MAGGIE LAKE: One of the great things about Real Vision is that we give you direct access to some of the world's finest traders and investors. You get to see how they think, how they approach problems, the mistakes they've learned from, and the principles behind their success. In this section, we want to show you how they use charts to navigate the markets. Charts can help you decide not only if you should trade or not, but when to trade. Quite often, timing is everything. And it's no secret that some of the best hedge fund managers start by looking at the chart.
Before we even begin to delve into the world of chart analysis, it's worth highlighting again that in and of themselves, charts are not enough evidence on their own for you to decide to trade unless you're an experienced technical trader. Here's legendary chartist Peter Brandt talking about where one can find the edge using charts. Notice what he says. It's not in direction. It's more in timing.
PETER BRANDT: I mean, here is the reality-- is that charts morph. You see something that you think, OK, this is what I'm looking at. And it has a way of becoming something different. And the reality is that 1-minute charts morph more often than 5-minute charts, more often than 10-minute charts, more often than 1-hour charts, more often than 2-hour charts, more often than 6-hour charts, more often than daily charts, more often than weekly charts.
And so there's two parts to this answer. One is you just have a lot more unreliability as you go down the timescale. Does that mean there are not trades that take place on the lower timescale? Of course that doesn't mean that.
There certainly will be times when you see a pattern on an hourly chart, and the pattern works. More often than not, you can say-- especially if that pattern occurs in a trend, and you think it's going to reverse that trend on the lower timeframe-- more often than not, it's going to morph. And it's going to resolve itself in the direction of the dominant trend in that time frame.
And so I caution people against that. But that really raises a whole big philosophical question. And that is, do chart patterns predict? Are chart patterns an accurate, a reliable way to forecast price? To that, I would say, absolutely not. They're overrated. Chart patterns in and of themselves do not provide a big edge to a trader. I'm sorry. They don't. Now, I've made money trading charts for 45 years. So I'm telling you that as somebody who has been profitable by trading chart instruction for 45 years. Chart patterns do not provide a significant edge in and of themselves.
But I have to use something to determine when I'm going to buy and sell. I have to have some way to say, I'm going to be long or I'm going to be short. I'm going to be in or I'm going to be out.
Chart patterns provide for me a couple of things. They give me what I think is-- they show me what I think is the path of least resistance. They show me levels where there has been support. And it'll suggest the opportunities where I might have an asymmetrical reward-to-risk trade. It's in that trade management where the edge is gotten. It's in risk management. It's in trade management.
It's not in direction. It's more in timing. Because for a trade to be a good trade, it has to be right directionally, and it has the right tactically. And if it's wrong on either one of those, it's a wrong trade. And so that's what chart patterns are for me. It's just a way for me to pull the trigger and know where I'm wrong.
MAGGIE LAKE: Some really important points here from Peter. First, let's make one thing clear. Charts do not predict where the price will go. But they can be used as a great tool for timing and in your risk management. As Peter says, I have to use something to know when to buy or sell.
Seems like an obvious thing to say, doesn't it? But it's vitally important. If you're consistent in your approach and framework, then you have a starting point, a rough formula, something to hang your hat on, as they say. It's a routine from which you can judge wins and losses and grow as an investor. Otherwise, you really might as well throw darts at a dartboard.
Now, there are many ways to build your routine through idea generation, bottom up as well as macro analysis. But what we're saying is that charts absolutely should play a role in this routine in order to be more disciplined in your approach. Let's listen to another master of the game tell us how he uses them.
MARK RITCHIE: But this could be anything. Generally, though, if you called me, you're like, I like XYZ bond or commodity or whatever, I'm going to look at the chart first. And so for me-- and again,
INTERVIEWER: It tells a story, doesn't it, if nothing else. It says, this has been the history of the stock.
MARK RITCHIE: Or sometimes there is no story. And we can get into how I look at technicals maybe versus others.
INTERVIEWER: No, I'd love to hear you tell us.
MARK RITCHIE: So to me, technicals-- and there's-- in Mark Minervini's book, there's a chapter, I think, called A Picture is Worth a Million Dollars or something. His view on technicals, I would say, is almost exactly mine. The idea, though, is that technicals are-- they are not the cause of anything. They are the effect.
