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Technical and Fundamental Analysis
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The majority of traders I have met in my career do not have adequate knowledge of the technical analysis basics, and are unable to identify correctly certain classical formations or interpret widely known and practically used technical signals. However, the transaction level according to common practice should be expressed by the specific currency exchange rates, so we should pay adequate attention to them.

INDICATORS AND OSCILLATORS

Most indicators describe the market mainly in an ideal form, but reason­able thinking indicates it could not be otherwise, because such indicators are based on previous and current market information. The mathematical formulas, which determine the indicator lines and histograms, include the data for the previous period. Using them, a trader tries to make a forecast based on extrapolation. See Figure 6.4.

Unfortunately, in reality, the indicators that are good for the correct description of the past cannot provide a true picture of the future. I think the main drawback of these indicators lies in their plotting principle. This principle distorts the current market situation due to the artificial smoothing of

the real market signals by the mathematical manipulations on which an indicator formula is based. The momentum indicator signals are often too late, and the indicators intended to signal market overbought or oversold conditions are simply ridiculous. The market can move thousands of pips, even after the indicator gave the overbought or oversold signals on the daily or weekly graphs. See Figure 6.5.

It is not reasonable to keep floating losses of thousands of pips, expecting the market to return to your position levels, because it might never happen. The retracement could be shorter than the market's initial movement against the open position. In this case, the indicator can over­pass the overbought or oversold zone before the market reaches the level of the initial position's opening price. Then the market renews its movement against an open position. Traders face this situation almost daily, but (having no better tools) they may consider this approach satisfactory for the development of various trading systems. See Figure 6.6.

Many traders simultaneously use several indicators in their trading systems. However, sometimes different indicators send contradicting signals. (See Figure 6.7.) Therefore, traders should select some of the indicators for certain situations and disregard the others. The selection of

FIGURE 6.5 Technical traders should hate this picture, especially those who rely on such indicators in their trading. After entering an extremely overbought area, crossing toward the downside and sending a false sell signal, the indicator became practically useless. It took more than three years for the market to get back to the short position initial open price after going against it for 3.600 pips.

indicators requires strong skills and experience, but often the selection does not work in spite of those skills. Some traders often use different filters to exclude false signals, which complicates the system and make it even less effective. These trading systems (though not dependable enough) require more time for analysis and decision making. Many such trading systems often generate false signals, so the statistical ratio is in fa­vor of the failed trades. It is clear that such a system can be profitable only if the average profit per one trade surpasses the average loss. Then, traders can be successful, not because of the dependable and effective system generating true trading signals, but mainly because of their money management skills and technique.

THEORIES OF TECHNICAL ANALYSIS

Technical analysis theories named after their authors (for example Fibonacci and Dow retracement theories, the Elliott Wave Theory, and the Gunn analytical method) are not useful for the trader. The Elliott Wave Theory sometimes describes market past events accurately, but gives only an approximate forecast of the future. I think the theory can be used only for mental exercises, but not as a real tool to earn money. It assumes a lot of options for a single case, and it relies on a trader's extensive experience

in trading. However, this theory remains a puzzle toy for intellectual traders, rather than a practical tool for the majority of traders. Don't for­get that Elliott himself was unable to use his theory in practice to make any money on the real market. (See Figure 6.8.) By contrast, the retrace- ment theory can easily and naturally be used in my method because, in real cases, it provides precise numerical rate value levels. Traders can consider these values when they choose strategy and tactics, and they can plan their transactions for each trading period.

SUPPORT AND RESISTANCE THEORY

I think this theory is one of the best for the development of my trading method, because it is more precise than the retracement theory. Each buy or sell level at the moment of opening or liquidating positions is expressed in this theory by a certain value rate. This theory greatly simplifies calculations and provides an almost ideal profit/loss forecast. Furthermore, this theory is free from the disadvantages of practical trade methods and sys­tems, which are based on a set of various indicators. There is no fluctua­tion smoothing effect, and there are no late trade signals. However, sometimes, as in the case of trading based on market formations, false signals are possible. See Figure 6.9.

FIGURE 6.9 The trend lines on the USD/DEM daily chart. Several triangle-like patterns are unmarked but are also clearly seen here.

CHARTS: POINT AND FIGURE, JAPANESE CANDLESTICKS

Both of these charts are designed, not for the real graphic reflection of the market, but for the analysis and forecast of future trends. There is no place for these charts in my common sense trading technique, not only be­cause my technique needs no forecasting, but also because it was undesirable to complicate trading tactics that were effective enough without these extras. Also, I was too lazy to learn and memorize a lot of Japanese terms and designations, because the value of the method itself seemed doubtful to me. However, I recommend that my students get familiar with both types of basic charts and methods of using them, for the purpose of general knowledge and the ability to understand some professional discussions. See Figures 6.10 and 6.11.

As a result of an investigation, search, and analysis of the tools, trade methods and theories available to the trader, I came to the following conclusion: Some of these resources (especially if they do not require fore­casting and provide exact market description) could be included in the method I was developing, but they could not solve the whole problem. In any case, I could not find a dependable combination of tools and theories

FIGURE 6.11 Japanese candlesticks chart sample. This is the oldest known study technique for market analysis, and it has also been popular in modern times. It is a perfect fortuneteller's tool, requiring a rich imagination and some knowledge of the Japanese language. There is no need for practical usage if you follow the common sense trading technique. The Japanese candlesticks chart sample is recommended for the purpose of general education, as well.

to develop the method that would satisfy my requirements. In the process of my practical work on the market, I noticed some repeated regularity in market trends that were not mentioned in the literature or used by the traders I knew. All these regularities were caused by similar extensions, and they clearly expressed statistical regularities in a certain sequence of market oscillations. I liked the idea of describing and formulating these regularities to use them in the method I was developing. This would take me close to the ideal successful trading method.

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