Day Trading & Forex Forum

From birth, we are conditioned to trade incorrectly. We naturally run from things we are fearful of and are drawn to things that make us feel good. If you take this action in trading, you are headed for trouble which in the trading world means losses. For example, if your invitation to buy into a market comes only after an uptrend is well underway, all the indicators are pointed up, and the news is good on that market, where do you think price is in that market? Yep, it's likely very high. To buy here completely goes against how you make money buying and selling anything and is very high risk. Never forget, when you buy, many people have to buy after you and at higher prices or there is no chance you will profit in your trade. To obtain an entry that allows you to buy before others and at price levels where the risk is low, most of the time (if not all the time) you are buying at the end of a downtrend, when most indicators are pointing down, and when the news is bad. This action is completely against our mental make-up.

As I said before, we are conditioned from birth to trade incorrectly. That action or belief system is often reinforced during the many years of traditional finance/economics high school and college education. For example, most college courses on markets teach to us to do plenty of research on a stock before buying into that market. The general rule is to make sure the company has good earnings, good management, is a leader in its industry, and has a stock price that is in an uptrend. Again I ask you, where do you think the price of the stock is when all this criteria is true? Almost always, the stock price is very high when this criteria is true which ensures that if you buy now, you are simply paying everyone else who bought before you.

In my opinion, there are two things that you must have if you are to succeed at trading for a career. First, you must have a solid understanding of how the market really works and a rule-based strategy based on the objective laws of supply and demand. Due to very little regulation in the trading/investing education industry, most people learn to trade completely wrong from someone who is good at marketing but not so good at trading. This ensures that perhaps as much as 80% of people who attempt to trade will fail as they never learn how a market really works and instead, are poisoned with trading education and information that has them buying high and selling low. This path is fraught with lagging indicators and oscillators and conventional technical analysis information that leads to high risk, low reward trading and investing. Second, you must have the discipline to follow your rule-based strategy. So, of the roughly 20% of hopeful traders who actually obtain proper trading education, the lack of discipline factor likely eliminates 80% of them which adds up to a select few that ever make it. Before you stop reading this piece and throw it into your fireplace because it is so negative, sit tight and read on; help is on the way…

I am the head trader/trainer for the Extended Learning Track (XLT) Futures and Forex classes, which are live virtual classrooms at Online Trading Academy. I have been trading Stocks, Futures, Forex, and Options for many years and being around new traders in the XLT, I see so many people come into the program not having the two most important pieces of the trading puzzle mentioned above. Let's go over some very recent trades in the XLT program in hopes that you will get closer to having a solid understanding of how a market works and then I will show you how we handle the discipline issues that can be so challenging for new traders in the XLT.

Here are two typical day trades in the NASDAQ (or S&P) that we pre-planned and took. Before the opening of the market, we simply marked off the demand (support) level below where the market was trading in the pre-market which is before the opening of the U.S. Stock market. At the same time, we marked off the supply (resistance) level above. Once the Stock market opened, we were very happy to buy from someone who wanted to sell after a decline in price and at our pre-determined demand level as that is the low risk / high reward / high probability time to buy. Understand that the laws of supply and demand ensure that the seller who sells after a decline in price and at price levels where demand exceeds supply will most often lose so we use our rule-based strategy to make sure we are there to take the other side of that trade and buy from the ill-informed seller. Next, as price rallied to our pre-determined supply level above, some XLT traders sold their long position or initiated a short position. Who did we sell to? We sold to the trader who is making the same two mistakes every consistent losing buyer and seller of anything makes. First they are buying after a big rally in price, mistake number one. Second, they are buying at a price level where the chart is suggesting that supply exceeds demand (more sellers than buyers). Why would someone buy at that price level? They would buy because they are conditioned to buy when the news is good, a solid uptrend is underway, and simply because the basic human brain is wired to buy when everyone else is buying.