A Return to Simplicity: Up, Down, Sideways

Aug 20, 2008: 10:47 AM CST

We tend to overcomplicate trading at times, myself included, but sometimes it’s refreshing to step back and recall the simplest, most basic (almost oversimplified) concept of broader trends and possibilities.

Adam Hewison of Market Club released a new video today entitled “Three for One,” in which he takes trading and investing back to the foundational principle “Markets can do one of three things… go up, go down, or go sideways.”  From this structure, trading strategies of infinitely complex nature can be developed.

Adam walks us through a simple decision matrix and then explains how they constructed their “Trade Triangle Technology” using these principles with additional inputs, and how it’s used to generate profits by identifying basic price structure/behavior across all markets.

In describing the video, Hewison states,

“The most important element in the market is not the news, it is the market action itself. Everything else is secondary. In my new video I explain exactly how we look at the market and how you can benefit from looking at the market the same way.

The simplicity speaks for itself.”

I’m in the middle of doing various backtesting studies and strategy development, and I get caught up in the optimal parameter for an indicator, the optimal stop-loss strategy, the optimal position sizing algorithm and can get carried away in the finer nuances of price action and trading opportunities.

To some extent this is a necessary progression, but it’s important not to forget that price behavior is driven by supply, demand, expectation, etc. but that when all is factored away, price can only go up, down, or sideways, thus it’s important to identify the current environment and then develop strategies to take advantage of low-risk opportunities within the current structure.

As an updated disclosure, I am a commissioned affiliate of the Market Club.

Let’s remember the foundation of technical analysis, according to Martin Pring:

“[To] Identify trend changes at an early state and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed.”

(Pring, Technical Analysis Explained, an essential book for those serious about the art of technical analysis).

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