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This article is going to be a little longer than usual, as I endeavor to make a balanced view about exactly why price action is preferred in the marketplace.

If you’re keen to expand your mind, deepen your knowledge, or simply learn something new about the financial markets, then please read on.

Throughout the centuries, traders around the world have tried to find every method possible to exploit the market for profits. The search for a trading edge has led to countless hours of research, hard work, and dedication. More recently, programming has become the rage as hedge funds, institutions, and large traders seek to find the optimal way to extract profits from the market.

While the internet is rife with methods, formulas, and patterns that claim to bring in profits, through my years of trading, I’ve found that trading strategies fall into these 3 simple categories.

Most Trading Strategies Fall into 3 Categories

 

1. Trend-following

Many beginners make the mistake of asking these 2 questions: “When should I buy? When should I sell?”

Beneath these two questions, are actually several important questions to ask before deciding when to buy and sell. You see, trend-following is the act of buying in an uptrend, and selling in a downtrend. It sounds simple, but several questions come to mind when a trader attempts to follow a trend:

  • Has the trend started? When did it start?
  • When will the trend end?
  • Where should I get in on the trend?
  • Is it a volatile trend, or a gentle trend?
  • Is it a strong trend, or a weak trend?

All of this has to be taken into account as the market unfolds before a trader’s eyes. The confluence of answers to these questions would allow a price action trader to buy or to sell. While it is impossible to predict what would happen, the better a trader can answer the above questions, the better he or she is positioned to make some money.

Why is price action preferred by professional traders?

Price action involves reading clean price charts, and understanding the motivation of buyers and sellers when taking trades. With proper training, a trader can answer all the above questions, and make the most efficient trade during a trending market situation.

Traders have to process large quantities of information at a go. Making the price chart as clean as possible allows the trader to clearly see what is happening, and simplifies his analysis. For example, in the above chart, buyers are committed during the most recent 10 bars, and a reasonable trade would be to buy on a pullback to the EMA or trendline.

 

2. Mean-reversion

Mean-reversion is simply doing the opposite of a trend-follower. In essence, a mean-reversion trader would be asking the following questions:

  • Has the trend ended?
  • Where might the trend end?
  • Are the traders taking profits, or are they initiating new positions?
  • What price levels are mean-reversion traders looking at?

Based on my experience, beginners should not look to be mean-reversion traders until they are profitable trend-followers. It is much harder than it looks when taking a trade in the opposite direction of the trend.

In my trading foundation workshops, I emphasize time and again that a trade setup must occur in the opposite direction before taking a reversal trade. In fact, instead of going against the trend, I would much prefer that the trend has already changed direction, and then I hop on to that new trend for a lower-risk trade.

Price action traders consider many more options and ask more questions than indicator-based or value-based traders.

The financial marketplace is filled with professional traders seeking to make a quick buck out of unsuspecting, ill-disciplined, or even lazy traders. It is just like in the Olympics; at the highest level of sporting excellence, sportsmen that miscalculate their aim or fail to squeeze out that last ounce of energy could miss finishing in the top 3.

In a bull market, going against the trend is much harder than you think. That is why price action is so important; it helps you decipher when the trend is going to end, and whether it is wise to enter or not.

 

3. Spread-Betting (Betting during volatility)

Spread-betting is used by institutional traders and proprietary funds to make short-term bets during times of volatility. The software and execution technology required is often expensive, and is not suitable for a retail trader. The strategy is complex, because bets are placed on both sides during a volatile event, and it requires strict discipline when trading. I won’t go into great detail on how this is done, but you can read up about it.

 

Why Then, is Price Action Preferred by Professional Traders?

 

1. CLARITY

Price action trading is trading with clean charts. The only information you need is the current price, and these are displayed using candlestick charts. In the charts below, we see that the blank chart is far clearer and easier to read than the complicated one with many indicators.

 

2. SPEED

When trading intra-day, traders need to quickly make a decision when the price action unfolds before them. While checklists and criteria do help, having a solid price action foundation would allow the trader to make a decision quickly. How would you make a trading decision, if you had to look at 12 screens at once?

