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When Trading – Simple Logic Always Beats Complex Illusion

Occam’s Razor is an old scientific principle that suggests the simplest answer is typically the right answer to a given question. Often, the obvious can stare you right in the face, and you will never realize it, the illusive obvious. The problem is not that illusion is distorting reality and creating confusion. The problem is that for most, the illusion is reality. As human’s, we often look deeper into issues when attempting to resolve them which often ends up making the issue more complicated. Ever notice when you get into an argument with a loved one, the most heated part of the battle is typically filled with details? Then, by the next day, you realize that those details have nothing to do with the problem and the real, yet simple issue becomes so clear? How many times have you said to yourself, “That was so simple, why didn’t I think of that?” The illusive obvious is all around us if you think about it. I focus on the simplicity of markets and trading when writing articles and leading online trading sessions in the Extended Learning Track (XLT) sessions for our Online Trading Academy graduates but let me tell you something. Due to how complex most perceive trading to be, my job is not that easy. I spend more time peeling away the layers of illusion than I do delivering objective rules of our strategy most of the time.

The Lemonade Stand

Recently, one of our XLT members sent in an email with a trade he took. He is a solid market speculator and understands the complex illusion traps that eat up trading and retirement accounts. Instead of falling for these traps, he gets paid from them. One analogy I recently used in an XLT session to describe how to properly think the trading markets is the simple lemonade stand. Did you ever have a lemonade stand when you were a child? Selling a cup of lemonade that costs you maybe $0.05 to produce for $0.50? Maybe even selling that same cup for $1.00? I am sure you didn’t realize it then but you were taking some great trades, some real solid buying and selling. Remember how simple it was… You spent maybe $2.00 on the lemons, added some basically free water and ended up with $15.00 or $20.00 in profit depending on the traffic at your street corner location.

Fast forward… Today, instead of being 8 years old, your 40 and your having a hard time with your trading, watching your 401K or retirement account not provide the returns and lifestyle you planned for. The way to fix this is not to seek the advice of so called professionals who get paid not on performance but rather from giving you advice. Aren’t these the same individuals that got you into this mess in the first place? Instead, bring yourself back to the days of the lemonade stand. Remember the simple logic behind how you reaped huge profit margins and treat all these trading markets that appear to be so complex with that level of simplicity. I will use a trade I took in the Gold market last week as an example of using this simple logic.

Income Trade: Gold (GC), 2/25/14

Income Trade: Gold (GC), 2/25/14

Income Trade Profit: $1,000

Income Trade Profit: $1,000

The supply level (yellow box) above is supply because of the pattern, Rally – Base – Decline. The fact that price could not stay at that 1338 area marked supply in the upper left means that supply exceeds demand. When this is the case, price declines. Over to the right in the circled area, I know that someone who buys after a period of buying and right at a price level where supply exceeds demand is making the same two mistakes every novice market speculator makes. This group of novice buyers who bought from me when I sold short are caught in that world of complex illusion. They thought buying Gold was a great deal at 1338. The last thing they are thinking about is the lemonade stand. This faulty thinking is rampant in the financial world and the people who get paid from this illusion based thinking are those who realize that the action you take when speculating in markets is EXACTLY the same as the action you take in other parts of your life when buying and selling, just like the lemonade stand.

Focus on those who bought at Supply

1) They bought AFTER a rally in price. This is a big mistake. This is like walking into a car dealership, seeing a $30,000 car they like and offering the dealer $40,000. I am sure these buyers who bought from me in the Gold trade would never take that crazy action when buying a car. They likely would offer the dealer $25,000 but because they are in the trading markets, they throw all simple logic out the window. The lesson here is to treat these markets the SAME as when you go buy a car.

2) They bought at a price level where the chart told us, supply exceeds demand. Let me ask you… When driving a car and you see that 500 feet in front of you is a huge concrete wall that is very thick, do you step on the gas or the breaks? The answer is simple of course. I don’t even think you need driving lessons for that one. Why then would you buy into a market at price levels where supply exceeds demand? It does not make logical sense to take this action which is why the simple logical mind typically gets paid from the complex illusion based thinker.

What is also ironic is today’s lemonade vs the lemonade from years ago. For those over 30 years old, we know lemonade as lemons, a little sugar, and water. Today’s lemonade is made of 30 chemicals that may very well cause your insides to glow some blue/green color mixed with plastic bottled water that comes from who knows where. There are some real benefits in keeping things simple and real.

Hope this was helpful, have a good 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.