Find The Novice Trader, Part 2 (we found some last week)
In all of our classes, there are rules that students are expected to follow. One of them is to NOT trade your own account in class. While we as instructors tell this to students on day one, students sometimes do it anyway.
Last week, I was in Dallas instructing an options class. Even though I told students not to trade personal accounts in class, some were set on doing it anyway so for me, it was very important that they did it the right way which means LOW risk and high reward trading. As I was covering market direction for the class, one student pointed out that RIMM was moving strong to the upside and that we should take a look at it. When we did, it was clear that RIMM was flying, up over $8.00 from the morning low (see the chart above).
As price rallied into the prior days highs which are resistance, I asked the class who was buying here. We had covered this extensively at this point so they all knew the answer: The buyer who is buying is buying RIMM after a large move up in price AND at price resistance. Not only was price at resistance but CCI was very overbought and we were looking at a potential double top. This buyer could not be a consistently profitable buyer because a consistently profitable buyer and seller of anything would never do that. This must be a novice buyer who always buys when the risk is high and reward is low. The student simply looked at the objective reality of all this and took the other side of the novice buyer's trade. He took it in the options in his own account which meant buying a put option when they were VERY cheap and about to become expensive and sold the put when the put was very expensive and about to become cheap - this my friends is trading.
The numbers above are screen shots of the student's real trading account. Could price have gone higher and stopped him out? Of course it could and that is why our goal is to keep trading low risk. This is why we focus on direction and always zoom in on the basics of how and why prices move and turn. While he took this trade and made lots of money on it in two days, the benefit of a low risk entry is the only reason he was able to enjoy that gain.
There is major risk of loss when you trade in the markets. It is well known that most people that attempt to trade fail. While this may seem depressing when thinking about taking a trading class or getting involved in the trading markets, think again. What is great about that statistic is that if you just look at the main two reasons why most people fail, all you have to do is the opposite of what they do, when they do it which is clear as day on a chart. When you see someone buy after a significant advance in price and at resistance, you may want to consider selling to that buyer. When you see someone selling after a decline in price and at support, you may want to consider buying from that seller.
Almost every trade we found in class worked out as planned which made this look easy to some of the students. While learning the information and rules is easy, emotion will make applying the rules one of the hardest things you will ever attempt to do. Emotion and faulty trading education is why the novice trader is a novice trader in the first place.
Lastly, if you think the student made a nice profit on that trade, he took the same trade in two other stocks at just about the same time and exited those around the same time as RIMM, all in his real trading account. The key is not to be impressed with the gains but to be impressed with the low risk he took on to get that gain. In other words, all the answers to trading are not going to be found by focusing on what the student did. The real key is to focus on the trader who was on the other side of the student's trades, that is where all the answers to profitable trading are.
Again, don't trade in class! However, if you are one of those students in class who sneaks to the washroom to call his or her broker and place a trade, do it when the risk is low, the reward is high, and the probability of success is stacked in your favor.
If you have any questions or comments, email anytime. Have a great day.
- 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.