Peter Brandt’s Thoughts on Technical Analysis

I’ve recently been re-reading my copy of Peter Brandt’s Diary of a Professional Commodity Trader.

If you haven’t read this book, you need to pick up a copy ASAP.

There are only a dozen or so books that I would consider mandatory reading for any serious trader regardless of their preferred style of trading, and Peter’s book is certainly on the list.

The book contains countless gems of trading wisdom and insight, but today’s blog post is going to focus on just one which stood out to me the most when reading the first few chapters this week.

And that is Peter Brandt’s contention that charts and technical analysis should not ever be relied upon as a means of predicting market moves – but rather, technical analysis exists purely and solely as a tool for traders to contextualize markets.

It’s a subtle difference in interpretation of the purpose of technical analysis, but an extremely important one.

In fact, this distinction could be the single thing that separates successful technical traders from unsuccessful ones.

I’ve covered this subject before in a blog post a few years ago called The Mystery of Technical Analysis.

But today’s blog post is an even deeper reflection on this idea, as I’ve been thinking deeply about this subject over the past few weeks since I recently had my first six-figure profitable trade in the crypto markets.

Technical Voodoo

Early in my trading career, I saw my trading mentor Steven Hart make calls in the market that seemed impossibly accurate.

It seemed like he had a direct line to the big players and market movers, like he had the central banks on speed dial, and he knew exactly where the forex markets were headed. Not all the time, and not every time, but certainly often enough and accurately enough to make me wonder.

Considering the fact that the forex markets are the most liquid and actively traded markets in the world with trillions of dollars exchanging hands each year all over the world, it was astonishing to me the degree of accuracy with which he could “predict” (or anticipate) market moves.

But as I got more experienced at reading price action myself, I realized that what he was doing didn’t involve any trickery or magic or psychic ability. It was just a skill.

And like any skill, even though some are more naturally gifted than others, it can be learned by almost anyone given enough time and deliberate practice.

I still see Steven make incredibly accurate calls about the markets all these years later, but now the captivation has worn off, and even though I remain impressed by his skill at reading the markets, I see now that he doesn’t have a direct line to Jerome Powell.

And all these years later, sometimes even I make calls that might make other traders think that I have a magic secret method of predicting future price moves.

Well, I’m here to tell you that unfortunately, as much as I wish it were true… I don’t.

But that doesn’t stop me from making money out of the markets.

My First Six-Figure Trade

Recently I executed the best trade I’ve ever made in my life – turning a $100,000+ USD profit over a matter of four days and three market orders.

I sold a large portion of my Cardano holdings (which I’ve had since 2017) into USD at $2.375, bought back my position at $1.04 a few days later during an epic crypto market crash, and then re-sold at $1.80 – resulting in my first six-figure profit in a single trade.

In hindsight looking at where I bought and sold, it looks like I knew exactly what was going to happen. And while it’s tempting to let myself believe that I have some kind of sixth sense for predicting price moves, the reality is completely the opposite.

I have no idea where price is heading. All I know is where I want to buy and sell.

And at the time I made those decisions to buy and sell, I did not make them because I thought I knew where the market was going.

I made those decisions to buy and sell because of what price action told me it was doing.

It might seem counter-intuitive to a struggling or inexperienced trader, but hear me out. Hopefully by the end of today’s blog post you’ll understand what I mean, and it should help to improve your own trading process.

I sold at $2.375 because I was already up on my original position I entered a few years ago over 3000% in profit, and I knew that the entire crypto market had been overheated for quite a while.

I’ve been in crypto long enough now to know that the good times can turn to bad times faster than you can refresh your portfolio page, so I was in defensive mode and looking for any excuse to protect my open positions.

So when the charts began printing lower-highs and lower-lows on a 5-minute chart as we began to show a slowing of momentum on the 1HR and 4HR charts after a huge multi-week run into all-time-highs – all the while Bitcoin began to show signs it was rolling over into a bearish trend – I made the decision to sell half of my altcoin positions.

Normally I wouldn’t make long-term investment decisions based on what occurs on a 5-minute chart. But the context of this situation meant that I felt comfortable doing that.

If I was wrong, I was prepared to admit I was wrong about my interpretation of price, and I was ready to buy back in at $2.50. I would have taken a 5% hit in my overall profit on my long-term position, but it was a risk I was willing to take to protect the 3000%+ profit I was already sitting on.

And so even though every part of my body was telling me “don’t sell! What if we keep going higher?” I stared at the charts and ignored the inner greed and fear of missing out.

I watched what price was doing across the broad market, I saw what it was telling me, I over-ruled my inner voice, and I pressed the sell button.

Price never did break through the previous high, and so I was never triggered to buy back in.

And what happened next was pure luck. I had no idea we were days away from a huge market crash. If I had known, I would’ve sold all of my holdings instead of just a portion.

As for buying back in at $1.04 – I decided to buy back in there because it was a previous zone of major support.

