By Sam Seiden, Online Trading Academy Director of Online Education
Growing up, I tried to do what I was told to do much of the time, whether I agreed with it or not. After all, what did I know, I was just a kid. In school, I was taught what everyone else was taught and therefore, learned what everyone else learned. To be honest, this never really felt right to me. At the time, I didn't know why it felt uncomfortable but something didn't sit right with me about how I was learning. I ended up spending as much time in school as I needed to in order to keep those around me happy, but nothing more. I have a very close relative (whose name I won't mention) who did very well in school, much better than I, almost straight A's in college and grad school. In the end, he had about 5 more years of schooling than I. He then went into the corporate world and ended up becoming a manager for a tech firm. I ended up becoming a trader, money manager, and trading educator. We are 5 years apart in age, have a good relationship, and speak all the time.
So what is the difference between him and me these days? He is not happy with his job; I love mine. He spends most of his days working, traveling for work, sometimes late into the evening. I tend to spend my mornings working, the rest of the day doing other things outside of trading that are important to me. He makes an average annual salary, I make more than six times his annual income. Before I go on, please know that I don't value quality of life with money. A strong income does, however, buy more life choices and allows you to spend more of your life smelling the roses instead of working to grow someone else's roses. He is incredibly book smart and has a knowledge base that far exceeds mine. While he has all the fancy degrees framed and hanging on his wall, it is he who calls me for career advice, not the other way around. He can't understand why he has trouble finding a job that pays him well and a job that he enjoys. When we talk about this, I always give him the same advice. I tell him, "If you want to command a higher income, simply learn how to do something others can't do." He has the hardest time comprehending this concept and the reason is because in order to attain the ability to do something others have a hard time doing, you have to think differently than others and this is the issue. He spent his entire childhood and young adult life in conventional school, learning to think how everyone else thinks. So much so that it as if he almost has blinders on and does not even realize he is stuck in the world of conventional thought. Let me take you deeper into his life so you can understand better what separates the people who tend to reach their financial goals from those who don't.
The biggest difference between he and I is where we live. He lives in a town called Foolsville. In case you have never heard about this very interesting town, I will explain. People in Foolsville all do the same thing. They eat the same food, wear the same clothes, drive the same cars, read the same books, and so on. The list is endless but everyone in the town does the same thing. I asked my relative about this and asked him why everyone does everything the same way? He said, "Why not?" I then asked why everyone in Foolsville buys the same type of car? He said, "Because that's what everyone drives." They all have an i-Phone and download the same Apps; it's really quite funny. He also showed me where Foolsville was on a map. Now this was interesting; it's actually shaped like a perfect "box." Another thing I found interesting is that when you are inside Foolsville, you never realize that you are in the box. All this strange information got me thinking...
Given my profession, I asked him how trading and investing is handled in Foolsville. He filled me in on their strategy and told me I would love it because it was so easy. He said the strategy was the exact same one he had learned in school. He explained to me that once there is good news in a market, price is going up, and all the indicators are pointing up, everybody in Foolsville buys at the same time. I then asked him if they made money with this strategy and he said, "No, not really." When I asked him if he as ok with this, he replied, "Not really, but no one here makes money with their trades and investments here so it's fine." He went on to tell me that each day, there is this giant pile of money that is transferred out of Foolsville and directly deposited into the accounts of the those who live elsewhere. I was shocked and had to ask him how he felt about this. He replied, "We don't like that but we can't do much about it." I started to really think and realized something profound. In my trading world, which consists of my trading and the education and guidance I provide in the Extended Learning Track (XLT) program at Online Trading Academy, I am buying from those in Foolsville when they sell and I am also selling to Foolsville residents when they are buying. Yikes! I couldn't tell him this; it might ruin our relationship. To explain better, let me show you a recent trade from the XLT - Stock Mastery program.
