Last week, I shared a trade taken in the Extended Learning Track (XLT) on July 16th. The XLT is our graduate online trading program. The purpose of the article was to point out how important it is to keep trading simple. I received some important questions regarding that trade so I thought I would share all the details of what made that trade work. Not to add complexity but instead, to dive into the psychology of what made that and many of our trades work. Always remember, not all trades are going to be profitable but that is part of trading and that’s ok. Let’s begin…
Understand a simple truth, most retail traders and investors are not very successful when speculating in markets. Short term traders especially tend to lose money over all. Institutions/market makers tend to do very well overall when it comes to short term trading. So, if you’re a consistent losing retail trader, it’s likely because your thinking and trading like one.
For a while, we have been willing buyers at fresh demand levels in the XLT as the trend is up and price has not reached fresh supply as of the time this trade was taken. Let’s take another look at this buying opportunity in the NASDAQ and get inside the mind of an XLT trader.
Notice the blue line on the chart. This line represents the Globex (US overnight low) low prior to the day session and our early morning XLT. Sitting just below the Globex low is a key demand level (yellow shaded area) I found for our students. We know demand exceeds supply at that level because price could not stay at that level and rallied higher from it. Odds Enhancers 1, 2, and 3 also suggested there was a strong supply / demand imbalance, much more demand than supply. So, XLT students know to buy at that level with a protective sell stop just below it and our appropriate targets above. Next, when the stock market opens at 9:30am EST, the futures volume picks up dramatically as you can see on the bottom of the chart. Once that session got going, the NASDAQ was still above the Globex low. So, let’s now think about how a retail trader is going to think in that situation. Retail traders who are going to buy that day are likely going to buy at the Globex low with a protective sell stop just below it. Retail traders who are going to sell short that day are likely going to sell short once the NASDAQ breaks below the Globex low. Our plan well before the market gets going is to buy at our demand level for all the reasons mentioned above (Odds Enhancers) and one more, the presence of a strong retail Bear Trap and here is how it works. Once price declines and reaches the Globex low, the retail buyers buy and place their sell stop just below. Once price declines below the Globex low as it did (see chart), the bearish retail traders sell short and those who bought at the GLobex low are now stopping out for a loss as their sell stops are triggered and filled. What has just happened is both retail buyers and sellers just sold on the break of the Globex low, just as price is reaching our demand level, where we (and institutions) are willing buyers. In other words, we have just caught both the retail buyers and sellers on the wrong side of the market. As institutions are buying at the demand level, retail is on the sell side which is why XLT students are buyers as well. If institutions are buying there, we want to buy.
Again, retail traders tend to perform poorly when speculating in markets. The key for you is to stop thinking and trading like a retail trader and start thinking and trading like an institution. Do all institutions make money, no. Overall however, they are significantly more profitable than the retail trading world as most day traders lose money and most longer term investors never achieve their financial goals. The Bull and Bear Trap are two setups that occur frequently for the short term trader. Learn how to properly identify and trade them to avoid falling for the trap which will cost you money and instead, get paid from the trap. As always, my hope is that this information will help lower your risk and increase your reward.
Have a great day.