Back in January 2015, Bill Gross along with just about every other expert were so sure interest rates would rise in 2015. The news early this year around rising interest rates was so strong it likely influenced many people to take action. During an XLT session in January of this year, I was leading the session and we looked at a chart of the 10 year note. With the market news predictions of higher interest rates so strong, we wanted to see what the chart suggested. In other words, what was the real supply and demand equation in the bond market telling us for 2015.
Below is news from Bloomberg on January 29th, 2015.
“Bill Gross, the former manager of the world’s largest bond fund, said the U.S. Federal Reserve will raise interest rates this year to end distortions that six years of near-zero borrowing costs have brought to financial markets.” – Bloomberg News.
Live XLT Session: January 2015 – 10 Year Note, Daily Chart
10 Year Note – Daily Chart, October 2015
For this illusion, let’s look at a chart (1st chart) of the 10 YR we covered in the XLT, OTA’s live online trading and analysis room. Illusion stemming from market news is the most powerful illusion in trading and investing as strong news leads to strong emotion (faulty beliefs). Most successful traders and investors have, at some point in their journey to consistent profits, fallen prey to this illusion. How many times have you seen bad news turn into a positive day for the markets? The thought of higher interest rates and a falling bond market would likely cause investors to sell bonds and buy them back when rates are higher. That belief drove the majority to sell, as seen in the chart above. However, once the last seller sells at a price level where there is more willing demand than supply, the laws of supply and demand tell us prices rise.
Lesson: No matter how bad the news is, when the last seller sells at a price level where there is more willing demand than supply, prices rise. There can be no other mathematical outcome.
The area labeled “XLT Demand” on the chart represents an objective demand price level. We know this because price rallies strong from this level. The area labeled “XLT Buy” represents the time when Online Trading academy XLT members are instructed to buy the 10 Yr. The news of a declining bond market was very real and prices fell. However, once they reached the level where there was objectively more demand than supply, prices turned higher. This gave us our low risk, high reward and high probability buying opportunity. What we have seen throughout the year are interest rates slowly declining, just as the chart in the XLT session suggested.
Lesson: Strong market news actually creates powerful turns in the market opposite of what the majority expects because one side (buyers or sellers) exhausts itself into a price level where objectively, supply or demand are out of balance.
Act Like a Goose
The human mind is not wired to trade properly. Our decision making process is not like most other animals. Most people don’t focus on reality when deciding to take action; we make decisions based on emotion, not intellect. Not only is it very difficult to live in complete reality. But, consistently making actions based on reality is an even harder task many times. A goose on the other hand would make an excellent trader and investor. When winter approaches in the north, the geese don’t wonder if winter will come or not. They certainly don’t call a goose meeting to figure out a way to stave off winter. They simply act like a machine and fly south for the winter and repeat this process each and every year flawlessly for their entire life, without questioning their choice.
Throughout history, people that pioneered original reality-based thought on certain topics often paid for it with their life. An example that comes to mind was the crazy thought that the world was round. Though your life is certainly not in jeopardy with illusion-based trading and investing, the growth of your hard-earned capital sure is.
A successful trader’s path must be reality based, not driven by illusion. The reality is that markets are nothing more than pure supply and demand at work; human beings reacting to the ongoing supply/demand relationship within a given market. This alone ultimately determines price. Opportunity emerges when this simple and straightforward relationship is “out of balance.” When we treat the markets for what they really are and look at them from the perspective of an ongoing supply/demand relationship, identifying sound trading and investment opportunities is not that difficult a task. At Online Trading Academy, we do not prescribe to the school of conventional technical and fundamental analysis. Furthermore, we do not prescribe to the school of conventional thinking because we are not interested in conventional results. We prescribe to the school of reality based thinking. In trading and investing, those who view the markets through the eyes of reality simply derive profit from those who don’t. I know much of what I am writing here flies in the face of what is written in almost every trading book ever written, but that’s ok. This piece is meant to help offer everyone a more complete perspective on how the markets really work.
Hope this was helpful. Have a great day.
Sam Seiden – email@example.com