How The Markets Work It Off

Brandon Wendell
Instructor, CMT

No, this is not an article about weight loss!  It is more about preventing financial loss.  As traders we often rely on technical indicators for signals to help identify turning points in the prices of both the markets and our stocks.  In fact, many people rely on them as the basis for their software to tell them when to buy or sell.  There is a major problem with trading in only this manner.  While it is true that a signal from a technical indicator can foretell a reversal in price, it can also signal a pause in price before resumption of trend.  A trader who solely relies on those signals for their trading decisions will often take trades that are stopped out for a loss.

So what should a trader do?  Obviously they need to look at supply and demand and price action as a major decision maker for trading or investing.  If you are a regular reader of these articles, you will know how successful traders like Sam Seiden, Gabe Velasquez, Rick Wright, Don Dawson, and others emphasize using the levels rather than indicators for decision making.

When most think of the market trends, they tend to think of only two directions, up or down.  However there is another direction the markets can take and that is sideways.  Imagine if you were in the lobby of a 40 story building with no elevator.  Now, if I told you that there was $1 million in a briefcase at the top of the building that you could have if you climbed the stairs, what would you do?  Of course you would start climbing!  Most of us would tire at some point and need to rest.  Would you stop climbing and go down stairs to rest?  Of course you wouldn’t.  You would stay at the highest level you had reached and wait until you gathered strength to resume climbing.

Prices will often move sideways in a strong trend for a rest as well.  Prices rise due to aggressive buyers pushing prices higher.  When prices have risen too high, many potential buyers will back away as price has become too expensive.  When they see that no one is selling to make the price cheaper, they will resume in the buying for fear that they will miss out on profits.  This pause will cause many traders who are already in the stock to book profits too early for fear of a reversal that never comes.  It may also tempt traders into unwarranted shorts as they try to pick the top of the markets.

worked off

Watch the price action as you come away from those overbought/oversold situations.  Prices may simply pause and move sideways at those areas in order to work off the indication and allow more traders to enter into the trend.  As with real estate, the key is location.  An overbought indication at supply is one to heed as is an oversold at strong demand.   Other indications may be false and lead to over trading.

decision support tool showing overbought supply

So use the indicators as they are intended, as a decision support tool for your trading on supply and demand.  To learn more, attend a course at the Online Trading Academy center nearest you.  Until next week, trade safe and trade well!

Brandon Wendell

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.