Capra, Trading Tools and Tactics

For me Greg Capra’s Trading Tools and Tactics: Reading the Mind of the Market (Wiley, 2011) is a trip down memory lane. Back ever so many years ago when I first became interested in trading I took advantage of Pristine’s free online offerings. My own trading strategies have since evolved, but I remain grateful for the education I received. It certainly wasn’t the worst place to start.

In this book Capra distinguishes between objective and subjective trading tools—a distinction which is admittedly difficult if not impossible to sustain. His claim is that technical indicators are subjective because, as derivatives of price, they are open to interpretation. The same holds true for trend lines and Fibonacci levels: you can draw them from a variety of plausible points and get radically different support and resistance levels. Price, by contrast, is objective: “prices are directly observable in the real world and tell us what we need to know.” (p. 6) Among other things, they tell us where support and resistance are. Perhaps, but I’d wager to say that twenty traders would mark up the same price chart in at least ten different ways.

Capra wants to convince the reader to start becoming a winning trader by simplifying his charts. To begin with, by focusing only on candlestick bars and learning their “tells”. Learning, for instance, that “a pivot on a smaller time frame will show up as a tail on a larger time frame” or that a “cluster of bars may reverse prices and show up as a pivot on a larger time frame.” (p. 39) Bar-by-bar analysis and pattern analysis form the core of objective trading.

Once Capra has a clean candlestick price chart he adds volume at the bottom and overlays on prices something he had preciously condemned as being subjective—this time, however, done the “right” way: moving averages. What moving averages the trader uses is largely irrelevant since they are meant only as a guide to determine trend analysis, not entry points. “With that being said, since we do have to pick one or two moving averages to use, I like to pick ones that most traders will be using…. Because when an MA does work as an actual support level, it is due to a subjective method based on a self-fulfilling prophecy.” (p. 60) Capra chooses the 20 and 40 trendsetting moving averages and the 200 as “a line in the sand.” (p. 62)

According to Capra, “for the most part, technical analysis really is one big self-fulfilling prophecy.” (p. 111) But self-fulfilling prophecies should not be dismissed out of hand. Retracements to Fibonacci levels, for instance, may be subjective, but “virtually every trader has retracement concepts in mind. What tends to work well is when these subjective measures line up with objective measures.” (p. 111)

Other tools the trader can profitably use are market internals and, for stock traders, relative strength. But the basic tool remains price charts. Fleshing out this theme, Capra devotes a chapter to gaps, another to the concept of multiple time frames, and a third to pattern failure.

On balance, Trading Tools and Tactics is a very good book for the beginning trader and a wake-up call for the trader who focuses on a mishmash of indicators to the exclusion of price.