And so the glass gets darker
Many terms in trading become clichés and even so much so that their real meaning gets buried in their familiarity.
Terms like “Price Action” sound so “cool”, while “Naked Chart trading” sounds positively “hot”!
But another term, “Lagging” is banded about in such a way as to segregate various methods of TA into “camps” which are, for some reason, considered as mutually exclusive and proponents of one such “camp” will try to trash the others as homogeneously defective.
Actually, all methods of performing TA contain, by definition, elements that lag the current price. Lets look at some examples:
This one looks at the historical chart and identifies certain “significant points” which might be relative such as a higher high or absolute like a swing low. They will then draw lines connecting all these dots (remember those pre-school colouring join-the-dots books?) and end up with something that vaguely resembles a stellar constellation. But it is all historic and running behind the current price. They will then extrapolate from this constellation to the vertical present line running through the current price, upon which it forms a reference value. The current price is then compared with this lagging reference value to deduce trading actions and a higher probability of which way the current price is most likely to continue.
The Battle Commander:
This one will tell you to look at your historic chart and identify horizontal lines that touch, or nearly touch, extreme points on various candles or bars, etc. They will tell you that the more points that touch the line the more relevant it is as a support or resistance level (although other such gurus will dispose of this as rubbish, claiming the opposite, that the more times such a line is touched and reversed from the less likely it is to hold yet again). This horizontal line is again entirely historic and the latest point on the line is behind the current price. This horizontal line is then projected to the right until it crosses the present line, where it again forms a reference value which lags the current value and with which it is compared. There will be a series of such lines like war trenches across the chart each of which may or may not repel the “attacking” current price.
Both these examples create static lagging reference points which are only updated once current price forms a new significant point.
Then we have the snake charmer:
So-called because their methods are typically called indicators and are mostly based on mathematical formulas which produce something that constantly snakes up and down with the movement of the current price. Typically, they will, for example, select a train of consecutive candles/bars the length of which reflects the “normal” flow of the timeframe concerned. They will then calculate an average value of these points (which may be closes, or HLC or OHLC, etc). But instead of placing the average value in the middle of the chain of candles/bars where it mathematically belongs, it is positioned at the right hand end of the chain right on the present line including the current price. In fact, the current price is included as one of the chain values and therefore the average value is repainting in line with the movement of the current value - which actually makes an MA less lagging than the first two options. In this case, the reference value is dynamic and constantly appearing to “catch up” the current price - which is the main reason why many only see these types as “lagging”.
Therefore we can see the common elements here. Current price can only be evaluated with respect to earlier prices. These earlier prices are selected according to a method and processed to produce a historic reference value which is then placed on the same vertical present line as the current price.
The reference value is (almost) entirely historic and therefore has a value that is lagging the current value and is constantly trying to “catch up” with the current value.
Does it matter?
No, I don’t think so. The aim of any TA is to use historic data to anticipate where price is most likely to go next, how far it might go, and where to conclude that the initial prognosis was false.
Each tool has its own characteristics and strengths and weaknesses. It is up to the individual trader to decide what information is needed to make a sound prognosis and what tools are most suited to provide that information.
For example, I, as a trend trader, use basic chart significant points, weekly ranges, trendlines and a few MAs, some to identify the strength and direction of a trend and some to aid in defining entry /exits.
But one only needs to look at something like Trader View (or whatever it is called) to see the infinite range of variations and combinations that traders put on their charts.
However, in spite of all that is said and claimed by various proponents and the forum “Messiahs” with their own versions of “The Way”, the fact still remains that over 70% of all retail traders LOSE their money.
So I would suggest that the reason for that is not in what approach one uses and how “lagging” things are or not - it lies between the ears of the trader and their experience and understanding of how markets move and what, exactly, their chosen tools are designed to do and how they are interpreting the data flows that these tools are streaming to them.
But that is another topic for later, maybe.
But now the Christmas Holidays are starting and I will return to this after Boxing Day.
With best wishes for Happy Holidays to anyone who might have ventured this far!