By Sam Seiden, Online Trading Academy Instructor
Today I wanted to share part of a lesson right out of the Extended Learning Track (XLT) program with you. It deals directly with identifying high probability turning points and if you are not a member of the XLT, you have not heard it before. This information is not in books, articles, and so on. Keep in mind that the XLT is the graduate program where we transform theory into real world trading and investing. The lesson and information is titled: "Odds Enhancers." Many people think that every prior turning point in a market is a support or resistance level suggesting price will turn at that level again in the future. While that line of thinking may sell many books, it certainly is not how things always work in real world trading.
Let's take a step back for a moment. Price will stop falling and turn higher at price levels where demand exceeds supply. It will stop rallying and turn lower at price levels where supply exceeds demand. This is a basic principle that I think we all can agree with. In other words, price will turn at price levels where the demand and supply equation is most out of balance. Given that there are different levels of imbalance at different price levels, we want to find the price levels where demand and supply are most out of balance. To identify low risk, high reward, and high probability turning points, let's take our level of understanding price action deeper than just red and green candles on your computer screen and begin to understand the order flow that is taking place behind the scenes that is responsible for the creation of these candles.
The Odds Enhancers
The Odds Enhancers are a simple set of criteria we apply to our analysis that help us arrive at key turning points (demand and supply levels) and equally help us ignore demand and supply levels that are not high probability. In other words, this simple rule-based exercise forces us into quality trades and keeps us from not so quality opportunities. Here is an email that came in a while back. Notice what the XLT member writes at the end of the email: "This setup is a 9." What does that mean? Let me show you.
Futures XLT Member Email:
From: Linnea M.
To: Sam <sseiden@tradingacademy.com>
Sent: Tuesday, January 13, 2009 8:27:21 AM
Subject: GOLD!
Sam,
Here is the ZG trade I mentioned to you. Got in on the pullback at 864 and took it down to 835 where I saw some demand creeping in. I had two contracts on...got out of the first one at 852 and the second at 835. But I did follow my trade management rules...pulled up my stop and made sure I would still make some money if it decided to retrace. Thanks for the help...you and XLT are the best! I will be able to spend more time with my kids doing things that are so much more rewarding and important. I can't thank you enough!
This setup is a "9."
With much gratitude,
Linnea M.
Figure 1
Here is the chart from that XLT member trade and the Odds Enhancers analysis that went with it. The Odds Enhancers help us arrive at an objective probability score for potential trading opportunities. The highest score possible is a 10. These numbers are reflected in the yellow column next to each Odds Enhancer. In white are what the student determined the score for each specific Odds Enhancer was based on our simple rules for scoring. Without going into too much detail, I will explain some of these odds enhancers for you.
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Strength of a Move
This Odds Enhancer is key and deals with probability. With it, we look at how price initially left the area. Did price leave in strong fashion as was the case with the trade above suggesting a STRONG supply and demand imbalance at the level or did it leave with a gradual decent suggesting a small supply and demand imbalance at the level? The fact that the initial decline from the supply level was fast and strong, the XLT member gave that a 2 (in white) out of 2 (in yellow), the highest possible score for this Odds Enhancer.
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Profit Margin
This crucial Odds Enhancer deals with risk reward. Here, we look at how far away demand (support) is from our supply (resistance) area. We measure the distance from our entry to protective stop and compare that to the distance from our entry point to the nearest demand level (profit target 1) below. In this case, the student went through our rule-based analysis and determined that the reward to risk was at least 3:1, which means that Odds Enhancer gets 2 out of 2, the highest possible score for this important Odds Enhancer.
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Big Picture
This important Odds Enhancer deals with probability again. While this setup was found on the hourly chart, we still need to know if we are considering a short position on the correct side of the curve in the big picture. For this trading opportunity, we would go to the larger time frame and find our "fresh" demand and supply levels and make sure we are not selling short anywhere near larger time frame demand and ideally, selling short much closer to larger time frame supply. This student performed this analysis and determined that the shorting opportunity is well placed on the supply and demand curve and gave this Odds Enhancer 2 out of 2, the highest possible score for this key Odds Enhancer.
As you can see, there are three more Odds Enhancers in our simple probability scoring system that I can cover at another time. Our student ended with a 9 out of a possible 10 which means she was taking this trade with a limit entry and putting all the orders needed for this entire trade in, before the trade took place. This exercise is one I suggest new XLT members use for a period of time but not forever. After some time, you should be able to "eyeball" these crucial Odds Enhancers and take the appropriate action or non-action in many cases. The probability score will tell you what to do. Risking $1,200.00 on the trade, our XLT member enjoyed a profit of $4,100.00 on this trading opportunity in Gold, one of the many markets we trade in the Extended Learning Track (XLT) - Futures Trading program.
Why don't we focus on all the information that is in the many trading and investing books, trading expos, and weekend seminars? Simple, why in the world would we want to be buying and selling when everyone else buys and sells? There is no edge when you take that herd mentality action buying and selling anything.
While the gain was nice for our XLT member, your focus should be on the mechanical and rule-based steps we take to arrive at these key trading opportunities. The most important part of this email however is the sentence I highlighted for you near the end of the email. If you're trading with the simple focus on building up that account, just looking at the numbers, you're missing the grander vision. Our XLT member is focused on trading to help create a better life for herself and her family. This focus allows her to have the discipline to wait for low risk / high reward opportunities to come to her as she is focused on the grander vision, not the urge to trade, trade, trade. Without a core focus on a grander vision, you will NOT be able to have the discipline required to attain that grander vision; they go hand in hand. Those who focus on the realities of markets and price, simply get paid from those who don't.
Hope this was helpful. Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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