Market Tricks

Market Tricks

Brandon Wendell

Instructor, CMT

Prior to joining the Online Trading Academy team, I had a brief stint as a trader for a retail stock brokerage in the United States. As a trader, I was charged with executing the brokers’ orders from their customers. I was to work the orders and try to gain some advantage for the brokerage in the spread that would not be passed on to the customer. All of this while the customer was paying a commission too! That is why as a trader for myself I would never think of trading without a direct access platform.
The brokers used small pieces of paper called a chit.  A blue chit was a buy order and a pink chit was a sell order.  As the trader for the brokerage, I would be met every morning in the office by a big pile of chit on my desk, (Don’t worry, you’ll get the joke if you read it again).  I had the task to execute these orders so the brokerage would make commissions and as I mentioned some of the spread too.
This daily process was repeated throughout brokerage offices all over the world.  All of these retail orders would flood in every morning, fueled by investors who heard about the next biggest thing on the news or a recommendation from the broker the night before.  As my duty required, I would execute the orders at the open of the market.  Feverishly working to fill all of those investors’ dreams of retiring from one great trade!
Knowing what we do about supply and demand, what do you think would happen as soon as those orders were filled?  The markets would immediately reverse as all of the emotion that was driving price strongly in one particular direction was suddenly over.  Think about it, if everyone who wanted to buy a particular stock just did, then how can the price continue to rise?  The stock becomes saturated with nervous sellers and collapses under its own weight.  I do not use the term nervous seller lightly.  Anyone who buys a stock becomes a nervous seller as they can only profit by selling the same stock they just bought.  The nervousness enters as they decide when to sell to maximize profits and minimize loss.
Brokerages not only have to fill the customer orders in the open market, but can also transfer shares from their inventory or even sell short as a market maker as long as they give the customer the best price as indicated by the exchange at the time of processing the order.  A smart trader who has seen the pattern repeat time after time, would take the opportunity to short into this strength in anticipation of the reversal that occurs from profit taking or stop losses being triggered once the buying pressure has been exhausted.  This is exactly what many market makers and specialists do every day.

The same reversal action occurs when there is bad news and panic in the markets.  For every share that is sold by a scared investor, someone had to buy it to either close a short or initiate a new long position.  Once the selling flood has subsided, the prices will typically rise as there is nothing to hold down price and some bottom pickers try to profit from a bounce.  The professionals who traded counter to the masses are now profiting as supply is gone and prices move higher.

Be careful not to think that this new trend will last as those who profited from the reversal will look to book profits as those who did not participate in the initial thrust of the market try on the second test.  Yes, there will usually be a second reversal that sends the stock into its trend for the rest of the day.
Knowing how to anticipate these two reversals and timing them correctly is something that we work on all the time in the XLT program.  If you are not aware of how to identify or trade these key reversals of the morning, then you should learn before venturing into trading that timeframe.  Fortunately we teach that in our Professional Trader courses at Online Trading Academy and trade it live in the Extended Learning Track online.  I welcome you to join us and learn how the professionals trade.  Until next time, trade safe and trade well!
ARTICLE SOURCE : TRADINGACADEMY.COM

Profit Zones

Profit Zones

Online Trading Academy, Chief Education, Products, and Services Officer

All market speculators share the same goal, which is to enjoy consistent low-risk profits. To accomplish this goal, you must be able to identify market turning points and market moves in advance with a very high degree of accuracy. This is the only way to attain low-risk and high-reward entries into market (trading) positions. Whether you are a short term trader for income or a longer term trader for wealth, nothing changes. Identifying key market turning points is the only way to attain the ideal risk / reward opportunity. Leading Extended Learning Track (XLT) sessions for so long, I have come across many people in the program. Occasionally, I receive an email from a member that is not satisfied with their results and desires better returns. Most of the time, they are not necessarily losing money but they are not making money or not making enough money, and desire more. One of my first questions to them has to do with strategy. I ask them, “Do you have a plan and are you following that plan?” Half the time the answer is no, so we dive into creating a proper plan and the importance of following that plan. The other half says they do have a plan and for the most part, follow it much of the time. For this group, my questions turn to the details of their plan, the strategy, where I look to see if their rules are proper or not. Sometimes, there is a rule or two that is incorrect and the student doesn’t know it so we correct it. In my many years of experience, I have found that most of the time, there is one specific and crucial rule that is missing from people’s plans more than any other and that is the focus of this piece.
Before we discuss this rule and its importance, let’s first turn our attention back to market turning points. Where are market turning points and where do market moves originate? Price movement in any and all markets is a function of an ongoing demand and supply equation. Market prices turn at price levels where this simple and straight forward equation is out of balance. Therefore, price in any market turns at price levels where demand and supply are out of balance which means the strongest turns in price occur at price levels where demand and supply are most out of balance. So, the question for us is this: what exactly does this picture look like on a price chart?
When I ask students this question, they quickly describe the picture of demand that I have shown in articles for years which is a “Drop – Base – Rally.” They then describe supply which is “Rally – Base – Drop.” These are the two pictures that clearly show price levels where demand and supply are out of balance which is what we as market speculators are looking for. Next, students go right into their rules for entries, targets, and stops and this is where I stop them as they are ignoring perhaps the most crucial rule that should be included in their trading plan. Drop – Base – Rally may be the picture of a price level where demand exceeds supply, a demand level. But, what EXACTLY is a demand level for you and your trading plan? I find that most people don’t quantify this with numbers and they need to. Quantifying exactly what “demand” (or supply) is to you and your plan is a key component to a trading plan that helps you have an edge over other trading plans that don’t. To explain this further and dive into the details, let’s look at an options trade I recently took and shared with some XLT students.

The chart above is a weekly chart of General Motors (GM). In the upper left portion of the chart, we identified an XLT supply level. As you can see, it is a large time frame rally – base – decline, the base is in between the two black supply lines which create our supply zone. Just because it represents the pattern/picture we are looking for does not at all mean we have a low risk / high reward trading opportunity. One of the most important questions that comes next is whether there is a significant Profit Zone associated with this demand level or not. The initial profit zone in this case is the distance between the two black circles (supply and demand). The presence of a significant profit zone is key for two reasons. The first is that it helps quantify the risk and reward. Second, the larger the profit zone, the higher the probability. This is because a big profit zone means price is far from equilibrium and out at price levels where the demand and supply imbalance is greatest. Compare the size of the supply base area between the two black supply lines with the distance to the demand below. The distance between the two black lines is the distance from our entry point to our protective stop loss price. We sell short at the supply zone and place our stop above the supply zone. This helps measure our risk. The distance from the supply zone to the demand below represents our potential profit zone. The logic is that if price was able to fall that far, this means there is no significant demand until the demand level below or lower. Back to our rule…
Rule: A supply level only becomes a supply level if the distance from the supply level to the demand is at least three times the supply level (1:3 Risk/Reward). Meaning, if the distance from entry to stop is two points in a market, the profit zone must offer at least six points or it does not qualify as a supply level for me. I will typically ignore any levels that don’t meet this minimum requirement.
While I require a 1:3 as a minimum requirement to actually meet the definition of a quality level, it may be different for you. You may require 1:4 or whatever. One of the most important factors for this successful trade was the profit zone and the length and speed of price to and from those levels. This is a rule many market speculators fail to consider.
Many people talk about supply and demand when trading and writing trading plans. Few actually define what supply and demand levels are exactly. This is another step in building the edge required to get paid from your competition instead of paying them. There are more subtle but important rules to consider but they are beyond the scope of this piece. If you have any questions or comments, feel free to email anytime.
ARTICLE SOURCE:TRADING ACADEMY.COM