Trading your charts for the fundamental view

REAL-TIME prices can provide fundamental insights hard to find by just studying the charts. For instance, you may have noticed that the equity markets are playing the “risk on, risk off” game continuously at the moment. If you haven’t, then it’s something you should know about. Catching the swings in the equity markets relies on an accurate assumption as to whether the market is likely to be risk on or off. If you get it right, month-on-month returns can easily beat the benchmark S&P or FTSE index returns.

Risk on involves a combination of factors that point towards bullish equity market conditions: a weak US dollar, a strong oil price, a strong Aussie dollar, out-performance in a range of industrial commodities, a low volatility index, weaker bond prices and an increase in trading volume. Risk off is the reverse. The objective is to buy when the market is risk off, and then to sell as the market turns risk on. The market adage is, “buy low, sell high” – which always gets a laugh when I tell novice traders that this is the secret to achieving staggering wealth. It is.

The risk on, risk off strategy seems simple enough and the clues are plainly visible at any time of the trading day, but even though such a strategy can provide well above average returns, very few traders ever consider it as the basis for their work.

I know why: they miss the real-time fundamental picture through a reliance on historical price charts. I equate it to the generals of WWI, scrutinising maps from behind the lines without noticing the shape of the battle. They fought a new type of war with obsolete tactics because they did not watch the action. In successful trading, like war, strategic planning can become tactical success if the method is in tune with the price action.

So, when I trade, I don’t use charts. I have a set of monitors that show me all the prices of the FX majors, commodity futures, equity index futures and other instruments, but it’s the movement of real-time prices I’m interested in, not their historical charts. Jesse Livermore, immortalised in the book Reminiscences of a Stock Operator, was quoted as saying “the tape never lies”. By the tape, he meant the real-time price activity of the stocks he was trading. This is true. All the information you need to make meaningful trading decisions is in the price activity in front of you, if you look. When I train new traders, the first thing they normally ask me is: “What charting package will we be using?” I politely tell them there is no package. Once they have been through the training, they can see why. Understanding the fundamental reasons why markets move and recognising the clues that enable you to buy low and sell high can transform your trading. Surely it’s worth turning off your charting package for a while and just looking at the price action to find out. Without charts you may find you are not blind; you are liberated.

David James Norman is the author of CFDs: The Definitive Guide, and a visiting professor at Essex Business School, where he is running trader bootcamps in June and September 2011. For details please visit www.tradertraining.net and follow the link or contact Denise Sherer at deniseh@essex.ac.uk