We have all heard the phrase, “Trade with the trend, the trend is your friend.” While there is much truth to this statement, what specific rule based action do we take to make money from this simple concept? To dive into the important details and make sure that by the end of this article you are a better trader, I will use a recent trade to make my points. But before we do dive in let’s define the word trend. Trend simply means “prices moving in a direction.” Trends begin and end at fresh supply and demand levels. The core strategy at Online Trading Academy is the simple combination of supply (retail) and demand (wholesale). By entering and exiting positions around supply and demand levels, we are entering the market just before the next trend which is low risk and high reward and exiting the market just before the opposing level.
Notice the trend on the DAX chart below from last week is clearly down. This means we only want to look for supply (retail) levels for our entry points as we are only interested in selling short when the trend of price is down.
DAX Futures Income Trade: 3/27/15 60 Minute Chart DownTrend
On the chart below, there may appear to be more than one supply level on this chart and you may be wondering why I chose the one I did (yellow shaded area). This is because, based on our “Odds Enhancers,” that was the only supply level that met our criteria. In other words, our rule based analysis told us that the supply level shown was a price level where there was a significant supply and demand imbalance. This means there was much more willing supply than demand. The reasons to sell at that price level should price rally back up to that supply level are as follows:
- Quality supply level with multiple Odds Enhancers at play
- Significant profit zone (that big base below is nothing to worry about)
As you can see below, price soon rallied back up to that supply level, stopped and fell quite a bit to meet my profit target for a short term trading gain of $1,425.00. Market timing is what I specialize in and it is the sole reason why this trading opportunity was low risk, high reward and high probability. The professionals say you can’t time the market’s turning points, I say you can with a very high degree of accuracy. The key to doing this is the ability to truly quantify supply and demand in any and all markets. This means identifying price levels where supply and demand are out of balance as that is where price always turns. Another way to say this is… know what the picture of real significant buyers and sellers looks like on a chart.
There is another key component to consider along-side market timing. It is really understanding who is on the other side of your trade. We want to make sure the person on the other side of our trade is a novice market speculator and not a big bank or a major financial institution like Goldman Sachs. Let’s use this same trade as an example and use simple logic to make sure that when we sold short, we were selling to a buyer who doesn’t know how to quantify true retail and wholesale prices in a market.
DAX Futures Income Trade: 3/27/15 The Result, $1425.00 Profit
When price rallied up to the supply level the key question was this; who was the buyer and what do we know about them. Novice traders always make two key mistakes. The buyers in this trade were making three and they are as follows:
- The buyers who bought were buying after a rally in price. This is a big mistake in trading. Think about how you buy things in other parts of your life. Do you ever get excited about buying after prices rise? If you would not take this novice action when buying things in any other part of life, don’t do it when trading and investing.
- They were buying at a price level where supply exceeded demand (Banks Selling). The chart already told us that (yellow shaded area). This mistake is even worse than mistake number one.
- They were buying at Supply in the context of a downtrend. This is not smart trading. During a downtrend the odds are with the shorts which is why we focus on identifying supply levels as entry points during downtrends.
The odds are so stacked against the buyer which is why being the seller meant that the odds were stacked in our favor, the risk was low and reward was high for the seller. Understanding who is on the other side of your trade is a key factor in trading. Those who buy against the trend, after a rally in price, and at supply tend to pay those who trade with the trend. Again, this is one of the many ways the transfer of accounts happens from those who don’t know what they are doing, into the accounts of those who do.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org