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Properly Thinking the Markets

Wal-Mart, Tesco, Costco, Sam’s Club, just to name a few. These are some of the biggest retailers in the world, huge operations that make fortunes in revenue. How do they do it? What is there big secret? Simple, at the end of the day, they have mastered two simple things. First, buying at wholesale prices and selling at retail prices. Second, they have mastered the marketing game. Wait, this is supposed to be an article on trading so why write about the retail world of gadgets, clothes, appliances, and more? It’s an important topic if you want to understand how to be a consistently profitable trader or investor. Their buying and selling actions in the markets they operate in are no different than the actions of the consistently profitable trader. For you to be successful, you need to learn to properly think the market place you’re buying and selling in, just like Costco does.


Let’s get more specific so that you can become a better trader by the end of this article. For Costco to profit, they have to make sure that there are many willing buyers to pay the retail prices they are charging. When we trade, we must do exactly the same thing, we need retail buyers who are willing to buy at the retail (supply) price levels we are charging. How does Costco get you to pay their retail prices? There are many ways but let’s start with a look at the Costco sign above. This sign is in huge letters at the front of every Costco and on every piece of marketing material. Notice the word in blue that is a part of every Costco sign, “Wholesale.” Why do you think that word is there? There is one reason and one reason only… To get you to think you are paying wholesale prices so that you actually walk in the store and pay their retail prices, period. In short, the word “Wholesale” is an invitation to get you to pay a retail price. As a market speculator, this is also what you need to know how to do in the markets.

Take the example below from a recent short term income trade in Crude Oil. The yellow boxes are supply levels. This is a price level that according to our rule based analysis had much more supply than demand. Another word for a supply level is “retail.” A little while after identifying that level, price rallied up to our pre-determined supply (retail) level which means people were convinced Crude Oil was worth buying at our retail price. After they bought in the circled area (our short entry), price declined as it should and we were able to buy lower, profiting from this trade.

 Crude Oil Supply/Demand Income Trade: 12/4/13


Demand Income Trade

Again, this is really no different from paying retail prices for a new car. As soon as you sign the papers and drive it off the lot, the price declines dramatically. The first step in this process is to accurately identify key supply (retail) prices in a market. The second step is to wait for someone to buy from you at that level. Just like people walk into Costco each day and pay retail prices, people will be more than willing to pay your retail prices in the markets if you know how to identify retail prices in markets and have the patience to wait for people to pay retail prices. This is because most people buy on good news and in strong up trends. In both cases, they are typically buying at or near retail prices.

Take a good look at the chart and specifically look at the supply level and then the rally into it followed by the decline. We are looking at Crude Oil prices. That picture is the same picture of price movement if you were to buy something at Costco and then try to sell it at a garage sale at your home. You are going to sell it for a much lower price than you bought it for at the store. Whether we are talking the Crude Oil, the S&P, or a Costco product, the chart is identical. Just like the retail store, you must know what retail price to sell at (supply levels) and you must have the patience and discipline to wait for someone to be willing to buy at that level.

As a market speculator, you really do have a retail operation going at your home if you think about it. Good traders know price levels that are too low (demand/wholesale) and price levels that are too high (supply/retail). They buy at wholesale prices from people who are trained, conditioned, and willing to sell at wholesale prices. They also sell at retail prices to buyers who are trained, conditioned, and willing to buy at retail prices. Then, they just repeat the same simple process over and over for the entire life of their trading. Try not to over think this and keep it simple.

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.

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