THE NATURE OF THE PRICE CHART AND THE FAILURES IN TRADING

If you have never seen a candlestick (OHLC) chart, then it very much means that you don’t have knowledge about trading in the financial markets. However, if you have seen one, and you know what the different parts of a candlestick symbol mean and what it represents on the chart, then you probably are familiar with the knowledge and practice of trading. And everyone who trades knows how difficult, chaotic and complex the game is.

It is a game because some degree of gambling, speculation, emotions, strategy, and moments of winning and losing are also involved. The reason people get involved in trading, especially retail trading is the same reason people partake in different investment ventures or gambling schemes. But one fact is well-established. Most people lose money in trading rather than make money. And if they do, it’s usually temporary. The financial instrument or broker involved does not matter. People jump from one instrument to another or change broker but the result does not change for most people. According to some reports, 80% of retail traders would quit in the first two years. Only up to 2% could remain after five years. ?

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Discipline in decision-making

Most people who get on trading terminals to place their orders barely have any knowledge of the dynamics of the financial markets or the assets they are playing with. However, some people do learn along the way, and they subscribe to tutorials and courses on trading. They learn in those courses that it is important to establish some discipline in order to become successful traders. These include discipline in technical precision, risk management and trading psychology which are all intertwined. If a trader in his decision-making process fails in one, everything else also falls apart.

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Technical precision: This is the ability to enter and exit trades at the place at the right moment. This comes with strategy and experience. And most strategies eventually fail because they either lack fundamental or external information to back the decision or are based on simplistic assumptions about where the supply and demand zones will appear. And even some that get it right may miss the entries and exits, or get stopped out if divergence happens, or a long-wick candle appears to trigger a premature exit. This means that just securing entries and exits is difficult already. If a trader cannot enter his trades at almost the exact reversal points on the chart, then his trades will fail in the long term because his profits will be limited by weak risk-reward ratios.

The goal of trading strategies and techniques is to find the best place and time to enter and exit a trade safely, which of course is at the exact reversal point. Advanced techniques like the scientific fractal flow strategy and the ICT order flow strategy can help with this if traders can sacrifice time and money to purchase and learn the original content.

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Trading psychology: There is always a herd mentality that affects the investor community whenever they observe fluctuating prices or hear major news events. They always react emotionally and instinctively to them. These reactions are unavoidable because of the inherent cognitive biases that control the human mind when it comes to the importance of finances and social validation. The aim of good trading psychology is not to suppress these feelings but to force them to stick to the plan and strategy regardless of the chart or the events because the markets can be non-deterministic. There is no mechanism that says that price is going to turn at this point, and at this exact time like clockwork. Since, we are dealing with probabilities, there is no need for the pressure to be right about trading all the time. In other words, it is motivating the trader to treat his trading like a hobby, where he must only risk only capital he can afford to lose. Entering a trade with your life-savings or with high leverage because of a fictitious certainty and expectation that the trade is secure and should surely succeed is a recipe for disaster. If the trade fails, the trader will take the emergency exit fast to rescue his remaining money. The ultimate result is a cascading effect across the world like the global financial catastrophe in 2008-2009 where millions of investors lost their assets, and businesses were closed.

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Risk management: To make money in trading, you must risk some capital. To make a lot of money, you must add leverage. Brokers know that what attracts traders to their trading terminals are low spreads and high leverage. This is why there is always a competition among brokerage firms on who offers the lowest spreads and the highest leverage for a given asset pair. Without leverage, many people won’t find trading attractive. At first leverage looks exciting and promising but the danger is that it is a double-edged sword. It amplifies both the risk and reward by increasing the pip rate per tick. And where risk and reward are amplified, emotions equally do likewise. If the pips go far into the opposite direction, a margin call may occur. This is why people who trade with little funds hardly make money. It will take a long time for trades around 1:3.5 risk-reward to accumulate the profits that can be sustainable in the long term. A simple 10x leverage can shorten it by promising 1:35 risk-reward ratios. This is false. Actually, it multiples both sides to make it 10:35. But many brokers offer far higher leverage than this, sometimes up to 700x.

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Why leverage is high?

The reason why brokers increase available leverage to dangerously high levels is because in the past before computers were less powerful than they are today, and currencies were stronger than they are today, trading was done on trading floors on stock exchanges with brokers having to yell aloud their clients’ orders. Back then, placing a single order required a lot of capital, and some legal or portfolio requirements. Today, computers and screens do the yelling, and provide real-time information on live price data. As a result, financial firms need a lot of liquidity, and a place to dump the risk that come therewith. So, it made sense to make the markets instantly available to very large numbers of small investors who trade with their personal accounts. Then big investors in large financial institutions would use their massive financial power to influence the movements of price in order to take the little money owned by the small investors quickly, thus guaranteeing losses on the side of the retail traders.

