During our development years, we are taught/conditioned to think certain ways. Our years in grammar school, high school and university are key belief system building years. One of the major conflicts during these years occurs when we are taught how to buy into markets and then how we are taught to buy and sell anything else in our life.
The basic principle of buying low and selling high or selling high and buying low is how we derive profit when buying and selling anything. When we buy cars or houses, we never offer what the seller is asking. We always offer a lower price and typically end up somewhere in the middle. Smart shoppers look for deals where they can buy what they are looking for at a lower price than others pay. We all typically try or desire to buy at “wholesale” prices and sell at “retail” prices, just like any successful company does. At this point, most of you are thinking that I am wasting your time because you know this already, and that’s true. However, during the years that we are conditioned to buy low and sell high, we are almost always taught to take the opposite action with our investments whether long term or in short term trading.
For example, at every level in school when we are taught to buy stocks as investments, we are told to wait for certain criteria to become true BEFORE we buy. These criteria include but are not limited to:
- Good company
- Strong earnings
- Healthy balance sheet
- Quality management
- Stock price trending up
- Moving averages sloping higher
When all these criteria are true, WHERE DO YOU THINK THE PRICE OF THE STOCK IS? Market timing using this criteria means the market will almost always be high, at or near retail prices when these criteria are true which means you will be paying $50,000 for the $25,000 car and the seller is the big winner, not you. The way we are taught to buy stocks and into markets is completely opposite of how we are taught to buy and sell anything else, and therein lies the major conflict and the reason most investors never come close to achieving their financial goals… When news is bad, people want to sell. When it’s perceived to be good, people generally want to buy. Last Wednesday everyone was waiting for the Fed to release interest rate news in the afternoon. There was more and more talk about what the Fed would say regarding the direction of interest rates.
April 27th, Fed Interest Rate News Day / XLT Live Market Session – GBPUSD FX Market
April 27th, Fed Interest Rate News Day / XLT Live Market Session – Gold Market
That day, our Supply / Demand levels in the XLT were a demand level in the British Pound and a supply level in Gold. Prior to the interest rate announcement, neither market was near these levels. Then, the big moment… The Fed announces and the markets really start moving. However, once it reached our levels of demand in the Pound and supply in Gold, both markets turned and moved quickly in the opposite direction, offering our students the opportunity to profit which some of them did. What we didn’t focus on was what the Fed said or any news around that. Actually, I was leading the session and didn’t know what the Fed did until about 30 minutes later after asking the students in that session what happened.
How can I explain these moves and all the others that happened that day right after the interest rate news? Simple; in the Pound, sellers did sell in big numbers on the release of that news, overwhelming the demand at those price levels. However, once price declined to a level where demand exceeded supply, as seen on the chart above, and the last of the sell orders at that level was filled, there was only one direction for price to go – up. And, since all the sellers that were going to sell on that news had sold, there was no real supply left to stop the rally. As I have said so many times, it’s all about quantifying the buy and sell orders (demand and supply). The news just sped up what was going to happen anyway.
Most people are so consumed with pattern recognition, conventional technical and fundamental analysis they forget the simple buying and selling action they take at the grocery store each week where they regularly try to buy things on sale. Whether it’s Costco, Walmart, Goldman Sachs, your local convenience store, or the 6 year old selling lemonade in front of their house, how price changes in markets and how money is made and lost in markets never changes.
Hope this was helpful. Have a great day.
Sam Seiden – firstname.lastname@example.org