Forget The News and the Noise, Trust the Charts
As technical traders, it our job to follow the money flow. Over millions of years there have been cycles, and patterns that have repeated over and over. Take the seasons for example, there is summer, spring, winter, and fall. These seasons tell us when to prepare for cold weather, warm weather, when to plant, when to harvest, and more. The ancient hunters used to watch the footprints of animal tracks to find their lairs, this is how they were able to feed their families. This is basically the same thing that technical traders do with charts.
As a technical trader we look for patterns that repeat over and over again in order to find solid trading opportunities. Often, when that chart pattern appears it gives the technical trader a chance to make a solid investment decision. While technical trading is not perfect it will allow the discipline trader to exit the investment with a small loss when wrong.
Yesterday, the Federal Reserve Bank announced that they would not start to taper their current $85 billion a month QE-3 program. Now, many traders were nervous about taking action ahead of the Fed announcement. A few days earlier I alerted to buy the gold mining stocks. This decision had nothing to do with the Federal Reserve or anyone else, it had to do with the charts. We were able to pick up the Market Vectors Gold Miners ETF (NYSEARCA:GDX) at $25.60 a share on September 12, 2013. Many members where asking me if a taper of QE-3 would hurt the gold mining stocks. I said to them that the chart is telling us that the GDX is going to rise and if I'm wrong we will just stop out of the position with a small loss. I said, trust the charts and do not worry about the news and the chatter in the media. Fortunately for us the GDX rallied higher by 10 percent yesterday closing above $28.00 a share.
Learn to use the charts. Over the years the charts have usually forecasted most market moves before anyone in the media. Technical traders should also have a stop loss in place just in case the pattern on the chart fails, but the loss should be small. The key to trading is to let the winning trades run to target and cut the losing quickly when the chart pattern tells us to do so. Now there is a lot to learn about the charts, you will not master them in a day. In fact, we are always learning when following charts, but it sure beats trying to trade off of the news or the talking heads in the media.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.