So anybody who says that this chart pattern causes this-- no, it doesn't. I will be as concrete-- I'm happy to argue with anybody who wants to argue with me on that. What causes markets to move are buyers and sellers. And occasionally-- a lot of charts, in my mind, are noise. I'm not going to be disparaging towards other people's technical disciplines. And I'm not claiming the way I look at something is necessarily better than theirs.
And I've made this point before. You can send me technical work, and it might not make any sense to me. I'm not saying it's wrong. But I know what I want to see. And some of the best traders I know, even occasionally, will say, it just doesn't have the look. Well, that comes from them having looked at hundreds of thousands of charts over the course of their careers.
So you ask, what's part of our process? Part of our process is we screen through 300 to 700 charts a day manually. Well, you back that out over a week and over 10 years-- over the last decade, I've looked at over a million charts. So my eye is keenly trained as I'm going through to say, OK, put this one on a different list. And 95% of it is kind of noise.
MAGGIE LAKE: Someone wiser than me once told me, you can tell a good poker player by the hands they play. But you can tell a great one by the ones they choose to fold. Don't let charts draw you into thinking an opportunity exists when it simply doesn't. Even Mark, who's a master at the game, says 95% of them are noise. So that's point one.
Secondly-- and this is such an important point that Mark makes, aligning him with Peter's view from above-- charts do not cause anything. They are the output of what's already happened. You cannot look at a chart and say it's going up or down because of what the chart looks like. Sure, charts follow patterns and trade in ranges, but not always. And more importantly, that doesn't predict where the price is going. So do keep that in mind when analyzing the price of an asset. Let's look at a few more examples of how the pros use charts and then circle back.
MARK RITCHIE: But back to my point, so if the chart looks terrible, I'm probably not touching it. But let's say you've got an area of expertise. You really think, fundamentally, this is a great area. Well, I may put that on another list just to take a peek at it every now and then to see if that chart or the temperature of that market is improving.
I think of it like the weather. I might want to go to the beach today. But if I go outside and it's just-- it looks like it does outside today here in Chicago, I'm not getting my swim trunks on and my towel out. I'll wait.
JAMIE MCDONALD: But let me ask about this-- because do you sometimes look at a chart, and you say, it's not for me right now. But if the fundamental story really makes sense to you, do you have positions in your portfolio, which is like, OK, this is Mark Ritchie the investor. I don't when this is going to work. But it is going to work over six months.
And then it's like, you know what? This chart means I think I can make money over the next week. And this comes back to the idea which I used to think about all the time-- is like, my job is to make money as much as I can over 12 months. So I need to have whatever in the portfolio has got the best risk for the reward over a time period. And I think people do get that. That time period thing's so significant.
So can you talk a bit about that? Do you have positions in the portfolio with very different time horizons? And do you have things in the portfolio where it's like, I think I can make money quickly?
MARK RITCHIE: Certainly, yes is the answer to both. However, generally, though, I would never just buy something if the technicals are terrible but I like the fundamentals. So to your example of, yeah, this is probably going to work in a year, but the chart looks awful, I'll wait. I would rather pay up to know that the wind is at my back than to sit there and buy. If it's so great, Jamie, why is the market saying otherwise?
JASON: So people make money during that, and it hurts. It hurts me to watch it. Oh, I know this guy's a moron. I know he's going to lose money, right? So I got to call it a bubble. But a bubble can last-- it's the old saying, right? Market can be irrational longer than you can be liquid.
So you don't have to be long it. But you don't have to be short it either. At least wait for something. I've been telling this guy for months on Tesla. He's been bearish Tesla, bearish Tesla, bearish-- I'm like, why don't you wait for the stock to have one down week before you short it?
Just let it go down for one week before you short it instead of just shorting it every day because you think it's garbage. The markets don't have to obey your rules. They don't have to obey the rules of logic for periods of time.
This is a conversation I've been having with this guy on LinkedIn for eight months. He's so cocksure of himself, which is always the first thing I look for when I'm looking for people to fade. People that think they are smarter than the market and they're so cocksure are bound, as we know, to get railed.