Plus I plan on holding my ADA for at least the next couple of years. I’ve been a holder of and “investor” (for lack of a better word) in ADA for 3+ years now through all the ups & downs.

I’m confident based on my fundamental analysis of Cardano that the project will be worth well over $1 in the years to come, and so I was content to get back in at a 50%+ discount even if price continued lower. It was a risk I was willing to take and live with the consequences.

But I was still extremely nervous, and it was one of the hardest trading calls I’ve ever made with the most amount of money I’ve ever managed on a single position.

I had to make my decision quickly, because price was moving insanely fast, and I know all too well that the best deals in crypto don’t last long during a manic phase like what we’ve seen these past few months.

So when I saw price clearly double-bottom on a 1-minute chart right at the top of my predetermined “buy zone” (which I’d identified weeks earlier), I didn’t hesitate to pull the trigger even though I was nervous and wasn’t sure if the level would hold.

The truth is I got extremely lucky. It’s not often that I pick a top and a bottom that accurately, and in fact I can’t recall a single time I ever did – especially on a 1-minute chart.

I never make trading decisions based on a 1-minute chart – but this time I made an exception because of how volatile price had become and how far we had already fallen from the recent high (56%+) and the fact that we had entered into a key support zone I intended to buy from anyway.

However – even though the outcome of this trade was heavily a result of lucky timing, I’ve noticed that the better I get at reading the charts and ignoring my emotional impulses and the better I get at letting price action determine what decisions I make, the “luckier” I seem to get.

Charts Are RISK TOOLS; Not Crystal Balls

The purpose of demonstrating all of this isn’t to brag or point out how great of a trader I am.

I’m hardly a great trader. I have a lot of room for improvement and I still make stupid mistakes and bad calls all the time, although I definitely do get better each and every year.

I laid all of this out to further emphasize the point that even though I just had the most profitable trade of my life a few weeks ago which was a landmark moment for me, the entire time I had no idea where price was going.

I was just reacting to what the charts were telling me in the context of where my risk parameters aligned.

Successful price action traders use charts to determine optimal entries, exits, and trade management decisions. That’s it. If you step beyond that arena, then you typically are stepping into impending disaster.

Chart analysis is a lot like weather analysis.

You will never hear a weatherman worth his salt claim to be able to predict the weather.

He could say there’s a 70% chance of no rain tomorrow, be wrong about that claim, and still get berated by people who didn’t bring an umbrella to work. He essentially told them there was a 30% chance of rain and they ignored that threat and still held him accountable, so can you imagine what would happen if he told everyone it certainly won’t rain tomorrow?

Traders are much the same.

We can use chart analysis to detect patterns which give us a statistical edge over the markets, and as long as we exploit that edge with consistent and proper risk and trade management, we can make money over the long-term.

But if you put a gun to my head and made me tell you where Bitcoin was going to be tomorrow based on the charts, even if I had the best technical analysis ability in the world and identified the most reliable and obvious setup I’d ever seen and I had the most amount of confidence I’d ever had in my directional bias… I’d still be praying to George Soros that the gun wasn’t loaded.

I don’t know where prices are headed next any more than you or anyone else does.

But I don’t need to, because that’s not how I make my profits as a trader.

I use my chart analysis to determine where I’m wrong, so that I know when to bail on my trading idea and cut my losses short before they get so large I can’t recover from them – which allows me to determine my position size based on how much I want to risk on a given opportunity in the event things go horribly wrong and I’m spectacularly incorrect about my prediction of market direction (which happens frequently).

By very definition that means that I’m not using the charts to predict where the markets are going to go. I have no idea where they’re going to go. All I know is where I don’t want them to go. And I want to be well and truly out of my position before that happens.

That’s not “prediction” – that’s risk mitigation.

And if I happen find myself in a profitable position, I still use the charts to much the same purpose. Except instead of contextualizing the risk of a new position, I contextualize the risk of my existing position’s open profits.

I decide where I’m happy to take my chips and leave the table, and the moment my cards turn sour and the odds of me continuing to succeed are diminished to an unacceptable degree, I pull the pin and move on to the next opportunity.

By definition, this is not predictive. If anything, it is reactive.

Technical Analysis Can Be Your Best Friend or Worst Enemy

Chart analysis can be used to confirm your biases, or it can be used to manage uncertainty.

If you use it to confirm your biases, which is easy to do, then you’re likely to lose money. Extremely likely.

If you use it to manage uncertainty, determine your stop loss placement and position size, and your target placement and trade management; then assuming you have a sound risk and money management plan and you can be consistent and disciplined with a system that turns more profit than it bleeds to losses over the long-term then you’re extremely likely to be a profitable trader.

It’s this simple distinction that makes all the difference.

Do you use charts to convince yourself you made the right trading decision, or do you use charts to inform you on how to handle yourself if you made the wrong decision?

