Deciding what to trade can be just as important as how to trade it. Traders often spend so much time trying to learn trading strategies and perfect their platforms. They then struggle to find the right stocks to trade for the type of market that is offered for the day.
I was teaching a Professional Trader Course Online last week and in the live trading module, I noticed a student looking for a shorting opportunity in a stock that had rallied strongly that morning. I asked the student for their rationale for the trade. They correctly stated that the stock had run up very quickly and was likely oversold and ready for a pullback. The QQQ’s were also reaching a supply zone and looked ready to pull back.
Looking into the supply zone of the stock, VRTX, I noticed that the zone had been tested once before and was therefore weakened. Looking further at the stock, I noticed that it was also showing a double top pattern.
This allowed me to offer two lessons for the class. The first is on how to find what to trade. The second, why you need to trade based on supply and demand rather than the “classic” chart patterns. At the time the student was looking at the stock, VRTX was one of the strongest stocks in a bullish market day. This is not the opportunity for shorting. If you are looking for something to short when the market pauses or even reverses, look to the weaker stocks that only seem to me moving upward due to the market’s action.
Sorting our trading list to the weakest stocks of the day, I found that ADSK was only at the even level for the day. I didn’t want a stock that was already moving down, but a weak stock that looked ready to drop from supply.
While ADSK did not reach the supply zone to give us a short entry, it did drop when the market paused at a weak supply.
Overall, the stocks that moved up with the markets offered the best opportunities for intraday trading. We want to trade with the market, not against it.
I mentioned that there was a second lesson for the students. The double top pattern is one that many traders are familiar with. It is published in countless trading books and is traded by many retail traders. That is why most of the time the pattern will fail. If novice traders all jump into a short position as price breaks the low of the double top pattern, they will exhaust the selling pressure and prices will not be able to continue lower.
Couple this with the fact that price was breaking down to a fresh demand, and you have the recipe for trading losses if you follow the conventional wisdom. Trading with the core strategy of Online Trading Academy that involves supply and demand and you are trading with the professionals. If you want trading success, you must follow the successful traders.