe for that, or see what I am trading right now, see how I made 100% profit in a year, and get trade alerts by supporting Trading Rush on Patreon. Thanks for watching!
