May 17th, 2013
by Sam Seiden, Online Trading Academy
We have all heard the phrase, “Trade with the trend, the trend is your friend.” While there is much truth to this statement, what specific rule-based action do we take to make money from this simple concept? To dive into the important details and make sure that by the end of this article you are a better trader, I will use a recent Online Trading Academy Pro Pick in the stock market to make my points. Pro Picks is the Stock, Futures, and Forex picking service for Online Trading Academy graduates in the Extended Learning Track (XLT). The service is delivered daily, giving XLT members an entry zone, stop price, and target or targets. Each trade is also delivered in a very educational way with a detailed explanation of strategy so that users can learn to do this themselves. The core strategy at Online Trading Academy is the simple combination of supply (retail), demand (wholesale), and trends.
The Pro Pick trading idea below was a recent shorting opportunity. Notice the trend on the chart is clearly down. This means we only want to look for supply (retail) levels for our entry points as we are only interested in selling short when the trend of price is down. There may appear to be more than one supply level on this chart and you may be wondering why we chose the one we did (yellow shaded area). This is because, based on our “Odds Enhancers,” that was the only supply level that met our criteria. In other words, our rule based analysis told us that the supply level shown was a price level where there was a significant supply and demand imbalance. This means there was much more willing supply than demand. The reasons to sell at that price level should price rally back up to that supply level are as follows:
- Quality supply level with multiple Odds Enhancers at play
- Significant profit margin (that big base below is nothing to worry about)
- Down trend
Click to enlarge
As you can see below, price soon rallied back up to that supply level, stopped, and fell quite a bit to meet our profit targets. Market timing is what I specialize in and it is the sole reason why this trading opportunity was low risk, high reward, and high probability. The professionals say you can’t time the market’s turning points, I say you can with a very high degree of accuracy. The key to doing this is the ability to truly quantify supply and demand in any and all markets. This means identifying price levels where supply and demand are out of balance as that is where price turns. Another way to say this is … Know what the picture of real willing buyers and sellers looks like on a chart.
There is another key component to consider along side with market timing. It is really understanding who is on the other side of your trade. We want to make sure the person on the other side of our trade is a novice market speculator and not a big bank or Goldman Sachs. Let’s use this Pro Pick in the stock (CERN) as an example and use simple logic to make sure that when we sold short, we were selling to a buyer who doesn’t know how to quantify true retail and wholesale prices in a market.
When price gapped into the supply level, the key question is this, who was the buyer and what do we know about them. Novice traders always make two key mistakes. The buyers in this trade were making three and they are as follows:
- The buyers who bought were buying after a rally in price. This is a big mistake in trading. Think about how you buy things in other parts of your life. Do you ever get excited about buying after prices rise? If you would not take this novice action when buying things in any other part of life, don’t do it when trading and investing.
- They were buying at a price level where supply exceeded demand (big supply/demand imbalance). The chart already told us that (yellow shaded area). This mistake is even worse that mistake number one.
- They were buying in the context of a downtrend. This is not smart trading. During a downtrend, the odds are with the shorts which is why we focus on identifying supply levels as entry points during down trends.
The gap up into the supply level is where Pro Pick traders sell short; the buyer was buying after a rally in price, into a price level where supply exceeded demand, and in the context of a down trend. The odds are so stacked against the buyer which is why being the seller meant that the odds were stacked in the sellers favor, the risk was low, and the profit margin was high for the seller. Understanding who is on the other side of your trade is a key factor in trading. Those who trade against the trend tend to pay those who trade with the trend. Again, this is one of the many ways the transfer of accounts happens from those who don’t know what they are doing, into the accounts of those who do.
Hope this was helpful, have a great day.