Image Source: LifeHacker.com

In contrast, I can make my trades on a single laptop computer, or even on my mobile devices. Something like this is more than sufficient:

Image Source: MyCompas.com

 

3. UNIVERSALITY

Perhaps the biggest reason why price action is preferred, is that price action is universal. You can trade commodities, currencies, stocks, bonds, ETFs, REITs, futures on just about anything, and even options, because every product has a price chart. You can be just as sure that Coffee Futures have the same price action mechanics as Apple stock, and you wouldn’t have a problem transiting between products.

Trading is very much like selecting from a diverse menu in a fancy restaurant; while there are many products to trade, many traders settle on trading a few products and get proficient at them.

Price action works on just about anything with a price chart and a liquid secondary marketplace.
Image Source: TheActuary.com

 

How Can I Get Started On Price Action Trading?

For a start, I recommend using the old-school way by getting your hands on a few solid price action books. Many of these are available in public libraries, and if you have some spare cash, you can consider buying them on amazon.

Next, is to practice! While reading books and watching others trade is a great way to learn, nothing beats learning to trade by actually making trades yourself.

If you currently use many indicators and are not profitable, perhaps the question to ask yourself is whether you would like to understand what is behind the price chart and the indicators. It is not enough to use a formula, because market conditions change over time.

Here’s to wishing you all the best on your trading journey, and I hope this article has expanded your mind just a little more!

In collaboration with TradeHero (now Ayondo) & SGX (Singapore Exchange), we have developed a series of 15 animated video tutorials that will make learning fun & easy for all beginners!

I have been tasked as the mastermind behind the content, drawing from my knowledge of the 200+ books I have read and 10,000+ hours of professional market experience as mentioned in the video.

The videos are divided into 5 parts:

Last week, we had some pretty decent trades in, netting close to US$2,000 in profits for a handful of quick trades, riding on the strength of the USD after the FOMC.


 

Also took the chance to check out my new house:

 

For those who are keen to join our private network for timely trade calls, you can reserve your spot here, but do so early, as we only allow 20 new people to join each quarter!
Register: https://synapsetrading.com/the-synapse-program/

Bloomberg recently did a good cover on what hedge fund managers are looking out for in 2017. The general consensus is clear; the market is uncertain, and world events are causing markets to react in unexpected ways.

“You’re going to have to take way more risk today in order to try to make outsize gains versus a year ago,” -Hanif Mamdani, PH&N Absolute Return Fund

I found the article to be pretty insightful, with a handful of key take-aways. To make it easier for my readers, I’ve broken up the article into easy-to-digest sections, and added some charts and examples to make it clearer. Here we go:

1. Distressed Energy Companies

Hedge funds specializing in purchasing companies that are on the verge of collapse, actually profited from the rise in oil prices last year. Companies that were in the red started to turn profitable, and after purchasing companies at ultra-cheap prices, these assets were starting to bring in significant capital gains for hedge funds. Even though oil has risen significantly, hedge fund managers still see the potential for more gains.

It’s interesting to look at the related ETFs for oil and gas companies. I’ve pulled out 2 charts of U.S Oil & Gas company ETFs (XES and IEO). The gains over the year are impressive.

The charts above summarize the oil and gas sector for the year of 2016.

On the technical side, the Oil & Gas sector is still on an uptrend. It is prudent to remain bullish when the market is still trending up. It’s interesting that XES has broken out of a wedge, and looks to be gathering bullish momentum.

In the longer term, oil & gas companies seem to be picking up momentum.

 


A few weeks ago, I was invited to give a talk at the Singapore Stock Exchange (SGX) on the Offshore & Marine sector, and Keppel Corp was one of our top picks. 

2. “Global Macro Deceleration”

Some hedge fund managers are positioning themselves for the worst. For example, a border tax in the U.S could “cause a global depression and a major equity market decline,” says Carlson Capital’s Black Diamond Thematic Fund. They’re waiting for commodities to “correct meaningfully” (meaning a decline in commodity prices), and looking to scoop up good stocks at the bottom of the market decline.

Traditionally, sector rotation strategists have sworn by investing in stocks like semiconductors, industrials and miners during full-blown bear markets. These stocks are famous for having high volatility and are not for the faint-hearted. A famous example, Caterpillar Inc, is shown below:


Heavy industrials like Caterpillar Inc tend to move cyclically with the economy. Notice the 6 big swing it has had since 2012!

