A Key Factor For Trade Success
Education
A Key Factor For Trade Success:
Though I have discussed entries before, many emails I receive deal with entries so I thought it would be a good idea to revisit this topic. "Profit Margin" is the term we use when referring to the objectively derived potential profit of a trade. We calculate the profit margin by measuring the distance between the supply (resistance) level and the demand (support) level. In the chart above, the profit margin is the circled area. There are only two types of entries someone can possibly take, the pullback entry and the breakout entry. A key factor in determining whether the trade will work out or not is this: Is there a profit margin or not? All you have to do is look to your left. When you are about to buy, look to your left and make sure supply is far above. When shorting, look to your left and make sure demand is far below. How far? For me, the initial profit margin must be at least 3 times the stop. In other words, I am looking for a reward to risk of at least 3:1 to the first profit target. Most of the time, price will go well beyond the first target but 3:1 is a good margin to get the trade started and in your favor.
You need to quantify the demand and supply accurately and make sure the profit margin is substantial. A losing trader is just like the individual who wants to open a business, doesn't do the research, buys inventory at $4.00 (supply) but finds out too late that the market will only bear $3.00 (demand). This is literally what happens in every market every day. It's incredibly simple and the vast majority miss the whole game being played out because of the illusions presented to them by those who have more to gain by obscuring reality.
Trading Ideas
10 Year Note Futures
Here we will revisit one of my favorite markets, the 10 year note. It is one of my favorites because of the huge volume and significant profit margins. Notice the supply (resistance) level above, labeled by the red lines. This level is ideal because of the strong initial decline from the level. This suggests a large supply/demand imbalance at the level which means that price is likely to fall fast the first time price revisits the level. Something I teach in the Online Trading Academy stock, futures, forex, and options class is to focus on that initial decline in price from the level. This subject is a whole section in the class so don't feel bad if you don't get it here. The fact that it moves down to the low it does before returning to the supply level shows us what the initial profit margin is. Traders can look to sell short in the supply area as the initial profit margin is greater than 3:1. Email me with any questions on this or see me at a class in the future.
S&P E-Mini Futures
Above is the S&P with a demand (support) level a bit below. There is also a strong move out of this level suggesting that we may see a nice trade if and when price revisits the level for the first time. There is one issue with this level, however, that does not make it a high probability level. In the larger picture, this demand level is not well placed on the supply and demand curve. Therefore, day traders will likely see a bounce higher from this level but this is not an ideal area to initiate a swing trade.
Newell Rubbermaid (NWL)
NWL is a stock that has recently traded into supply (resistance). This is a large level which is not always a good thing. The strong rally into the level on no basing does make this trading opportunity one to watch. Volume on this stock is good but not great so you may just want to watch this one as an educational watch idea. What we have here at the supply level are buyers who are buying AFTER a large advance in price and at a price level where supply EXCEEDS demand. The laws of supply and demand tell us that this buying is not a consistently profitable trader so we would want to find this buyer and take the other side of his/her trade. Keep an eye on this one.
Goldman Sachs (GS)
Goldman Sachs has been moving higher for a while now from the August low. Notice however that we are now getting the big green candles and "gap up's" after the advance in price. The key word here is "after". Consistently profitable traders don't buy after a large advance in price so we can conclude that novice buyers are starting to enter this market. If price gets up to the supply level, we would be selling to the buyer who is buying after an advance in price and into a supply level.
All of these little pieces of information are designed to give you an EDGE. If you don't have an edge in competition, don't compete. In sports, you will lose the game. In trading, you will lose your money. If you have any questions, please email me.
- Sam Seiden, sseiden@tradingacademy.com
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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.