Making the “right” trading decision doesn’t necessarily mean you made money, either. It’s possible and in fact common to make money in trading despite making terrible decisions. After all, price can typically go one of two ways – up or down.

It doesn’t take a rocket scientist to get it right sometimes, and even a gambler gets extremely lucky from time to time.

The way to judge the quality of your trading decisions is not based on how much money you made, but how much risk you took to make the money you made, and how consistently you can repeat that process.

A strategy with a 100% win rate and a 100% profit potential is useless if it can only take one trade. Unless you’re starting with millions in capital, a 100% gain isn’t going to be enough to retire on.

You need consistency and reliability in your trading as well as good risk management practices.

In the case of my example above – I risked 5% of open profits (which were already up 3000%+) to make another 70% on the rebound that I managed to capture. I’d say that’s a decent trading decision given that context, at least as far as my personal trading methodology and track record is concerned.

Breaking Down Your Charts Using First Principles

To wrap this blog post up, I want you to reflect on a simple but powerful question to turn all of this theory into a practical application:

What are you trying to achieve with your trading?

For example, “I want to…”

• Capture trends
• Capture reversals
• Capture consolidation
• Capture breakouts

Of course, you could pick all four of these market conditions, but in the context of strategy development, it’s typically impossible to create a strategy that exploits more than one market condition well.

A trend-following strategy by definition is going to struggle during consolidation or trend-reversals.

Likewise, a mean-reversion or consolidation strategy is going to struggle during trending markets and breakouts.

And a breakout system is going to struggle during consolidation and fake-outs, etc. You get the idea.

So even though as traders we should be trying to capture as many profitable trading opportunities as humanly possible, we can’t do that using a single strategy. We need a portfolio of strategies if we want to exploit more than one market condition, but that’s outside the scope of today’s article.

I just want you to think of a strategy you already trade, or one that you’d like to develop, and decide upon the market condition you want to build this strategy around.

Then you need to objectively determine what defines that market condition, and then develop setups and trade management processes around those market conditions that make sense in the context of maximizing profits and minimizing losses.

For example, this would be how I would break these down:

Trends:

Markets must be making higher-highs and higher-lows (or lower-lows and lower-highs).

Define this (what timeframe, what constitutes a major swing high or low vs a minor or insignificant one, what markets do you want to attack).

Develop a system around this with predefined and clearly identifiable entries, stops and targets.

Test this concept to see if it produces an edge, develop a strategy out of it, trade the strategy (on a demo account or small account preferably), and then optimize it based on whatever feedback you notice out of the markets.

Reversals:

Markets must be over-extended, then begin making opposite higher-high/lower-lows.

Define this. What does over-extended mean? How do you objectively decide if a market is over-extended? Do you use an RSI, Stochastic, pure price action etc. How do you know when a potential reversal is happening? How do you plan to capitalize on it?

Develop a system with entries, stops & targets, test it, optimize it.

Consolidation:

Markets must be range-bound between two zones.

Define this. How do you define a range? What do you need to see happen before you can declare a range “broken”?

Develop a system, test, etc.

Breakouts:

Same idea – markets must be building up against a key level or price pattern.

Define this support/resistance/trendline/pattern.

What do you need to see happen before you can declare the breakout as valid? Where do you exit if it’s a fake breakout? Where do you take profit if the breakout succeeds? Do you have a fixed profit target, do you trail your stop, do you scale out slowly?

Conclusion

This is the appropriate way to think about technical analysis, charts and price action.

Don’t waste your energy trying to use them to predict where price is going next. It’s a complete and utter waste of time.

Instead, focus your energy on identifying where you don’t want price to go next in the context of what you’re trying to do.

Define what this looks like. Develop a risk management plan around it so that when things go wrong and price doesn’t do what you expect it to, you come out with only a minor wound. (When, not ‘if’).

Then, if price does happen to go where you hoped it would, have clear and predefined rules of engagement on how you will handle yourself in that scenario.

The goal is simple: to keep your losses small, and get out of losing trades as quickly as possible – but to do this without compromising the setup’s potential to play out as profitably as reasonably possible.

This is the eternal challenge as traders, and it’s never perfectly attainable. There is always a compromise and a trade-off. It’s probably what drives most traders crazy and leads them to quit before they find a method that works for them.

You don’t want to suffocate every trade you take so that you never catch big wins, but you also don’t want to stay in every trade hoping for a big win while you let your account bleed to zero. It’s a delicate balance of defense and offense.

Defense is far more important than offense, because if you don’t defend your account and manage your risk properly, you’ll have no capital left to go on the offense when the opportunity arises.

But offense is just as important in the balance. Once you have good defense in order, the real challenge is maximizing your profits without over-exposing yourself to too much risk. This is the yin and yang of trading.

It’s a brilliant challenge that never gets boring, but is always frustrating.

Get used to it, accept it, and keep on keeping on. It’s worth it in the end.

Take care, and best of luck with your trading.

Speak soon,
Matt.

---