In today’s day and age of high speed computers, lighting fast financial information, and data overload, diving into the world of trading can be a frightening challenge for a newcomer to say the least. Add on top of that deciding which strategy to use and it’s no wonder why so many traders fail. You can choose the path of fundamental analysis where you will focus on economic and financial reports to make decisions. You can focus on conventional technical analysis which is loaded with price patterns, indicators, oscillators, and more. Maybe you want to combine the two like some people do and spend 23.5 hours a day crunching data and looking at charts, leaving about 30 minutes for eating and sleeping. An alternative approach to trading may be something you are already very good at, properly buying and selling anything. Let’s take a look at the various ways people attempt to trade the markets, including the core strategy we employ at Online Trading Academy. Let’s explore these to simply figure out what makes sense.
I was leading a live online trading session in the XLT (Extended Learning Track, our graduate program) recently and took a picture of a trade I setup for our students. It was a buying opportunity for a day trade in the NASDAQ.
The trade was to buy the NASDAQ at 2565 with a protective sell stop at 2558 and a target at 2580. The demand level we were planning on buying at is shaded in yellow. I assume there is more demand than supply at that price level because price could not stay at that level and rallied. I know that this can only happen because demand exceeds supply at that level. Another word for demand is “wholesale.” So, if I am a smart buyer and seller of anything, I know that when prices are at wholesale levels, I want to buy from someone who desires to sell at wholesale levels. Isn’t that how every business makes money? Isn’t this how you make money buying and selling anything? Trading is no different.
Once the market got going, our trade met entry as price declined to our demand level. What that meant was that someone was convinced that the NASDAQ was worth selling at our wholesale price which meant we wanted to buy. Shortly after meeting entry, price rallied and met our profit target of 2580 for a low risk gain. Our simple rules-based strategy has us buying at price levels where demand exceeds supply (wholesale prices) and selling at price levels where supply exceeds demand (retail prices). This may sound too simple and boring but that’s the way I choose to do it. Let’s take a look at some alternative ways of trading and in doing this, let’s look at the same trade through the eyes of conventional technical analysis with indicators and oscillators and such.
The chart below is the same chart with the same trade only I have added some popular indicators and oscillators to it. With all this added information on the chart, you would think that we are able to make a smarter trading decision; but think again. First of all, the hardest thing to see on the chart are the candles and that is the most important piece of information for me (obviously not for the conventional T/A trader). The reason why I believe none of these things I have added to the chart help a trader is because they all lag price. They will simply do what price has already done. This means that if we add any of these indicators to our core decision making process, we are also adding risk and decreasing profit margin. The goal is low risk entries and big profit margins.
As I have said before, you can learn the book version of trading if you want to but make sure you find plenty of people making money from reading the books first. Or, you can learn to trade by focusing on the reality of how markets work and money is made and lost. This means quantifying real demand and supply in a market and then buying low and selling high, just like you do in every other part of life. Simplicity is the key for us in XLT.
Hope this was helpful, have a good day.