By Sam Seiden, Online Trading Academy Instructor
The other night, a few friends and I were eating at The White Horse, a small, cozy restaurant in the little village of Welwyn, England. This establishment is over four hundred years old. The food was great and we sat right next to a burning and crackling fireplace that had been in use since the restaurant opened. This was a real four hundred year old fireplace with real logs; I felt like I was in an old movie. Using a poker to maneuver the burning logs and an old bellow to help the flames breath, people would walk over and tend to the fire every once in a while. The food was good, the conversation was great, but I could not stop thinking about that fireplace. You see, I am always attracted to genuine, original, and real things in life. After a glass of wine and some hot Camembert, it hit me - the fireplace reminded me of trading…
The biggest challenge I see new traders face in their journey towards consistent low risk profits is the ability to keep things simple and real. Instead of seeking quality education and information, the majority of aspiring traders seek quantity of information. Instead of keeping the process simple, they complicate things with more tools, more rules, and a library of indicators that could fill up a daily chart on the jumbo-tron at Fenway Park. Some new traders that I meet in the Extended Learning Track (XLT) program or classroom talk to me about so many trading ideas sometimes that I feel like I am the one getting the lesson.
The other day, I received a few emails from XLT members who took some of the trades I had set up in the Extended Learning Track (XLT) - Momentum Intraday Trading room. Here is one…
Sam,
Good morning. Nice job on that DRYS trade. It bounced right at the 4.88 like we discussed in class. As of this writing it's at 7.09!!
Thanks,
Tim
The chart below is a daily chart of DRYS. I marked off a demand zone in the area marked such on the chart. This was demand (support) because price rallied strong from this level, it could not stay there in December. It could not stay there because there were many more willing buyers than sellers at that price level; this is the ONLY reason for the rally in price. If that statement was not true, price would never have left the level, it would have stayed at that price. A couple days after I drew lines around this level in XLT (creating a buy zone), price revisited the level and it was time to buy. This means that sellers were selling after a decline in price and into an objective demand level. Only a novice trader would take that action. Our action was to simply buy from that novice trader as I have written about so many times. The risk was as low as it could be, reward as high as it could be, and the probability of price turning higher was VERY strong. I would write more about this but there is really nothing else to say. This is motion into mass, supply and demand, whatever you want to call it. Why complicate something if you don't have to?
We are people and people in general have the hardest time keeping things simple. In all parts of life, things tend to get complicated. When there is an issue, the tendency is to dive deeper into the problem to resolve the issue. In trading, this action will quickly drain your account and deposit in right into someone else's.
The next chart below is a chart I see all too often. It is loaded with indicators and oscillators that almost cover up the price action completely. People add these tools because they think the tools add some edge and reduce some risk. What they don't realize is that these tools may actually be doing two things that very much work against the trader. First, they lag price which means adding risk to your trading if you use them as a primary decision making tool. Notice the direction of the moving averages when our XLT student bought DRYS - it was down. In fact, at the time XLT students bought DRYS, all these indicators were leading you to sell. Using these tools in a conventional sense ENSURES you will never attain the low risk entry and instead, ENSURES that you will ignore it. There is a very right way to use them but most traders choose to use them in conventional ways. Second, by overloading our brains with too much useless and conflicting information to process, something as simple as buying at support (demand) becomes nearly impossible.
Kevin Mezzone is another Online Trading Academy instructor with whom I am also good friends. We were leading a class together in London and a student asked us what the difference was between a Slow Stochastic and a Fast Stochastic oscillator. Kevin's reply was "the word before Stochastic." I had to chuckle and others did as well but the point Kevin was making was this: The student is going down the wrong path if he or she is going to make a derivative of price a primary decision making tool. Once they try the slow and the fast and don't see positive results, they will try the middle, the very fast, and the Super Duper Speedy Speed Racer Stochastic. I think you get the point. They are taking route 66 trying to reach Miami Beach and don't even know it because the path they are on is an illusion. It's all an illusion that actually forces you to ignore reality. This trap is one of the many vehicles the market uses to transfer accounts from those who ignore reality, into the accounts of those who don't.
High speed connections, super computers, automated strategies with seven billion inputs, and a few hundred new indicators have created this illusion that you can somehow ignore the simple reality of how markets really work. Markets don't change, motion into mass is no different now than when Isaac Newton talked about it long ago.
These days, most fireplaces are gas burning with fake logs, have some added chemicals for color, and an on/off switch. This fireplace will certainly heat up a room but for me, only in temperature.
The old fireplace in Welwyn still burns the same way it did four hundred years ago.
Have a good day.
- Sam Seiden
sseiden@tradingacademy.com
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