3. Long High-Yield Corporate Bonds Amidst Rising Interest Rates

Some hedge funds are betting on higher-yield corporate bonds rising during this period. High-yield bonds typically have both a short maturity and high coupon rate. With interest rates expected to rise in the coming decade, bond prices are likely to fall and bond holders will actually be worse off (Economics 101!). However, with the shorter maturity, higher-yield corporate bonds become more attractive as they are less exposed to the beating by rising interest rates. Bearing in mind these ideas, it is understandable why these have been attractive to institutional investors in the past year.


I’ve inserted a little-known ETF, “HYG”, a high-yield corporate bond ETF that tracks the prices of high-yield corporate bonds. You can see that the bear trend sharply reversed at the turn of 2016 and has been rising steadily since. The uptrend is still in force, and some hedge fund managers are looking to speculate on a variety of interest-rate products.

What They’re Saying:

In summary, what we notice to be the consensus about the market in 2017 is this:

  • Heightened interest rate, inflation rate, and economic volatility
  • Renewed interest in unconventional investment strategies

That being said, it’s important to keep yourself updated and continually learning about financial markets. In such a unique market climate, it would serve you well to continue reading up and knowing what market participants are paying attention to.

Want to Learn How to Tackle the Markets?

Join us for a 3-hour intensive “Trading Foundation Workshop” where you will learn all the necessary skills, and witness firsthand live trading, where many of our new attendees managed to make some profits from their very first trade! 😀

Register now: https://synapsetrading.com/trading-foundation-workshop/

 

Research Sources:

bloomberg.com/news/articles/2017-02-28/the-top-hedge-funds-of-2016-share-their-best-bets-for-this-year

beach-house

Here are some of the key lessons from someone who did it not once, but three times. If you want to be part of the 1% you have to do the following:

1. Be mentally tough. Learn to get over your fears. What happens when one is afraid? You retreat, you hold back, you dither, you procrastinate. Worse, you become more prejudice, or even take on extreme forms of hate. You miss out on opportunities, you become a prisoner of your irrationality. So learn to ask a simple question when you are uncomfortable with something, what have I got to lose?

2. Live within your means. Don’t be an idiot.

3. Learn how to make money, not how to save money. You will never save your way to riches. Again, this doesn’t mean you need to be an idiot with money!

4. Learn how to scale yourself and the business. This means learning how to delegate, how to motivate others and recruit great talent to do works you don’t know how or can’t.

5. Learn all the time, I read 10-20 books a month.

6. Learn from history and previous success as well as failures. Some of my favorites books are biographies, you get to learn a great deal about some of the greatest characters in history. Don’t be surprised to learn that a lot of successful people in history had to overcome a tremendous amount of adversity and failure before accomplishing greatness. If you study the great characters enough, the lessons and examples they have set can be just as valuable today.

7. Ask a lot of whys. Usually 5 whys in a row will help you dig out the truth of the matter. I stole this idea from the book “The Lean Startup”.

8. Work with smarter people, people who like to hack mostly. Learn, steal their ideas, they won’t mind. How else do you stand on the shoulders of giants?

9. Travel as much as you can afford, you will have a much broader perspective. Go get your passport already!

10. Laugh at adversity, have fun. Life can be really hard, don’t take it personally, even Bill Gates have really really shitty days. It always gets better.

11. Don’t be a victim, don’t make excuses. Nobody gives a shit about your problems. I can’t live off whining about how life isn’t fair! Some say inequality is a fact of life, but I never wasted much time bemoaning it. Embrace your dire circumstances and make the best of it, adversity is a blessing in disguise.

12. Learn a trade that can make you money in good times and bad. I personally can always fall back on my trading no matter what. This makes me fearless. For that matter, I can fall back on all kinds of jobs and functions I have done. I can work as a bookkeeper, a stockbroker, a trader, a salesperson and so on. I almost certainly can start another business and build it up from scratch, I am the jack of all trades.

