As technical traders, it our job to follow the money flow. Over millions of years there have been cycles, and patterns that have repeated over and over. Take the seasons for example, there is summer, spring, winter, and fall. These seasons tell us when to prepare for cold weather, warm weather, when to plant, when to harvest, and more. The ancient hunters used to watch the footprints of animal tracks to find their lairs; this is how they were able to feed their families. This is basically the same thing that technical traders do with charts.
As a technical trader we look for patterns that repeat over and over again in order to find solid trading opportunities. Often, when that chart pattern appears, it gives the technical trader a chance to make a solid investment decision. While technical trading is not perfect, it will allow the discipline trader to enter at the most optimal time and exit the investment with a small loss when wrong.
Yesterday, the Federal Reserve Bank announced that they would not start to taper their current $85 billion a month QE-3 program. Now, many traders were nervous about taking action ahead of the Fed announcement. A few days earlier I alerted to buy the gold mining stocks. This decision had nothing to do with the Federal Reserve or anyone else, it had to do ONLY with the charts. We were able to pick up the Market Vectors Gold Miners ETF (NYSEARCA:GDX) at $25.60 a share on September 12, 2013. Many members where asking me if a taper of QE-3 would hurt the gold mining stocks. I said to them that the chart is telling us that the GDX is going to rise and if I’m wrong, we will just stop out of the position with a small loss. I said, trust the charts and do not worry about the news and the chatter in the media. Fortunately for us the GDX rallied higher by 10 percent yesterday closing above $28.00 a share earning great profits with ease. This was simple chart reading, a task which many think they have a grasp on, but are too often reading the charts incorrectly.
Learn to use the charts to your advantage and you will look at the markets in a way you never imagined. Over the years the charts have often forecasted most market moves before anyone in the media. Technical traders should also have a stop loss in place just in case the pattern on the chart fails, but the loss should be small and you should know your exact stop level before entering the trade. The key to trading is to let the winning trades run to target and cut the losing trade quickly when the chart pattern tells us to do so. Now, there is a lot to learn about the charts, you will not master them in a day. In fact, we are always learning and adapting to the market when trading charts. But one thing is certain, trading charts sure beats trying to trade off of the news or the talking heads in the media which are almost always late to the game.