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The nature of the price chart

The truth is that even if a retail trader manages to get everything right, the odds of long-term success by trusting a candlestick chart only is still too low. The reason has to do with the mathematical dynamics of the prices of financial instruments that is not clearly understood by inexpert retail traders and not mentioned in many trading courses. The price chart is a final representation of millions of decisions and forces around the world trying to vote on the value of an asset. There is no retail strategy that can overcome such immense power in real-time. Price action as indicated by the price chart is an example of a financial time series that is characterized by very chaotic patterns in that it is non-stationary, stochastic, and heteroscedastic.

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Non-stationarity: The price of an asset on any trading terminal is a continuous variable with a lower limit of 0.00 but no upper limit. As a time series, price travels three directions: uptrend, sideways, and downtrend albeit in a zigzag manner because of orders being met along demand and supply zones. When price reaches a so-called overbought or oversold level, the overall trend changes direction within that timeframe or fractal dimension. The problem here is that the price range does not have a determined upper limit at any given timeframe. This means that there is no genuine way to state where price is going to reach in future given that it would not reach 0.00 if it is in a downtrend. And because the rate of climb or descent also changes, it is also extremely difficult to know exactly the moment where price may reverse. This is what non-stationary means. The true mean, median of price cannot be precisely computed because it does not exist.

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Stochasticity: The word stochastic means random. Since every moving value in an order book is a vote made by a trader somewhere around the world, he can pick any decimal value of his choice for at what price he wants to buy or sell an asset. It means that new prices are randomly being generated all the time. If the industry was designed such that traders have to choose from a set of price intervals to buy or sell, then the stochasticity of price will drastically reduce and everyone will go buy the supposed price other traders prefer. But this is not the case. The price you pick is an arbitrary decimal value that is different from another value some other person picks. And this is what makes the chart ebb and flow, and bounce around like a floating ball being pushed around by waves. You cannot determine the location of the ball in thirty minutes or three days as the waves constantly bounce it around.

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Heteroscedasticity: Price is heteroscedastic. This means that its volatility is not fixed. The consequence is that price fluctuations are noisy and unstable. Volatility is the speed and amplitude at which price moves or fluctuates. Volatility can change gradually or suddenly. Moments of high volatility occur whenever large traders or big financial institutions make important transactions, or whenever there is a massive crowd of buyers rushing to buy a new promising venture or to sell off a defaulting asset in panic. Low volatility usually happens when there is a moment of recession, or the price has reached a place of equilibrium globally. This is why low volatility leads to sideways price action. Volatility combines with stochasticity and non-stationarity to consolidate the chaotic behaviour observed in charts.

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Technical oscillators: Trading terminals come with several tools called technical indicators or oscillators to assist traders in their analysis and decision-making. They work by applying statistical formulas to price movements based on rolling calculation windows. The problem is that these indicators apply smoothness and stationarity to the chart thereby omitting a lot of information. This is the reason why technical indicators suffer from a problem called lag-noise tradeoff. If the rolling calculation window is widened, so much information will be lost due to lag. And trade signals will appear late. However, if the rolling calculation window is shortened, there will be so much noise and clutter that will still mask the signals. Thus, technical indicators are not very reliable.

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The combination of these factors is the reason why many traders begin to lose money in the long term. The combined seasonality and huge positions in the higher timeframes will render all highly leveraged trades worthless in the coming hours, days, months, or years.

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To succeed in trading in trading is very difficult. However, if an amateur trader is going to increase his chances of earning substantial returns in the long term, there are a few things he should not do:

1. Do not trade with little capital: If the capital is too small, the profits will also be small. In moments of high volatility, if the price goes in the other direction, the profits will be wiped out and most of the remaining money may get lost.

2. Do not trade with high leverage: The higher the leverage, the easier it is to blow your account quickly. Also, high leverage makes big profits but do not secure them in the long term. When the seasons or financial climate changes, the leverage will give way for losses.

3. Do not trade using superficial techniques: If a technique cannot get you to the exact reversal points in demand and supply zones, it will fail you in the long term because the profits made will be limited and you may later break even if you don’t lose. Advanced techniques like the fractal flow methodologies can predict the right entry points and signals to use. These would guarantee the best take-profit levels and provide spaces for risk collapse in case the take-profit cannot be reached.