There was quite a rumble in the markets this week and it made me realize, again, just how much I don’t know. Nevertheless, I consider this a huge advantage because I have a pretty good handle on what it is I don’t know. When I know what I don’t know it is oh-so-simple to look it up and learn all about it.
At this point I’ve also come to realize that certain indicators are very powerful at times and useless or even counter-productive at others. I’ve seen how some are powerful in certain time-frames or in the narrow confines of a single security while others are only useful at extremes. And, then again, there are times when the technicals hold sway over the fundamentals and vice-versa.
To me, this means that one should know exactly what sort of trader they are (scalper to position), learn their market and it’s players, then carefully choose their indicators: from broad-based sentiment down to which chart-types and chart-indicators to use – and when to use which ones.
Sentiment is simply optimism or pessimism in a market. I’ve learned that on the broader, global, scale this translates to risk appetite vs risk aversion. From Wyckoffian VSA I’ve learned that on the smaller scale, sentiment is about how the chart is being setup during a campaign. Speaking generally, sentiment at a particular point in time shows the tendencies or probabilities of a market making a certain move. Then, in the balance, are the news events, especially those related to economics. These events can turn sentiment in a second and it ultimately shows as a change in volume on the chart.
All this brings me to the conclusion that each indicator must be thoroughly understood and applied thoroughly – not half-heartedly. For instance, Inter-market Analysis is about four markets: Commodities, Currencies, Equities and Bonds. So, any analysis that does not include all four is lacking and will probably lead to some wrong conclusions. Another example: the COT Report is about Commercials and Large Specs. Therefore, any analysis that is not based on a thorough uderstanding of the players involved will probably lead to wrong conclusions. Finally, trading from this broad-based, long-term, sentiment indicators without going to the charts and understanding the campaign will probably be a disaster in timing and risk.
Major eocnomic news events will trigger a rebalancing of risk. (It might be a pendulum swing: if risk appetite is on, then risk aversion will be triggered.) As for Risk Aversion, spurred by this FED announcement where we saw it overwhelm fundamentals and technicals.