What Happens When You Stick To the Rules
Education
Last week we focused our education on the importance of having rules and having the ability to stick to rules. This week, I wanted to highlight a trade from a mentoring student of mine from last week. While it has taken some time, he is now much better at sticking to the rules. I attribute my trading success to two reasons. First, I have developed a mechanical set of objective rules based on the laws of supply (resistance) and demand (support). Second, I have learned that it is one thing to have rules and another thing to actually follow rules.
AAPL Day Trade Short – Online Trading Academy Student Trade
This was a day trade short from last week. What we spend most of our time on in the mentoring program is identifying TRUE support (demand) and resistance (supply) levels in any market and any time frame. This student has been doing a fine job. Here is his trade. First, he identified a demand and supply level that had an ideal "profit margin" between them. Once he found that, he simply shorted right at the supply level and bought back the short at the demand level for a nice gain. While the gain was good, he is learning that the low risk entry associated with that gain is much more attractive than the gain itself. You see, entering short at the supply level, before you have a big red candle is key. It allows us to be first in line at the right time. By selling short at supply, he is selling short very close to his protective buy stop if he is wrong so the risk is low. He is also selling short far from the demand below, allowing for a large profit margin. The more he lets price drop before selling short, the higher the risk and lower the reward so he does not wait long. How does he know price is going to turn at that supply level? No one knows for sure but that is life in the trading world. All we can do is use objective information to stack the odds in our favor. Here is how we do that.
Notice the initial decline in price from the supply level. Price basically free falls from that level which tells us objectively that there are many more willing sellers than buyers at the supply level. The first time price revisits that level is when my student sold short. Who did he sell to? He sold to the buyer who is making the same two mistakes any novice market speculator makes. First, he sold to the buyer who is buying after a move up in price. Second, he sold to the buyer who is buying at a price level where we already knew supply exceeded demand. The odds were stacked against that buyer so the high probability trade is to simply take the other side of that trade and sell short. The exit is simply taken at the opposing demand level which is shown here on the chart.
Trading Ideas
NASDAQ ETF (QQQQ)
This is a chart of the QQQQ, the ETF for the NASDAQ. The nearest demand and supply levels have been identified on this chart with green and red lines. Remember, these areas are "zones" which is where we would look to buy and sell. Active traders can look to take positions in these areas when price reaches them for the first time. The reason we only take a position the first time price revisits these levels is because this is when the risk is lowest and the reward is highest. With each pullback into a demand or supply level, the probability of the trade working is decreasing so make sure you focus on that first pullback.
CEPH
CEPH is a stock that is nearing a significant supply level as seen on the chart here. Notice the dramatic decline in the stock from the supply level. This dramatic decline tells us that there is likely a large supply and demand "imbalance" at the level. Therefore, if and when price revisits that level for the first time, we would look to sell short. We would be selling to the novice buyer who is buying after an advance in price and buying at a price level where supply exceeds demand. This is the same opportunity as the one outlined in the education section above.
EURUSD (cash forex)
Here we have a chart of the EURUSD. The supply level above is an ideal level to potentially take a short position for the active trader. Intra-day, price will likely turn lower from this level, offering the day trader a low risk shorting opportunity. Again, the initial decline from the supply level was strong suggesting the first time price revisits the level, it will likely drop again.
If you have any questions on this, please email me. I was a bit behind in email the last two weeks. I will be caught up this week, thanks for your understanding. Have a great week.
- Sam Seiden, sseiden@tradingacademy.com
|
Sam brings over 15 years experience of equities and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.