Trading and Analysis are Different, Don’t Confuse the Two

Many traders think that if they can predict where the market is going next they will be a profitable trader. This is a fallacy. Trading and analysis are different. I should know, I am a Chartered Market Technician–a supposed analyst, and I do some analyst work–but when I trade I shut that aspect of myself off.

An analyst will point out a whole bunch of reasons a forex pair should go up, but there is no strategy involved–no place to enter, no risk control, no place to take profit, no position size, no guidance on managing the trade….and the list goes on. In trading you need to consider all those things. You also need to try to control your emotions while that trade is on and your hard earned dollars are see-sawing up and down.

I see a lot of traders spend hours dissecting their charts trying to predict the next move. They come to a conclusion and jump in. That is an analysis based trade, but it doesn’t make you a trader.

To be a Trader (a successful one), you must trade off a tested strategy. Everything is planned and then you just wait for certain planned setups to form. Your trading plan outlines what that that set-up is, how, when and where you will get in, your risk, position size, your profit potential and how that trade will be managed while you’re in it (if required). Everything is laid out. There is not any analysis to be done, you are just looking for certain set-ups and conditions. When they occur you take a trade.

My trading is a based on a tested strategy. I put out my orders (entries, stops and targets) when my plan tells me to. Trading is based on probabilities and implementing a proven method, analysis doesn’t enter into it for me (although I do still falter occasionally and try to predict the market, messing up my trading plan in the process).

You can think the market will go down (analysis-type thinking), and be right, but you lose money because you placed entries or stops at the wrong level, or couldn’t take the trade because the risk was too big for where you would have had to place a stop.

When the market will go down is just as crucial as picking the right direction. Thinking it will go down, and taking a position based on that, won’t help if the market continues to go up for a few days and causes a large loss (for us short-term traders). Prediction won’t make you money. Coming up with a complete trading plan based on the probabilities of the patterns you see repeat over and over again is much more likely to make you a better Trader.

In fairness, there are some good analysts who have a good track record for prediction, and are also good traders. But they are good traders because they follow a strict strategy, and don’t act impulsively based on their analysis. They are still using a fine tuned, well laid plan for all their trades; their analysis is just incorporated into that plan.

Final Word

Being the best analyst or market forecaster in the world won’t help you if don’t have a plan for acting on that information. The best traders I know don’t spend time pouring over charts. They look for key set-ups and have a detailed plan for how they will trade that pattern, and they do it over and over again, every time they see it. It is based on probabilities, and for most traders spending extra hours doing analysis likely won’t improve results.  Be efficient. Create a plan, follow it and have lots of spare time.