13. Find an outlet for your stress. When I really really feel like I can’t deal with things anymore, or just don’t want to face anything, I get in my car and go on a road trip, all by myself. When I didn’t have much money, I spent my zen time listening to music, mostly classical music to escape.

14. It’s good to have a chip on the shoulder, it gets you motivated. But it is an annoying personality quirk too, so balance it well.

15. Maybe you are just not born with it, I mean motivation.  I have always been obnoxious ever since when I was a kid. I constantly challenged the elders, the status quo and always wanted to do one better. I don’t think it has changed even all these years later. As my wealth and the resources available to me has grown, I want to do even more. People around me are used to me saying “why not” all the time. Why can’t you do it this way? Why can’t you do better? Why not me? Where are you weak?

16. One of the reason the West lead in development for the past few centuries is the fact for the first time in mankind’s history they allowed the creative class, the entrepreneurs to actually keep their money. This allows wealth creation and built in motivation for people from all walks of life to strive to push themselves to accomplish more.

17. Don’t believe the BS about inequality. The real inequality is the level of personal drive and intelligence. I came from nothing, dropped out of college with IQ no higher than George Bush. If I can join the 1% 3 times, so can a lot of people.

18. Yes, it is you against the world. There will be all kinds things that “conspire” to put you down, but so what? But even at my darkest moments, there are inspirations I look for to lift myself up. 

19. Learn how to sell. This is perhaps one of the easiest way to get above everyone else. Whether you are a doctor, lawyer, accountant or any other professional, you will notice the ones on top are usually people who can sell. They sell themselves, they sell their ideas, they sell and motivate others to do their bidding (this is scaling). Bottomline, sales people are some of the highest paid out there, and it requires no specialization or education.

20. Don’t take yourself too seriously. Make sure you are having fun. The American cliche about working on something you love or having passion is grossly overrated. It is far easier to find something you can fun in. Business can certainly be fun. Often times fun and not taking yourself too seriously can be the key differentiator for your business success. Who wants to do business with a bunch of boring and sour puss?

21. For most people this is the part that is hard to take: you will never get rich working for someone else. You might still be able to join the 1% if you have a highly paid job, but you are still someone else’s wage slave.

22. I am probably going to offend a lot of people with this one. Yes, I am Chinese, or what might be considered a minority in US. I have personally experienced what some might considered racism, but I never let it get to me. I simply try harder. You will be surprised that even racist appreciates someone who doesn’t give a f*** and simply out hustles. Effort is infectious!

23. You have to know how badly you want to succeed. Some of the comments I see out there regarding this more or less suggests that I am not the norm and I got to where I am by luck. I will admit that I have been incredibly fortunate, but much of it had to do with the desire to succeed.

24. It’s OK to be a generalist. Being a generalist because I tried and failed at so many things is the real reason I am where I am today, but being able to synthesize all the things I learned from different aspect of work and life is the ultimate triumph.

25. Pursue what you love is so overrated. My burning desire to succeed in business is what will actually allow me to pursue what I love, now that I have the time and resources. But does this mean I hated what I did all these years? Absolutely not. I loved trading, I love being engaged and building business, I love motivate people and see them do amazing things with abilities they didn’t think they have. I loved the process of building a business.

26. If you are a young man just starting out in life, this is the advise I got from someone years ago and I still try to live by it today:
Try everything in your twenties, you aren’t going to be any good at anything anyways, people have low expectations from you so don’t worry about failing or being lousy at what you do. Have fun, try everything!
Try and figure out what you are good at in your thirties.
Maximize what you are good at in your forties.

27. If you are starting at the bottom, regardless of your age, remember this one simple rule: always deliver more than what is expected. I don’t care what job, what industry, or just how menial the task is, go above and beyond what is required. If you always do more, or delivering more value to your boss, your employer, your partner, your significant other, there is no way you won’t succeed at what you are working on.

28. Be different, even if it means being different for spite. In business, companies are being told to be innovative, differentiated in order to be more appealing to consumers and be better competitors. If you copy what they do, you are merely trying to play a game that is perfected by them! Even if you are good, work hard and so on, you are not likely to beat them at their game. You should play a different game, a game played on your terms, perfected by you!