So this guy has been so bearish Tesla since presplit, pre-everything. You're talking probably around the 80 level in Tesla now split-adjusted. And he just goes on there every day, talking about how all these people that are buying Tesla are a bunch of morons and fools, and they don't know what they're doing. I'm like, dude, you're the guy that's short the thing, and it went up 9 times in your face. Who's the fool?
You can call people that are long the fool if you want. But I'd rather be long at 100 and watch it go to 800 than be short at 100 and watch it go to 800. And it's always what's going to happen. It's going to crash. It's going to go to 0. It is a bubble. Maybe you're right. But in the meantime, you're down 800% in 6 months. So like you say, who's smart, and who's dumb?
RAOUL PAL: But we had to blow off top with retail participation in the middle of the thing because people have learned the Pavlovian response. That was an unlikely thing. But the NASDAQ is never a market I'd be short because there's so much behavioral parts of it.
Would I short Facebook or Google when I think they're about to be regulated? Yes. But I'd look for a chart structure and a topping pattern. And I showed that in the past when we looked at Google. There's times when it would make sense. But the NASDAQ itself, with this kind of behavioral narrative around it, makes it not quality short. It becomes a vanity short. And those people you need to steer clear of.
Tesla-- I never got involved because I saw it was a vanity short. I know I understand the story, but the price structure never told you Tesla was going to break down. So I'm like, OK, we can talk about this all day. But unless you see actual evidence of price structure, then your narrative is wrong.
Narrative may be right, but it's not the predominant narrative. So my narrative of markets right now is that they should go lower. But it's not the predominant narrative. And I won't trade things that aren't my narrative.
MAGGIE LAKE: So three important and related points from Raoul, Jason, and Mark-- point one for Mark, charts are not just useful for tactical trading. They help to time cyclical and secular trades, too. If you think back to our module on market drivers, that's important.
Point two from Jason-- people get emotional about stocks. And really, you shouldn't. As we said in part 1, this is not personal. The old adage that price can be irrational longer than you can stay solvent is painfully true. And charts help you identify whether it's a good time to act or sit this one out.
Point three from Raoul-- charts by themselves are not going to draw him into the trade. But they tell Raoul a narrative, and that narrative has to match his thesis. If it doesn't, he does not act. That's a really nice, clean way of thinking about charts as a tool.
Overall, all of them agree that they will not buy or sell anything where the chart has not started confirming their thesis even a little bit. As Mark said, if it's so great, then why is the market saying otherwise?
Finally, let's have a look at the master of oil trading, Pierre Andurand.
RAOUL PAL: Do you use technical analysis to help you with market structure and what the overall nuance of the market is. How do you approach the market?
PIERRE ANDURAND: Yeah. So it's part of the picture, but it's far from being the main one. First, it's a global supply and demand analysis for the current year and the next 3 years, sometimes even more. Once you have that as a background, if I think there's a big imbalance or there's a big surplus or big deficit, not only for this year, but for the coming years, it means that there has to be a repricing. So that's how it starts.
Then I look at market positioning, also commitment of traders. I look how the market trades, and we act. So that's more in terms of entry point or exit or when I decide to increase or reduce risk-- is how the market reacts to bullish news. So if you have a bullish news, and the market can only go up on it, you're like, OK, maybe we are towards the end. Or maybe it needs to take a breather before going up and vice versa. If you have a bearish news, and it goes up on it, you're like, OK, maybe all the bad news are priced in, and I should go long or increase risk.
So it's a mix first of fundamental analysis, understanding how the market is positioned, understanding the psychology of the market, what people are looking at, what they might be missing. If I think there's something that they might be missing, have a good understanding of when they will start getting it because you don't want to be 1 year too early. So you need to get in relatively early but not too early, understanding that the other guys will understand it in the following month. And then, yeah, a little bit of technicals, but it's probably towards the end of the list.
MAGGIE LAKE: So this was a great clip to end on and draw conclusions from. As we've said all along and Pierre reiterated, charts are and should always be part of the picture. For a trade to work, the chart needs to match Pierre's fundamentals or narrative, as Raoul puts it. And it helps to give an idea about market positioning.
If something's not going up on good news, you know that the market's likely long already. So be cautious buying more. To the extent that the chart depicts price action and price action depicts sentiment, they are incredibly useful. Next, let's go check in with Roger to see what he's prepared for us this time.