Frustrating Trading Makes for Great Reading

Five Highlights From Chapter 5 of Psychological Analysis

This was another frustrating week for me. I’ve had about zero traction with growth stocks for over a year now, which I know is not unusual considering the market, but it sure is aggravating.

I’ve also been revisiting that Warren Buffet quote about making a list of your top 25 priorities, focusing on the top five, and crossing off all of the rest. Trading is still in my top five, but I think it fell from #2 to #5 as I’ve adjusted my rankings a bit here in the early part of 2022.

Part of me thinks I should consider a less time-intensive trend following option. Another part of me thinks that maybe I’m just getting antsy because it’s been a rough stretch.

Part of me thinks that anyone who looks at my tax return, including my accountant, would suggest I focus my efforts on the areas where I’m already making lots of money. Another part of me thinks that nothing in the world has the potential to grow the money I’m making and saving quite like the stock market. My accountant would say that my real estate holdings beg to differ.

This was a little deeper than I usually get in the intro. If you’re feeling frustrated too, I hope it helps to know that you are not alone.

I’m not changing anything just yet, so let’s get into this week’s chapter.

Chapter 5: How to Use Technical Analysis Like a Pro

This week’s chapter of Psychological Analysis by Adam Sarhan took us through the basics of technical analysis. If you made the effort to subscribe to a stock trading book club email newsletter, you probably already have a solid grasp of this material, but I thought Adam once again did an excellent job of covering the necessary details without boring us to death.

Here are my top five highlights from the chapter:

TECHNICAL ANALYSIS STUDIES PRICE ACTION

In its purest form, technical analysis studies price action. The idea is that all pertinent information is available in the price of the stock, and technicians try to find price patterns that they can capitalize on.

I’ve always loved the idea that all the essential information is baked into the price of a stock, and that’s precisely what Adam mentions here. I’m constantly reminding myself that I’m not going to outsmart the greatest traders in the world, but if I can see what they’re doing in real time through technical analysis, I might have a chance to ride their coattails.

REAL LIFE IS SLOPPY

I provide simple sketches of these patterns because, in the live market, these shapes rarely appear perfectly. Real life is sloppy, and it takes some practice to learn to identify these patterns on a real chart. Again, technical analysis is more of an art than an exact science.

This is something I have found endlessly fascinating lately. I’m learning more and more that there really aren’t very many bases that look exactly like the ones we find in the books. Instead, we get the imperfect ones that give us just enough reason to doubt them.

I like how Adam says that “Real life is sloppy,” and I’m reminded that I hear Jim Roppel often say that an imperfect base isn’t a deal-breaker. It just reduces your odds of success.

PRICE IS PRIMARY

I still love to see monstrous volume behind a big move, the more volume the better. But my experience has taught me that price is primary and everything else, including volume, is secondary.

This is one that I need to write out on one of my 4x6 index cards and staple to my freaking forehead. I am notorious for getting lost in all the fundamental data, and I constantly need a reality check to start with price first and volume second.

SMART MONEY LOVES THEM

Most people fear these pullbacks, corrections, and bear markets. Smart money loves them. Why? Because they get out of the way when things are not acting well and load up the truck (buy) after the selling has ended.

Buying pullbacks and follow-through days off the bottom always seems so obvious with the benefit of hindsight. Putting your money where your mouth is when things look the worst is an entirely different story. We have to mentally prepare ourselves to pull the trigger when the signal happens. It’s not going to be easy, but if it was easy, then everyone would be making money in the market.

THE SPIRIT OF THE RULE

My experiences have taught me that technical analysis is more of an art than a science. Additionally, I have found that most people get caught up in the minutiae and miss the big picture. These people—and early in my journey, I was one of them—have a strong, almost blinding need to follow hard rules and obsess about things that simply do not matter. In the process, they end up beating themselves up and they miss the big moves. The idea is to capture the spirit of the rule and not the letter of the rule.

This falls along the same lines as the earlier quote about bases not looking perfect. I like the point that Adam drives home about focusing on the spirit of the rule instead of insisting on getting every detail lined up correctly.

Like I said above, I’ve struggled with this probably more than anything else over the years. I’ve gotten better for sure, but I still have a long way to go, and having this reminder should certainly help me out.

Speaking of helping me out, it’s time to get into the weekend review and see what the charts say about the market. Let’s get to work.

Have a fantastic and profitable week!

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