The Trading Lesson That Changed My Career

Editor's note: Finding great businesses with stable histories is important. But understanding patterns in price movements could be the most important lesson in the market. In this issue, Ten Stock Trader Editor Greg Diamond explains how his trading method caught the market crash in 2020 before the first leg lower... and how understanding the past can lead to profits in the future.

"I'll give you $1,000 if you burn that book right now."

I was 22. Sitting at my desk, I was lost in my reading – studying for my Chartered Financial Analyst ("CFA") exam.

Just a few weeks earlier, I had started working at a hedge fund. My boss had trained under a trading legend. It was a huge opportunity to work with him. I was excited, but aware of the pressure. I wanted to learn as much as I could as quickly as possible.

But I was startled when my boss walked up and told me to burn my book. What the heck was he talking about?

It turned out to be the beginning of an obsession. My boss led me down an entirely different path than I had imagined. And I never ended up getting that CFA certification.

Today, I want to share the path I chose instead. It taught me a completely unique way of looking at the markets. And once you understand it, you can start trading like the pros...

The Pro-Trading Signal Most Investors Miss

After telling me to burn my book, this is what my boss said next (I'm paraphrasing a bit)...

Look, if you want to understand risk, if you want to understand trading, if you want to understand portfolio management... you can't just focus on fundamentals. It's not that fundamentals don't matter. But to get really high returns and really exceptional trading results, you have to understand how markets move... which markets move... and the psychology behind why markets do what they do.

You probably know there are two schools of thought when it comes to analyzing the market. There's fundamental analysis and technical analysis...

He wanted me to focus on the technicals.

The CFA exam and its study materials focus almost entirely on fundamental analysis. They go deep into the weeds of debt, profits, and management teams. And while all that's important... my boss followed a different path.

I'm not saying that fundamental analysis doesn't matter... It does. Great businesses with a history of making money and paying good dividends through both good times and bad are vital for "buy and hold" strategies.

But when it comes to trading and understanding the patterns behind price moves, technical analysis dominates.

Technical analysis focuses on the price behavior of a stock or asset through various indicators and price patterns.

As my boss said, "Technical analysis focuses on the now, fundamentals on what was."

To be clear, fundamental analysis works for a lot of people. But it's not how I invest...

I spent more than a decade on Wall Street trading multimillion-dollar portfolios across a range of asset classes.

Gold, crude oil, foreign exchange markets, stocks, futures, options, copper... I've traded it all.

Yet within weeks of joining the hedge fund, my boss taught me the greatest lesson of my career.

Eventually, after years of intense studying and a formal examination in front of the board of Chartered Market Technicians, I received my "CMT" designation.

Technical trading became my bread and butter. And I realized that this approach helps the pros trade with one principle in mind... "History doesn't repeat itself, but it often rhymes."

The ups and downs of the market are nothing more than the graphic representation of human behavior... expressed on a chart of buyers and sellers.

Here's a perfect example – a type of technical analysis called "intermarket analysis." The same warning signal at the start of the financial crisis in 2007 repeated before the COVID-19 crash.

Intermarket analysis is based on correlations between asset classes... When one of these asset classes turns down, it may be a warning sign for other asset classes (stocks, in this case).

We know this because these chart patterns have shown up before... and other assets have fallen. Take a look...

The S&P 500 Index (the blue line) and U.S. 30-year interest rates (the black line) traded in tandem at the end of 2019. The "trade war" with China was calming down, and both asset classes were moving in the same direction. All was well.

But then, as you can see, the correlation broke down in early 2020. The red lines show that stocks made new highs while interest rates failed to do the same. That was our warning.

The "fundamentals" looked fine. But I could hear my boss's words in my head... The only thing that mattered was what the prices were signaling.

This is an extreme example, given the crash that followed. But it was a warning... and one that worked well.

That's the essence of technical analysis – understanding how history rhymes in the markets.

This concept is lost on many investors. They simply don't understand and aren't willing to put in the necessary time and effort.

But pro traders know that you can use this approach to generate outstanding returns.

That's why technical analysis is much more than trend lines and charts... It's about understanding the past to profit in the future.

Good trading,

Greg Diamond, CMT

Editor's note: The U.S.-Iran conflict is wreaking havoc on the global economy. And Greg says the recent volatility is just the beginning. But by using what Wall Street calls a "weird and mystical" trading strategy, Greg just showed subscribers how they can leverage this volatility to double their money. It's the same strategy he used to identify previous market peaks... and make $4.6 million in 24 hours.