Getting StartedTechnical Analysis

Objective Rule Based Trading

Does your trading lack the "trader’s edge" needed to be a consistent winner in the markets? Do you find yourself entering and exiting positions at the very wrong time? If the answer is yes, you’re not alone. The good news is that there is a very specific reason why the majority of traders enter and exit trades with very poor timing. Also, the answers needed to fix this problem are far simpler than you may think. To gain the edge and learn how to stack the odds in our favor, we will go back to the school of basics, not just to review the basic concepts but more importantly to look at them very differently than we have before. We know that if we look at charts, indicators, and any other tools used to perform market analysis the same way everybody else does, we would just be entering and exiting positions with them as well which gives us little to no edge. To gain the consistent edge which means low risk/high reward entries, we must first have a solid understanding of why most traders fail. Second, realize that moves in the markets are driven by mass psychology and the pure laws of supply and demand. Third, know how to properly identify and utilize support (demand) and resistance (supply). Finally, we need to be able to see what this looks like on a chart and also have an objective and mechanical set of criteria for execution.

Today, I was teaching a class in Houston Texas. It’s now day six of the seven day class and for me, day six is always my favorite. The reason it’s my favorite day of the class is because this is when I can really see the students trading the markets the way I have been teaching them all week. They tend to do well on days four and five but by day six, most are trading very well and having a blast doing it. While it’s fun to trade and make money, by day six, they realize they have been taught the rules for obtaining consistent low risk/high reward profits forever, not just a strategy that will work in certain market environments, and break down in others. They understand now that when you have a solid understanding of pure supply and demand coupled with objective and mechanical rules for analyzing a chart and trading, you are able to perform the same in any and all markets, and market environments. As I mentioned before, most people lose consistently in trading. There are two groups of consistent losers and it’s important that you get to know them well. I will explain why in a minute. The first group is the group who has never been educated in trading. This group tends to make buy and sell decisions based on emotion. The second group are the people who have been thoroughly educated, the wrong way. This group is in much worse shape than the first group because they are walking east and west trying to find the North Pole and don’t even know it. They don’t know it because they are following the rules they were given and likely paid for so how can the education be wrong? It must work! Think again? The problem is that the foundation of their strategy and training is fraught with lagging indicators and oscillators that only increase risk, traditional chart patterns that are better served with a frame around them on your wall, and tons of illusions given to them by those who have more to gain by obscuring reality. Let’s go back to school and re-learn some basic concepts you may have already been taught, the wrong way. The reason I said that you had better get to know the consistent loser very well is because these people are the ones who provide income for the consistently profitable trader. Let’s explore this by looking at three trades taken today by students in my class trading real Online Trading Academy money, using objective rules based on the laws and principles of supply (resistance) and demand (support).

This student sold short at the circled area. The trading platform inserts the little green line at the entry price. The student inserted the blue lines to identify the objective supply (resistance) level. As price was rising for shares of ADBE, my student was waiting for price to come up to his level so that he could sell short. He only wanted to short at his predetermined level for the following reason? This reason is the key to a proper foundation when buying and selling anything. It’s the difference between consistent profits and consistent losses. When price came up to his supply level, he sold short to the buyer who was buying AFTER an advance in price and at a price level where SUPPLY EXCEEDED DEMAND. The laws of supply and demand ensure that the buyer of anything who takes this action will lose consistently. The student who made this day trade gladly sold to this ill-informed buyer. Shorting at the turn in price means your risk is very low and your reward is very high. The longer you wait to short from the level, the higher the risk and lower the reward.

The supply level here in ABAX again represents temporary price stability which gives the appearance of supply and demand equilibrium. The price drop from that level tells us objectively this is really a price level where supply greatly exceeded demand. Therefore, if and when price revisits this supply level for the first time, we can say that price is revisiting a level where supply greatly exceeds demand. In any market, when price is at a level where supply greatly exceeds demand, prices decline. Again, another student in class sold to a buyer who was buying AFTER an advance in price and at a price level where SUPPLY EXCEEDED DEMAND. His short entry was at the circled area. Mind you, this is a daily chart and a huge low risk gain in a short period of time. What I impressed upon the student was the fact that while the gain was nice, the most important part of the trade was the low risk entry taken to obtain that gain.

An Observation? I have been trading and providing trading education for many years. One of the most important lessons I have learned is that most people can’t follow simple rules. I can hand someone quality trading tools and a mechanical set of rules on a silver platter but if the foundation of their trading belief system is faulty, they will not be able to follow or execute the simple rules. The problem is that they succumb to illusion filters they don’t even know are present. These illusion creators can come in the form of lagging indicators and oscillators, market or economic news, so-called professional’s opinions, green and red candles on your price charts, and so on. This leads to falling for what I like to call, "the illusion trap". At Online Trading Academy, our objective is to not only teach people how NOT to fall for these traps but also how to get paid from those who do with a set of objective rules.

This was my trade in the QQQQ. The entry to buy was at the circled area, a buy at demand (support) right around the first reversal period. Who did I buy from? A consistently profitable trader or a consistent loser? I bought from the seller who sold AFTER a decline in price and at a price level where everyone in my class knew demand exceeded supply. If I was wrong, the stop loss was right below the demand level, nice and close to my entry which is very low risk. The profit margin on the upside was sufficient so the trade was taken.

The Proper Foundation begins with two important concepts:

  1. The movement of price in any and all free markets is a function of an ongoing supply and demand equation. Opportunity exists when this simple and straight forward relationship is "out of balance". In other words, we want to enter a position in a market when price is at a level where supply and demand is out of balance and exit that market when price has moved back to a level where there is supply and demand equilibrium.
  2. Any and all influences on price are reflected in price. In other words, price charts alone give us all the information we need.

Sam brings over 15 years experience of equities and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.Points of interest:• Chicago Mercantile Exchange Floor• Author of Market Advisory Letters• Fund Manager/CTA• Speaker to Investment Groups, Universities, and Private Seminars• Contributing Author for Stocks, Futures, and Options Magazine, Active Trader Magazine, and Futures Magazine• Trading and Investment Conference Speaker

Sam brings over 15 years experience of equities and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has tr...

fibonelli

Experienced member
1,338 288
A very good article on the importance of demand and supply and of patiently waiting for high probability setups.
 

bewise

Newbie
3 0
A simple thing is best kept simple. If you put in too many indicators, you won't be able to see the woods for the trees.Looking at a chart in its pure form is the best. The closing price, volume and range are what you need.
Indicators are road signs. If you know the way, you don't need them.
 

firewalker99

Legendary member
6,655 599
A relief to read an article that discusses supply & demand without turning to some fancy indicator. This is really what it's all about, buyers vs sellers. Excellent article.
 

Bossant

Newbie
3 0
thanks

this helps alot but only concern is how you figure where the supply and demand lines are put?
 

foroom lluzers

Veteren member
3,611 135
Do you find yourself entering and exiting positions at the very wrong time? If the answer is yes, you're not alone. The good news is that there is a very specific reason why the majority of traders enter and exit trades with very poor timing.

Just looking for confirmation why this market timing does not work , why this strategy may offer an alternative.
 

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