SPY (S&P), September 1st, pre-market
Figure 1 On the morning of September 1st, I was leading XLT members through our pre-market analysis which is when we plan out our low risk, high reward, and high probability trading opportunities. We noticed that the S&P had a supply (resistance) level above current price. This is the area above, the price level marked by the two black lines which create the "supply zone." The reason we call this a supply level is because when price was there, it could not stay at that level and gapped down from that price level. Understand that the only reason this happens is because there is too much supply and eventually, no demand. When this happens, price declines. This means that when price rallies back up to that area, we would have a low risk, high reward, and high probability shorting opportunity offered to us at the supply level. The only issue was that price was opening lower than that level. September 1st, we needed a rally in price. We not only needed a rally in price for our shorting opportunity, we needed someone to buy after a rally in price and right at that supply level. Then I remembered the strategy those who live in Foolsville use to buy into markets. All we needed in the XLT was for price to rally and then the Foolsville folks would likely buy from us at the supply level.
Financial Service Sector (XLT, C, GS, MS, COF)
Figure 2 During the same XLT trading and analysis session, after finding the S&P supply level, I noticed that the whole financial service sector had the same supply level. Above is a picture of that live session. Inside the sector, I noticed specifically that Goldman Sachs and Citigroup were the prime candidates as they had clear supply levels just above that morning's opening price. These levels and the S&P supply level suggested that the odds were stacked in our favor for our shorting strategy that morning, once the market opened. Again however, in these stocks, we needed buyers to buy right at these supply levels so we could sell to them and obtain the low risk short position we desired.
SPY (S&P), September 1st
Figure 3 Shortly after the market opened, price began to rally and reached our S&P supply level. This is exactly where those who live in Foolsville buy which happens to also be where we sold short. It wasn't just us. You see, it's quite simple. Members of the Foolsville financial committee and residents of Foolsville are the buyers at that supply level. Everyone who lives outside of that strange looking box on a map are the sellers. Why would someone buy after a rally in price and right at a price level where the chart is telling you supply greatly exceeds demand? Because that is how they are taught, which means that is how they think and thoughts lead to actions and repeating actions build habits. Anyway, price declined quickly and strong after we sold short to the Foolsville buyers. This is how money is transferred out of Foolsville and directly deposited into the accounts of residents outside the Foolsville box.
Goldman Sachs (GS) and Citigroup (C), September 1st
Figure 4 As the S&P reached its supply level, so did the Financial Service Sector. Goldman Sachs and Citigroup met our XLT entry criteria and dropped like a rock. Foolsville buyers bought right into supply because that is when their strategy has them buying which offered us very low risk shorting opportunities in the S&P, this sector, Goldman Sachs, and Citigroup. By the way, for those interested in a real estate investment, Foolsville is a booming town. The population never stops growing, guaranteed, it's amazing!
The interesting but sad truth is that the people who live in this town don't even know it. My hope in writing this piece is not to gloat about gains or beat up my relative; it's to open your eyes to the reality of how wealth is transferred from those who think like everyone else thinks, into the accounts of those who think in reality-based terms. Instead of believing everything you are told and read, try thinking about how and why prices move in any and all markets (hint: supply and demand imbalance). Next think about how you make money buying and selling anything. Then, combine these two thoughts and you are on your way. There is nothing wrong with reading a book on money and markets, just make sure that you are the author.
Have you ever lived in Foolsville? Worse yet, do you live there now? For some, Foolsville is a permanent address which is unfortunate. There are two things I can tell you that will help ensure you never end up a resident in Foolsville. First, look at a map and look for the perfectly shaped "box;" it's easy to spot. You see, you have to be outside the box to understand that there is a box. When traveling or thinking of a place to move to, avoid this area of the map at all costs. Don't worry though, if you can see the box, you will never end up in it. Second, realize that market speculation, just like life, is a competition and the only way to succeed when you compete is to have an "edge" over your competition. This can only be attained by THINKING DIFFERENTLY, outside the box.
If you have ever spent some time in Foolsville, send me an email and let me know.
To be continued...
Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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