» Context in Technical Analysis Blog for Trading Success: Ray Barros

Published in January 31st, 2011

BarroMetrics View: Context in Technical Analysis

A subscriber to the newsletter asked:

From: Bill Mitchel
Date: Saturday, January 29, 2011

“Through your book and your posts I am learning about your technical
analysis process. But one of the things I think really sets your
method apart is the use of context. For example the FOMC.

How do you interpret an event like the riots in Egypt? Clearly that is causing a
flight to safety. When the event passes do we go back to testing
1305-1310 or does that indicate a move into the correction you have
predicted? How much does context need to impact your technical
analysis? Thanks again!

Context is a critical component to my analysis.

Context can be technical. Most technical analysis is pattern recognition but for me the same patterns can lead to different conclusions depending on the structure of the higher timeframes and the volume/range relationship in which the patterns occur.

Fundamentally, (following Pete Steidlmayer’s ideas), I classify events into three groups:

Expected events (the event is seen by traders in the same way - usually leads to some form of sideways activity).
Surprise events (the event is usually an act of God or Black Swan event e.g. Chernobyl. This type usually leads away from the then current levels. Subsequently, prices return to original levels)
Unexpected events (the effect of an event is misinterpreted by the majority of traders e.g. sub-prime. This type usually changes the underlying condition of the market and eventually leads to a new market structure).

The events in Egypt, I classify as a type (2). The threat to the Suez Canal will have some impact on prices but the uprising is unlikely to produce a change in the structure of any market.

In terms of Gold and the S&P, the technicals were warning of a possible end to the Gold correction and the start of a correction in the S&P. Has Egypt has had any impact on Gold and the S&P? Perhaps; and if it has, it’s been the catalyst to confirm the technical condition.

Refer this blog post to a friend or colleague…

9 users responded in " Context in Technical Analysis "

baz said, in January 31st, 2011 at 10:38 am

Hi Ray, To what degree,would your views on context, fit in with Dow theory or Gann’s, commodity prices discount future events?
Is sentiment your way of measuring context?
By the way, Happy New Year cheers Baz

Paul said, in February 1st, 2011 at 5:16 pm

Context is in the eye of the beholder?
- Be it fundamentally & technically?

For a successful and experienced trader, he may see it beautifully.
But for a newbie, he may see “no beauty, hear no beauty”?

Can a newbie start with Discretionary Trading Approach successfully?

ray said, in February 1st, 2011 at 6:06 pm

Hi Paul

I am not sure what you are asking in the first part of the question. Are you asking if there is such a thing as an objective context? Or are you asking if a newbie can assess it?

I’ll wait for you to clarify.

Can a newbie start with a DTA? Sure but whether he would be better off starting with a mechanical approach is another question. The answer probably depends on the trader.

Incidentally for me: discretionary = rule based with a rule that says: “I need not follow my rules”

ray said, in February 1st, 2011 at 6:08 pm

Hi Baz

Thanks for the comment.

Context for me is an overview and I suppose sentiment could provide an input.

re Gann etc: seems to be that for an unexpected event, the discounting is incorrect - that’s what makes the event unexpected.

baz said, in February 1st, 2011 at 6:52 pm

Could context be put down to fundamental experience?
Today for example,the Aud/Usd continued to climb, yet the Reserve Bank kept rates the same,Queensland & Victoria,after years of drought,are flooded and a whopping big cyclone is about to hit Queensland,again. To my view of context,i thought the Aussie would drop, given these natural disasters yet it appeared to soar. cheers baz

ray said, in February 1st, 2011 at 7:05 pm

Hi Baz

Thanks for the comment.

For me today was more of background to current price action - context has a longer time frame connotation e.g. my view that the trillions of US$ created will lead to inflation (when the US banks start to lend) and will thus lead to stagflation.

Today was like a negative development play that told us that you were right - once the AUDUSD settled down and started to climb, I felt we could expect an upward move at least till we attained daily ATR (110 to 120 pips).

Paul said, in February 1st, 2011 at 7:19 pm

Hi Ray,
Yes, I am asking if there is such a thing as an objective context.

It is like, many times, chart patterns technical analysis can be very subjective, which cannot be described mathematically precisely.

ray said, in February 1st, 2011 at 7:34 pm

Hi Paul

Thanks for clarifying.

In my view there is an objective context but given we are dealing with uncertainty there can be no mathematical precision. To paraphrase Rand: the ‘out there’ is seen by the ‘in here’.

The task of a trader is to align himself as best he can with reality and profit by his alignment.

» US Inflation Blog for Trading Success: Ray Barros said, in February 3rd, 2011 at 9:02 am

[…] a recent blog, “Context in Technical Analysis”, I spoke about ‘unexpected events’. One such example cropped up on Tuesday’s […]

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