Lessons from the Pros


Are You Leading or Lagging With Your Trade?

In the world of trading, the people that usually profit are those that learn how to anticipate when the market will turn, versus those that follow, and usually get in late. The primary cause traders join a move after it has already run its course is that the indicators they use to trigger their buy or sell signals  are always lagging price. By this I mean that since most traders  use conventional technical indicators (which calculate price in the past to plot a line or oscillator)  to trade, they  will always generate  buy or sell triggers after price has turned. As a result, they will never give a trader the lowest risk entry point.  The lowest risk entry points are always found at the market turning points, not after the move is already underway.

In addition to the indicators used by most, the patterns used by the masses always need “confirmation” to trigger  buy or sell signals. Again, this means that the move is always underway before they buy or sell.  For the  majority of  traders this gives the illusion that it is safer to buy after a confirmation move has taken place, but reality is that when price is moving fast into a supply or demand zone the risk is actually very high, and the reward is very low.

A recent example  of this happened over the last two weeks as the stock market sold off sharply and then swiftly reversed.  One of the most common indicators traders and investors use to gauge a trend is a moving average. Specifically, the 200 day moving average is used by the multitudes to identify whether stocks are in a bull or bear market. Simply, if price is trading above the moving average the market is bullish and if we close below that average traders are told to sell because this implies a bear phase is starting.  The one challenge with this strategy is that if you sell after price has violated the 200 day moving average you are always selling after the market has dropped  ten or fifteen percent from its peak.

Instead, selling near the highs can be accomplished by identifying where the institutions are selling ( supply). As we can see from the charts below a trader/investor would have taken lower risk anticipating where the market had a high probability of selling off rather than waiting for a sell signal from price crossing below the moving average.

ES Supply 10-22-2014

So when the market finally bottomed and turned up furiously , this same approach suggests that an investor wait until the moving average is crossed to the upside. As we can see that also does not avail a trader to capture a low risk entry.

Another common pattern the traders who use conventional  patterns to identify when a market may be headed higher is a double bottom.  The pattern simple looks like the letter “W.” The chart below shows that indeed we did form a “double bottom” and then turned up.  The setup in this pattern is to wait for a break above the apex of the “W” before buying. The challenge here as seen on the chart is that a trader would have had to suffer through roughly a 15 point pullback before the S&P 500 resumed the upward move.

ES demand 10-23-2014

As an alternative, a trader would have taken a lower risk entry  by buying at the demand zone highlighted in the chart.

Finally, the objective of this article is to get you thinking about the tools you’re using to engage the markets. Are they lagging? Or are they leading (anticipatory)?  And contrary to what everyone thinks, yes, you can anticipate market turns before they happen.   Provided you learn how the markets really works.

Until next time, I hope everyone has a wonderful week.

DISCLAIMER 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.

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