29. Money doesn’t define you. Please learn from my mistakes! When I was this raging asshole with money back in my late 20s, I was foolish enough to think money is my identity. Plenty of people make this same exact mistake. The problem with having your ego tied up with money is that when you fail, like I did, your ego will get crushed along with it too.

30. Learn to say no. Most of us want to be loved, approved of, fit in, popular and so on. Unfortunately this also means saying a lot of yes when you really don’t want to for fear of offending others. I am not a baseball fan, but there is this expression in baseball called the “fat pitch”. It basically means as a batter you don’t swing at every pitch that is coming at you, you patiently wait for the statistically high probability pitch because you only have limited chances at swinging. You need to think life and business the same way. Take charge of your time and effort.

31. What if you are just not smart! Don’t sweat it! Well, I am not so sure there is a strong correlation between monetary success and intelligence. If anything, there might even be somewhat of inverse correlation! This is not to say the dumber your are the more likely you will succeed. Persistence and doing the things that just aren’t glamorous can pay off big too, but it tend to take time. I used to scoff at the turtle vs. hare story and thought I rather be the hare. Now that I am much older, I realize the secret to enduring success is winning over time.

32. Always be long term greedy! Most people are selfish and greedy, they just don’t want to admit it. I have no problem with being greedy. But what I cannot stand is being short term greedy. Being long term greedy means you do the things that might not pay off right away but it will help you build sustainable business and hopefully wealth over time. If you treat your relationships with people with this mentality, you will be far less stressed out (you are not spinning your wheels all the time). Always ask yourself when you engage with people in business and life, am I being short term greedy or long term greedy? Do I want a transaction or do I want a relationship?

33. Money is a tool. I didn’t need all that much money to build the business (remember, it took us $45,00 to build what is now a $100M business), I didn’t need all that much material possessions to feel safe and secure, but why am I still trying to make so much money?!!! The answer is simple, it really isn’t about the money, it is about having the tool to do things. I now understand why Richard Branson gets into so many businesses! It is just plain fun!

34. Don’t do business with dodgy people. You know who those people are, most of us can feel it in our bones. Due to circumstances, we sometime overlook and override our gut instincts and end up doing business with questionable people. It will unfortunately boomerang and come back to bite you, just like what happened to us. There is no such thing as laps in integrity, you either have it or you don’t.

35. Are you a choice maximizer or a choice satisfier? Some of us agonize over decisions on all things in life, then there are people like me, able to make snap decisions and be perfectly happy with our choices. The folks who agonizes over things will spend a great deal of time doing research, slicing and dicing over their decisions to make sure it is the “right” one. Often times, even after the decision is made, they will spend a lot of time second guessing their choices. Needless to say, these people tend to be unhappy, unsatisfied a lot of times.

36. Learn how to spot opportunity. Life can throw you a wrench sometimes to make you feel miserable. But it does the same to the rest of the world as well! When the whole world is in crisis mode, people and businesses are in turmoil, as humans, we simply want someone, something to step up and turn things around. If you are an entrepreneur, there is no better time to start or invest in your ventures when there is a crash or recession because pretty much everything is cheaper and you will have far fewer competitions!

37. If you are aiming to get into the 1%, you are aiming too low. My point is, at the current time, I believe we are at the golden age for entrepreneurs. There has never been a time one can have so much access to computing power, exponential scalability and the abundance of cheap capital, resources. If you work hard, work as an individual contributor, you can get to the 1%. If you really want to go far beyond just the 1%, you should aim much much higher. Aim to solve problems on a massive scale, because the resources are there for the taking. I will repeat the old cliche in business, if you solve people’s problems, money will come. If you solve massive problems, you can expect massive wealth too.

38. I don’t know why it took me this long to get to this point, which is be persistent. This isn’t a secret. Persistence wins by default. Think about it, you don’t have to be good, you just have to be around when everyone else gives up. That is what happened to my company during the “Great Recession”. Persistence does something else too, instead of worry about being judged based on someone’s disadvantaged beginnings, you now have control on how you finish.

[This is an excerpt from a response in Quora to the question, “How can one become part of the 1%?”. The full story can be found here: https://www.quora.com/How-can-one-become-part-of-the-1/answers/8734078]