By Sam Seiden, Online Trading Academy Instructor
The world of market speculating is made up of everyone from the active day trader to the longer term investor, speculating in all kinds of markets and asset classes. People all around the globe pushing buy and sell buttons each day in hopes of achieving income and wealth. Never in history has there been so many books written on how to speculate in markets. Each weekend in many cities around the world, there are educational seminars given on how to "get rich" from trading. With so much education on how to properly speculate in markets out there, why is it that most people lose money? How can this be? The answer is twofold and is the focus of this piece.
First, it's because of most of the books and seminars. Most books and seminars are loaded with conventional Technical and Fundamental analysis which tends to teach you how to buy when everyone else buys and sell when everyone else sells (herd mentality) which is high risk, low reward, and low probability. Conventional Technical analysis is based on pattern recognition that has people buying after price has rallied and also offers buy and sell signals based on indicators and oscillators that always lag price which means high risk buying and selling. Conventional Fundamental analysis offers buy signals only after good news is present and company numbers are solid. Where do you think the price of a stock is by the time this good news is offered to you? If you guessed high, you're correct almost always. Remember, the only way to be consistently profitable when buying and selling in markets is to have a strategy that has people buying after you buy, at higher prices than you paid and selling after you sell, at lower prices than you sold at. Conventional Technical and Fundamental analysis do not help us in this regard; the basic principles of these two ways of thinking ensure you will buy and sell with the herd when it's too late which means high risk and NO EDGE. Come on, if proper market speculating was as easy as reading a book, wouldn't every librarian be a millionaire?
The second reason most people lose money in the global trading markets, which is really part of reason number one, is that they throw all simple logic out the window. When you go to buy a car and you're at the dealership and see the car you have your heart set on, you see the price and it's $20,000. Do you go to the dealer and say, "I like this $20,000 car so much, I want to pay you $30,000 for it?" Of course you don't do that, you likely offer $17,000 or something like that. In trading, most people wait for confirmation of higher prices and then buy which is the opposite of how they buy things outside of trading; this makes no sense.
I once had a gentleman go through my training program and I will never forget the day I met him and spoke to him about the program. He approached me and said he wanted to learn how to trade and join my program. I said, "Before we commit to this, let's have a conversation or two and make sure this is right for you." You see, I always want to make sure whoever is coming into the training program has the best chance in succeeding. I don't want to waste their time or mine. My first question was, "What do you do for a living now?" He happened to own and run a pizza chain that he had just sold. As soon as he said that, I knew he had the best chance at doing this because he already knew how to make money buying and selling. In fact, there was nothing about buying and selling in a market that I could teach him that he didn't already know; I will explain this in a minute.
Our first lesson went like this… I asked him to tell me about his business and he did. He explained that the whole business comes down to the price of cheese. I asked him three simple questions: 1) What is the average price of cheese? "Around $2.00 a pound," he said. 2) If the cheese you buy is selling at $4.00 a pound, how much will you buy? He said, "As much as I need." 3) If the cheese is selling at $1.00 a pound, how much will you buy? "As much as I can and store it," he said. I then told him that he was already a great trader and that there was nothing I could teach him about trading that he didn't already know. What I could teach him however is EXACLTY what this proper buying and selling looks like on a price chart. He was already buying and selling in a market properly, he just didn't know what that looked like on a price chart. This was an easy task for me because he already had the foundation of how you make money buying and selling down and had made plenty of money from it. The most important part of today's article for you to understand is this:
The more you can bring the mind set and rules that you use each day to purchase everyday items at the grocery store, appliance store, and so on into your market speculating, the better you will do. Do you ever use coupons to save some money? If you do, you already know how to buy at a low price. Take that same exact mind set and action into your trading world. The mass illusion is that proper trading is somehow different than how we properly buy things in everyday life.
Many so-called professionals like to complicate the process with smoke, mirrors, curtains, and sleight of hand. They do this to trick you so that you will transfer some of your account into theirs without you realizing it. The key for you is to keep everything "real." Use your simple logic filter to ensure you will not lose some or all of your account to illusion. For your review, let's walk through a real trade we took in the Extended Learning Track (XLT), the graduate program at Online Trading Academy.
Extended Learning Track (XLT)– August 19th
Figure 1 Above is a screen shot of a live XLT Stock trading session on August 19th. This trading and analysis session began an hour before the US stock market open. This is so we can scan the markets using our "top down analysis" approach, quantify supply and demand, and pre-plan our trading opportunities. The NASDAQ market seen above was gapping down right into a price level where demand exceeded supply (circled area). Simple logic translation: The NASDAQ was briefly on sale and was about to become more expensive. We assume there is demand at that price level where the lines are drawn because when price was at that level previously, it rallied quite strongly from that level. This rally can only happen because there is more demand than supply at that price level. Why then would someone sell at that level, on the gap down in price, thinking price is going lower? Perhaps there was some negative fundamental news in the market. One thing the seller on that gap down failed to consider are the basic laws and principles of supply and demand and the simple logic we use when buying and selling things in other parts of our life, outside of the trading markets.
QQQQ (NASDAQ)– August 19th
Figure 2 As you can see above, the market opened, price moved considerably higher, and our pre-market demand and supply analysis paid off as many XLT members enjoyed low risk profits from this work. The key, however, is that we didn't fall prey to the many Conventional Technical and Fundamental analysis traps that many market speculators fall for. Instead, we applied the same simple logic we use to buy and sell anything in other parts of our life, outside of trading.
Below, Cisco (CSCO) was a stock we also found that morning that had a nice demand level that lined up well with the broad market (NASDAQ) Demand. Had we focused on the bad news at the open of trading, we would not have been interested buyers in CSCO. Using the same logic we use when we buy our favorite avocados at the grocery store, we see that CSCO was selling at wholesale prices that morning and that these prices were not likely to be offered too long. This low risk opportunity to buy CSCO on sale, based on the CSCO chart and its alignment to the broad market opportunity on Aug. 19th, worked out well. These wholesale prices we enjoyed quickly turned into retail prices.
Figure 3 There is nothing wrong with following the rules of a trading book, just make sure you are the author and that your strategy has you buying at wholesale prices and selling at retail prices. To do this, start with using all the powerful buying and selling knowledge you already possess and use on a daily basis outside of the trading world. Bring this key but simple strategy into trading and you will soon be spotting "blue light specials" all over the place.
Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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