Nostradamus and Rod Carew?

There are some folks out there who do pretty well in markets who use “chart patterns”. But that’s probably not why they do well. There are two parts to being successful as a trader/investor. The part almost everyone focuses on is the analysis (aka method). The other part is one’s abilities as a trader. (And sorry folks, an investor is basically a trader, but just with a longer term time frame.) But of the two parts to becoming successful in markets, trading ability is by far the most important. I’ve known floor traders who have been wildly successful, but who employ a very simple method/analysis. And they know that. But they also know they wanted to focus more on developing their trading skills, rather than believing in a method. And there are also people who are the opposite. Meaning there are folks who have a brilliant method, but who suck as traders, and they end up as ex-traders quite quickly. When I was a very young and very clueless floor trader, I knew a fellow (we’ll name him Nostradamus) that could “call” market moves brilliantly. He spent hours and hours working on his charts. And his analysis was brilliant. One of my two mentors was the best “analyst” I’ve ever been around. Nostradamus was almost as adept. But my mentor, more importantly, had very good (but not great) trading skills. And when he melded the brilliant method with the very good trading skills, it resulted in a wealthy guy. And when he (for some unknown reason, but incredibly fortunate) took me under his wing, he kept urging me to focus on my trading skills. He stressed that the analysis method would develop over time. After an extremely rocky start as a floor trader, I somehow managed to survive. Nostradamus was gone after about a year, never to be see again.

And on the other side, my other mentor was also wildly successful. He was similar to the great Rod Carew – lots of singles and doubles, but very few home runs – very effective and efficient. And he had amazing trading skills. But he spent very little time analyzing charts, etc. He knew almost zero about charts. I used to tease him that he didn’t know the difference between a batting average and a moving average. But he understood RISK, meaning – recognizing/respecting/controlling RISK. He rarely lost money, meaning he had mostly small profits and scratch trades (break even), and a few big trades – truly spectacular RISK CONTROL. And he barely did any analysis. But he was a master of knowing when/where/how to enter a position, when/where/how to exit a position, and maybe most importantly, when/where/how to stay out of markets – to have the patience to ONLY wait for his opportunities. A short term trader has many more opportunities to make money than does an investor. But the catch is, the shorter term trader also has many more opportunities to lose money. We all have to find our own comfort level within that dichotomy.

But as far as “chart patterns” go, the presumption of a “chartist” is that a “chart pattern” can help you to “predict” what a market is going to do in the future. I’m not trying to “predict”, that was my buddy Nostradamus’s undoing, so identifying the TREND of the market and the current technical position of the market – where the SUPPORT and RESISTANCE areas are – if a market is overbought or oversold – and if/where/how much ACCUMULATION or DISTRIBUTION there has been these are very wonderful pure trading tools. That’s basically how someone can use charts very effectively. Markets are about PROBABILITIES, not “predicting”. They’re about uncertainty, not certainty.