In today’s day and age of high speed computers, lighting fast financial information, and data overload, diving into the world of trading can be a frightening challenge for a newcomer to say the least. Add on top of that deciding which strategy to use and it’s no wonder why so many traders fail. You can choose the path of fundamental analysis where you will focus on economic and financial reports to make decisions. You can focus on conventional technical analysis which is loaded with price patterns, indicators, and oscillators, and more. Maybe you want to combine the two like some people do and spend 23.5 hours a day crunching data and looking at charts and about 30 minutes for eating and sleeping. An alternative approach to trading may be something you are already very good at, properly buying and selling anything. Let’s take a look at the various ways people attempt to trade the markets, including the core strategy we employ at Online Trading Academy. Let’s explore these to simply figure out what makes sense.
During a live online trading session from last week in the XLT (Extended Learning Track), we setup some trades for our students. The screen you see below is one of two that begins all of our trading sessions where we lay out the entire trade for students. It was a buying opportunity in a stock, EMC.
The trade was to buy EMC at 24.94 with a protective sell stop at 24.81 and a target at 25.40 and 25.77. The demand level we were planning on buying at is shaded in yellow. I assume there is more demand than supply at that price level because price could not stay at that level and rallied. I know that this can only happen because demand exceeds supply at that level. Another word for demand is “wholesale.” So, if I am a smart buyer and seller of anything, I know that when prices are at wholesale levels, I want to buy from someone who desires to sell at wholesale levels. Isn’t that how every business makes money?
The EMC Demand Zone
Live Trading Session – EMC Returns to Demand: Time to Buy
During the trading session, the trade met entry as price declined into that level. What that meant was that someone was convinced that EMC was worth selling at our wholesale price which meant we wanted to buy. Shortly after meeting entry, price rallied and met our two profit targets for a nice low risk gain. Our simple rule based strategy has us buying at price levels where demand exceeds supply (wholesale prices) and selling at price levels where supply exceeds demand (retail prices). This may sound as too simple and boring but that’s the way I choose to do it. Let’s take a look at some alternative ways of trading and in doing this, let’s look at the same trade through the eyes of conventional technical analysis with indicators and oscillators and such.
The charts below are the same two charts with the same trade only I have added some popular indicators and oscillators to it. With all this added information on the chart, you would think that we are able to make a smarter trading decision but think again. First of all, the hardest thing to see on the chart are the candles and that is the most important piece of information for me (obviously not for the conventional T/A trader). The reason why I believe none of these things I have added to the chart help a trader is because they all lag price. They will simply do what price has already done. This means that if we add any of these indicators to our core decision making process, we are simply adding risk and decreasing reward. The goal is low risk entries and big profit margins. Notice all the moving averages on the chart. Most people will only buy when they are sloping up. Notice that when price declined into our demand zone and it was time for us to buy, the moving averages were all sloping down. This will always be the case which is why conventional T/A traders always miss the low risk entry.
Next, notice all the other squiggly lines on the chart, they actually would have hurt us with losses and high risk entries. And, what about ATR, Average True Range (ATR). I have absolutely no use for this and feel bad wasting time writing about it but I will for your benefit if you’re trying to make this work. ATR shows you an average of the prior ranges in price. The thought is that this will tell you what future ranges will be to potentially help with risk management. But what if I gave you a choice and said I could teach you how to use conventional ATR which looks at ranges in the past or I could teach you how to identify what the future range will be, what would you want to learn? I am sure your saying “future” ranges as that is the key information we all want to know, I agree. Well, if you want to know what the range in the near future is going to be, measure the distance between a markets “fresh” demand and supply levels. If they are far apart, the range is “going to be” large. If they are close to each other in price, the range is “going to be” small.
As I have said before, you can learn the book version of trading if you want to but make sure you find plenty of people making money from reading the books first. Or, you can learn to trade by focusing on the reality of how markets work and how money is really made and lost in markets. This means quantifying real demand and supply in a market and then buying low and selling high, just like you do in every other part of life. Simplicity is the key for us in XLT.
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