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Financial Markets Require Thinking Differently

Sam Seiden
Online Trading Academy, Chief Education, Products, and Services Officer

There are times in life where thinking differently is really not a good idea. When the traffic light turns red, especially at the busy intersection, you probably want to stop. When the train signal starts flashing, indicating a high speed 200 ton locomotive is about to cross your path, it’s probably a good idea to stop and not think differently believing that you can make it across without turning into a human pancake. When your parents tell you to take the garbage out or do your homework, it’s not a good idea to think out of the box and try to get out of the task. When your wife asks you to… Well, I think you get the idea. When it comes to making money in our global financial system, everyone has an opinion on what action you should take with your hard earned money; this is one area where I strongly encourage you to think differently.

Free Trading WorkshopMaking financial decisions that are truly best for you requires non–conventional thinking. The reason for this is because just about every decision you’re going to make requires you to buy something: stocks from your broker, annuities, mutual funds, life insurance policies and more. In all cases, you are essentially buying something from someone which means they are trying to profit from your decision, which is typically not a good thing for you. Don’t blame Wall Street, as this is how the system is set up. Instead, realize that the responsibility to make the right decision is on one person, you. The challenge is to first become aware of this issue, then understand how to make the right decision and, lastly, feel comfortable doing it.

At Online Trading Academy, I try and reinforce this concept often with our members. Let’s take a look at a trade I took the other day from our Supply/Demand Grid. While this is a trading example, the idea applies to anything you buy and sell.

November 24, 2015 Supply/Demand Grid: NASDAQ Supply. Income Trade Profit: $1,000.00

Professionals on Wall Street don't follow the advice in trading books

Above is the Supply/Demand Grid from November 24th. The NASDAQ Futures were rallying into the supply level on the grid. The grid represents where banks and financial institutions are buying and selling so I want to buy and sell there also. The circled area is where I sold short, betting that price would fall from that level and meaning I would profit and the buyer would lose if price fell, which it did. Area “A” represents the rally in price up to that level. The NASDAQ is one of, if not the biggest stock markets in the world, meaning people pay attention to it. The rally “A” is an uptrend in price. Every trading book on the planet, at least from my knowledge, says to only buy in an uptrend and never sell. During the uptrend, news is almost always positive which is why average traders and investors are buying. Furthermore, people buy when they see others buy (silly I know, but that’s what people do).

Another bullish seed was planted by the Fed the prior day with news of a strong economy, giving average investors reason to buy into the stock market. Here’s the catch… What average investors and traders who bought late in area “A” never considered is how you really profit when buying and selling anything. Remember, in the financial markets like anywhere else in life, when you buy something, the only way you profit is when someone else buys what you bought at a higher price. Also, the buyer in the circled area who bought from me never considered they were buying at retail prices where banks (and grid members and I) are selling. Why would they consider that? After all, the books say only buy and never sell when price is going up. You can probably start to understand now why the gap between Wall Street’s performance and the average trader/investors performance is so wide. When one group is buying, the other is typically selling and so on. Hint: The stock broker is not your mother, you don’t have to listen and always say yes when told to buy a stock. I learned all this many years ago during my time and observation on the trading floor of the Chicago Mercantile Exchange. Here, I am simply sharing this concept and what it looks like on a price chart with you, for your benefit.

What still amazes me is when Wall Street advisors tell the average investor to buy something, the investor almost never asks the two questions that would certainly tilt the outcome in their favor.

  1. When someone tells you to buy a financial product or a stock, ask if they own it also (the seller).
  2. When a broker tells you to buy a stock, ask what price you’re buying at and, even if you don’t understand charts, ask the basic question of where price is compared to the average price of that stock. Make sure you buy it on sale just like Wall Street does. What you may not realize is that often the Wall Street buy signal and your friendly trading book on conventional Technical Analysis are the locomotive disguised as Thomas the Train. Learn to recognize the difference and don’t allow anyone to flatten your financial well – being.

Hope that was helpful. Have a great day.

Sam Seiden  – sseiden@tradingacademy.com

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.