Stocks

Find the Fool and Trade Against Them

BrandonWendell
Brandon Wendell
Instructor, CMT

I have a friend and I will spare him the embarrassment of mentioning his name here, who always seems to buy and sell stocks at the wrong time. He watches a lot of TV and gets excited at the prospects of becoming rich quickly from any publicly traded company that happens to make the news. It struck me after having watched my friend lose plenty of money throughout the years that there are many others who get involved in the markets the same way. They hear a hot tip, listen to a broker who pushes some brokerage inventory or watch the top performer lists on their computers.

As a trader, this is the type of person we would like to find. We want to find the consistently wrong investor/trader and take the opposite position. This will obviously lead to successful trades for us. Since I can not share my friend’s contact information with all of you, I will have to share a way to find when the uneducated investors enter the market.

Most of you may have read trading books that state that increasing volume is good for the continuation of the trend. While this is true, there becomes a point of saturation where the markets cannot sustain the trend. Think of what makes prices rise. There has to be a buyer and a seller for every transaction. However when there are many buyers chasing a limited amount of supply due to a limited number of sellers, prices will rise as the buyers outbid each other to claim the shares.

This will continue until most people who were interested in buying shares are already in or have stopped bidding as shares became too expensive. Now the market is saturated with too many worried holders of shares who will sell to realize profits. Unfortunately for them, at this time there are few buyers for their shares and they become forced to sell at lower prices to attract buyers. Eventually all of the supply will be dumped onto the market and prices will start to rise as buyers once again outnumber sellers. This is what happens behind the scenes in all markets and we see this action causing supply and demand levels.

The interesting thing about this price movement is that the amateurs typically enter into the trend AFTER it has already been moving. This seems counter intuitive as you wouldn’t walk onto a car dealership and offer them higher than sticker price or pay extra at the drive thru just because you love the taste of a Double-Double Animal Style Burger (my West Coast friends know how delicious they are). However, when it comes to trading and investing, most amateurs look to buy after a large rise in price or sell after a large drop. We can see this over and over in the charts.

csco amateurs

As a professional trader, I want to trade against these amateurs and in the same direction as the Wall Street Professionals. If you notice in the following charts, the price will often move far and fast at the beginning of the trend as only the professionals are entering the market. This is viewed as large candles at the beginning of the trend. By buying at strong demand levels and selling at supply levels like we teach in Online Trading Academy’s Professional Trader class and XLT Stock and Stock Mastery, you will be trading with the pros.

rimm pros and amateurs

So the takeaway from this article is that when we trade, we must look for the highest probability entries at supply or demand. Often our trades will be confirmed immediately after we enter with large candles and professionals entering. We can help to time our exit at our target supply or demand when we see large candles signaling the amateurs’ entrance into the trend…

csco timing exits

right at demand!

csco 5 min support

Trade with the professionals…find the fool and take the opposite position. As they say, “At the poker table, if you don’t know who the fool is… it is you!” Learn the tactics that professionals use to trade and avoid common mistakes of the amateur. Until next time, safe trading!

Brandon Wendell
bwendell@tradingacademy.com

Disclaimer
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.