We started by understanding how the economic machine works, the chart representation of markets and market cycles, and realized that there are only four trades in technical analysis. We learned how to plot market structure on bar/candle charts and analyze the swings. Then, we continued with learning practical trading templates, and we added drawing trendlines, channels, moving averages, and momentum indicators as confirmation tools. All these principles learned earlier can be used to analyze whatever market you want—stocks, futures, bonds, cryptocurrencies, etc.—because technical analysis is the way we study the psychology of market participants.

While tools remain the same, the trades you take may differ through time. For instance, the concepts behind the Turtles’ success in the 1980s and 1990s were to buy s a breakout of a 20-day or 55-day channel. There is also good, simple logic for focusing on these types of trades: if a market is going to go higher, it has to take out previous price highs. If a market is going lower, it must take out previous lows in the process. Traders focusing on breakout trades will naturally catch all the big trend moves. But markets always look for liquidity, so when the strategy became popular, it stopped working, and a new profitable strategy was formed—it was called The Turtle Soup. Basically, it was a failure test of a 20-day or 55-day channel breakout. You take the other side of the original Turtle trade and capitalize when the crowd exits a non-working popular trade they are in.

Prices in any free market are determined by the attitude of all market participants toward the underlying fundamentals. For example, in the 1960s, there was a group of growth stocks called “one-decision stocks,” because every year the profits went up, and every year the price went up, so you had one decision to make—just buy the stock and hold it. Then, in the 1973–1974 bear market, half of the Dow Jones Industrial Average was cut, and the growth stocks came down with everything else. During the next 10 years, the market went up, but these growth stocks didn’t make a new high until 1983—a full 10 years—while most of those growth stocks experienced rising earnings during that period. It’s not the fundamentals that are important, it’s the attitude of people toward the fundamentals that matters.

The more you study technical analysis, the more you appreciate the fact that psychology is very important in understanding what’s happening in the market. Charts reflect the psychology of the people as they trade. Keep your charts in a way that helps you read the psychology of the crowd. For instance, if you are studying several years of data or analyzing a growth market, plot your prices on a logarithmic scale, as shown in the chart above. In a logarithmic scale, a particular percentage decline or advance takes the same proportion regardless of when it occurs. Since psychology “works in percentages” you can feel how strong and terrifying that Great Depression decline was in comparison to other recessions.

Also, you should not forget that when doing technical analysis, you are not dealing with certainties but probabilities. If you are 90% sure, there is still a 10% chance that you are wrong. The hopes and fears of all market participants are reflected in one thing—the price—and there is no certainty when it comes to hopes and fears because we are not created equal!

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