20-year trading veteran Brian Shannon talks about why it's important to know the psychology behind technical analysis.
I’m here with Brian Shannon, a 20-year veteran of trading. We’re talking about your book, Trading Using Multiple Timeframes. Tell me a little bit about the book, why you wrote it and what do you hope the traders get from the book?
I wrote the book four years ago now, which seems like yesterday because there was so much work today. There are a lot of books on technical analysis out there, and they still come out daily it seems. I wanted to put my spin on it. No my spin necessarily, but my interpretation. I think a lot of people don’t understand the psychology behind technical analysis, that they’re looking at it as a stand-alone tool; buy at the 50-day moving average.
Why is the 50-day moving average often support or the 200-day moving average? What’s the psychology behind the shift from sellers to neutral to buyers?
I wanted to put that out there, and I had some new concepts basically, I thought, that hadn’t really been spoken about much with volume-weighted price and using multiple timeframes. I wrote it because I thought it was something, actually, my boys could learn from. And that was a big motivation.
Do you find that you’re more of a day trader, in and out of positions right away in the day or do you hold positions for longer than a day? Or are you a long-term trader holding positions for months?
Definitely not a long-term trader. No one has accused me of that in quite a while. I look at the market. I’m always looking for swing-trade ideas. Often times I’ll day trade them. It seems like more often I’m day trading them just because of the volatility of the market.
It just seems to follow through the way they would maybe a few years ago. It’s what the market tells me in terms of timeframe, and it seems that more often it’s telling me take your profits or I get stopped out with partial profits and that sort of thing.
What are the biggest obstacles for a day trader these days? Is it regulation? Is it margin requirements? Is it risk? Or is it the same thing it’s ever been, psychology?
I think it’s psychology. Yeah, you know there’s always I hate to say whining, but sometimes it feels whiney when people are talking about the high-frequency trading programs or messing up the market.
It’s the market, you have to deal with it. It’s not going to go way so you have to adapt.
The market is always adapting which is why we need the human element because you can’t write a program that’s going to keep up with the current psychology of what’s going on with elections recently or what’s going on in Europe. The stuff changes so drastically that the systems, you can’t program them quick enough.
Are you more of a technical trader or do you follow fundamentals?
I’m generally aware of fundamentals, but I’m definitely a technical trader. As I always say, only price pays. Fundamental analysis, there’s nothing wrong with it. I think they can complement each other. When it comes down to timing and coming up with a good risk:reward ratio and planning your trade and executing it, you have to have some technical skills. You have to understand the psychology behind the technical analysis, not just, again, we’re buying at a 50-day moving average or something like that.
That’s fantastic advice. Your book is Technical Analysis Using Multiple Timeframes. You’re Brian Shannon, Alphatrends.net. I love the blog.