Many of the new traders that leave the markets with a bad experience are the ones that could never grasp the concept of reacting to what is currently happening in the markets versus their desire to know what is going to happen. The new traders that look for gurus to predict the future, forecasts, and prophets, usually do not do well. The traders that I have seen that do the best and are profitable over the long term are the ones that use ‘reactive technical analysis’ not ‘predictive technical analysis’. The reactive traders are looking to trade as price develops at key areas of support, resistance, break outs, and trends. The predictors are trying to judge where a price will be in an unknowable future time.
Reactive traders buy using high probability signals. A bounce off support, a short at resistance, an entry at a breakout of a former trading range. Predictive traders use fundamentals many times to put a target out on where they think a market should be valued. Other times a predictive trader just has a pure opinion based on on little fact just personal thoughts. A reactive trader’s opinion changes as the chart changes.
Reactive traders set stop losses at a price level that indicates they are probably wrong and they will exit if that price level is breached. Most predictive traders just pride themselves on their ‘conviction’ to stay in the trade that goes against them. The problem with traders that use fundamentals is that a trade that goes against them even starts to look better so they will even add to it as they lose money averaging down in price. Reactive traders look for price action confirmation before entering. They like confirmed price strength before they entry at support or on a break out.
My entry is based on confirmation of a possible new trend starting while my stop loss is where near term support is lost and I may be wrong. I exit winning trades with trailing stops and watching for a top to be established. The chart is my leader and I am its follower. I do what the chart says not what I believe it should do or will do, but what it is actually doing right now.