One of our ads has a headline that basically says: “Humans suck at drawing trend lines.” And this ad in particular has caused a bit of a stir on social media, so we thought that it would make sense to provide some more elaboration on what we mean. Here it is:
Humans Suck At Drawing Trend Lines.
Yup. We meant what we said in the ad. In this post we want to explain why.
Our thesis goes something like this: more so today than ever before, chart traders who analyze charts by hand are finding themselves at a market disadvantage. This is the result of of multiple factors including:
- A long term bullish marketing coupled with FOMO
- Confirmation bias and company bias
- Over fitting of indicators and analysis
- Emotional pain of loss
- Inconsistency in trading rules & application
- Algorithms getting faster and better at trading every day
- Belief in conspiratorial market manipulation explanations for lost trades
- Limited sight beyond whats on their screen
- The influence, often hazardous, of trading chat rooms, signal services, and trading gurus
- The proficiency of bank trading desks, prop shops, hedge funds, and other major players at exploiting human psychology with algorithmic trading systems
- And much, much more.
Trading has NEVER been easy. But when it’s Average Man v. Super Smart Machine, or Average Man v. Hedge Fund Trading Desk, it’s really no contest. These entities will always be faster and more accurate at reading charts than a human would be.
And yet here we are – with traders everywhere staring at charts all day long trying to find patterns before anyone else does so they can get in early or at least get some of the action.
How often do you find a chart you want to trade, and then the big move or breakout happens before you can get in?
Remember this: Obvious patterns are obvious to everyone. Not just you.
So what can you do about it?
Well, I know I’m bias, but my advice is inject some automation into your trading process so you can move faster and apply rules the same every time. That way, your trend lines are always drawn on a 320 candlestick chart, so they are precise.
Look at multiple time frames.
TrendSpider has a nifty feature that makes this a breeze, but you can do it by hand just as well, if you are willing to invest the time. Check long term charts before trading. Analyze them the same way you would a short term chart. See what trends other traders who swing for longer are looking at. Remember their position sizes are probably larger than your day trading size and understand if you buy when they are selling, you’ll probably get hosed out, at least temporarily.
Diversify your analysis.
Don’t just look at trend lines. Check out indicators. Check out Fibonacci levels. There are many different types of traders out there, trading many different styles or methods, and just because you don’t look at it, doesn’t mean they don’t. Fibonacci retracement levels, in particular, have a strong following in the algorithmic trading community. They are worth watching.
Don’t curve fit.
Test different moving averages and indicators on your symbols to find the best match with the strongest historical evidence, don’t just go with the 50 day moving average on every chart.
This is a point I can’t emphasis enough. There is zero statistical evidence for any one particular moving average (exponential, simple, or otherwise) across charts.
Avoid complex indicators, especially lagging ones.
Things like MACD and multiple-moving-average cross over strategies are difficult ways to produce regular results because they don’t always work. The statistical advantage is zero, you are just as likely to win or lose flipping a coin. I have found that you get much better results when you keep it simple.
Hope you enjoyed reading. Let me know what you think in the comments below.