Lessons from the Pros

Featured Article

Major Retail Investor Mistake, Simple Correction

I have been in the trading and investing business for nearly 20 years as a trader, fund manager, author and educator, beginning on the floor of the Chicago Mercantile Exchange. If I had to list the top three mistakes I see most traders make, one that would for sure be on the list is when people enter the market. Most traders today still buy when news is good and prices are up and sell when news is bad and prices are down. This is the single biggest reason Wall Street makes so much money and the average investor doesn’t. I will use a market setup I went over in one of our live market coaching sessions with our students to illustrate how this works.

Before getting into the details of the mistake and correcting it, it’s important to understand two key components of markets that you invest your hard earned money in.

  1. Why do prices move in any market? Price in any market turns at price levels where demand and supply are out of balance. The consistently profitable market speculator is able to identify a demand and supply imbalance, which means knowing where banks and institutions are buying and selling in a market. By quantifying institution demand and supply areas on a price chart, you can identify market turns and market moves in advance with a very high degree of accuracy.
  2. Who is on the other side of your trade? Market speculating (trading and investing) is simply a transfer of accounts from those who don’t know what they are doing into the accounts of those who do. The consistently profitable speculator knows that a novice is on the other side of their trades. Profitable traders and investors know to buy at wholesale prices (demand) and sell at retail prices (supply). This means they are good at identifying people who buy at retail and sell at wholesale by looking at a price chart.

The Retail Investor Mistake

Free Trading WorkshopNotice the screen shot below. This was a live trading session I was holding with about 300 students and we were looking at the S&P, one of the biggest and most important equity index markets in the world. At the time, the global stock markets like the S&P were near all-time highs, news was good and the trend was up. This meant most investors were buying, but was this the right thing to do? As you can see from the chart, I was going over the professional perspective, not the retail investor point of view. The chart was telling us the price had rallied to a level where supply greatly exceeded demand; banks were selling in that area. I knew this because of two things: first, that was an area of supply because price could not remain at that level and fell strongly. This can only happen when supply exceeds demand. Following our rules at Online Trading Academy, that supply level was VERY strong. Second, when price rallied back to that level we knew that novice investors were buying and, like Wall Street, we want to sell to that group as they are paying retail prices and unfortunately don’t know it. The novice investor was making two key mistakes that all novice market speculators make. First, they were buying after a period of buying and second, they were buying at a price level where supply exceeds demand. The chart told us that almost a month before that novice group bought at supply.

S&P Setup: 11/25/15Online Trading Academy XLT students know how to avoid the most common mistake made by retail investors and traders.

The Action

Given the strong supply level and the huge profit zone below, the action we took was to sell either by taking a short position or a bearish options position, which is what I did. Why would someone buy from us up there when price rallied to supply? The news was good and the trend in price was up, that is very attractive to most investors around the world. After all, that is when people are taught to buy into markets.

S&P Result: 1/8/16
Wall Street Professionals buy and sell according to supply and demand.

The S&P ended up falling over 175 points from our supply level which is a huge move for the S&P. This can be very frustrating for the average investor because they are simply buying when they are told to buy, following conventional wisdom and education. The proper time to buy in any market and any time frame is at demand (wholesale) and sell at supply (retail). A key component to making this work that is beyond the scope of this article is this: When taking any buy or sell entries in markets, make sure you know exactly where price is with regard to larger time frame supply / demand. Whether you trade Stocks, Futures, Forex or Options, understand that behind all the candles on your screen in all these markets are people and their emotional decisions and banks with their logical buy and sell decisions. Learn to see the difference on a price chart and join the group that is consistently profitable. This is one of the most common mistakes I see investors make; they buy high and sell low.

Hope this was helpful. Have a great day.

Sam Seiden – sseiden@tradingacademy.com


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.