The Perils of Chart Burnout

One thing I discovered after hours of staring at candle charts, CCI graphs, stochastics, Bollinger Bands, Stark bands, moving averages, Parabolic SARs, and a variety of other more exotic charts and signals was that, no matter how much visual information I had in front of me, I still wasn't able to predict the future with much accuracy. In fact, I noticed my predictions got progressively worse the longer I watched the markets on a minute by minute basis, and the more charts and signals I looked at.

When you're just getting started as a forex trader (and I still consider myself a newbie) it's easy to confuse a lot of information with a lot of certainty, and a lot of cool charts and nifty signals with high trading odds. In some cases this may be the case, but all too often, especially for beginners, it's easy to get swamped with data and begin thinking that you're seeing patterns and trends that aren't there. The fact is, most of the 50 different signals you're looking at are really just variations on the same theme -- a change of price direction, a breakout, an emerging trend, a statistical anomaly, an oversold or overbought condition, and so on. For example, when I realized that the CCI graph was describing the same price behaviour as one moving average crossing over another and then approaching and rebounding off the Bollinger Bands, I felt more confident in being able to look at fewer charts and still receive the same information.

In addition to getting burnt out looking at too many different charts, you can burnt out looking at them too long. There are long periods when there's just not much going on in the markets, and you'll only drive yourself loopy staring at a chart at those times waiting for something to happen. If you can identify the really important periods and confine your attention to those, you'll avoid hours of frustration when the charts aren't describing much of anything. You'll also avoid the risk of jumping on a false signal that looks like the real thing but leads nowhere, which are common during periods of low market activity.

Another problem with charts, which I alluded to earlier, is that they can give you the illusion of certainty. Here's one example I was often guilty of -- for a while, I was absolutely sure I knew what would happen when the price crossed above or below a Bollinger Band. After trending up or downward for a while, it would obviously have to bounce back above or below the band and head in the opposite direction. Right? Well, yes, eventually that's usually what happens. But when you're constantly looking for that "Bollinger bounce," it's very easy to start filtering all the incoming information to point exclusively toward that bounce. And if you're like me, you may then overinterpret one of these signals, make an impulsive prediction, and trade on it. You may then discover, as I did on numerous occasions, that what looked exactly like the beginning of a rebound up or down may in fact be part of a minor holding pattern until the price continues its original trend, leaving you sputtering as your stop-loss gets vaporized.

The lesson that you'll eventually learn, if you're paying attention to all the money you're losing, is that it's impossible to know for sure, and very often you'll get it wrong. That's the key fact here: very often you'll get it wrong. If you can't accept that you'll get it wrong, or that you'll have to wait longer than you expected to be proved correct, then charts aren't going to help you. What will help you is adjusting your expectations, and realizing that staring at a chart 12 hours a day may in fact be as harmful as it is helpful. The more data you have to interpret, reinterpret, second-guess at, third-guess at, and lose sleep over, the more likely you are to resort to wishful thinking, trade out of boredom or desperation, hang on to bad trades too long, and end up blowing your whole account at 2:00 in the morning. In short, the more likely you are to get burnt out or burnt up.

These days I look at charts for maybe 15 minutes a day. I spend far more time working with Excel sheets of price data, testing potential signals, looking at long-term trade statistics, and developing simple yes/no, short/long indicators and entry points that allow me to place trades and then leave them alone for hours or days. Oh, and I still spend quite a bit of time playing with FX Engines, which allows me to do all of the above on a highly automated basis.

Perhaps most importantly, I get far more sleep and feel much less anxious about my trades than I did when I was staring at charts all day (and much of the night).

Related topic:
Limiting your emotional exposure to the markets