By Sam Seiden, Online Trading Academy Instructor
As I have mentioned many times, at the core of any successful trading and investing strategy is an "edge." Few traders and investors ever attain the significant market edge they desire and there is a simple reason for this. Most new market speculators begin their quest for edge-building information and education at the local book store or online. They naturally are drawn to reading best sellers and popular authors with many books on the market. The problem with learning how to properly trade and invest with the needed edge from reading these books is that everyone else is reading the same books. Your competition is learning the same strategies you are. They are learning to buy and sell exactly where you are learning to buy and sell and therein lies the trap. Simply put, if you are processing market and strategy information the same as others (your competition), you can't possibly have an edge. For this reason, I typically focus my articles not on conventional trading, technical analysis, and market information but instead, on edge-building, reality-based concepts that you won't find in the book store. In today's piece, I will cover two of many simple tools that may help you in your quest for that needed edge when speculating in markets.
Trends
Looking back at recent prior data in any market on a price chart, it is easy to see what the current trend is. Most of you are very familiar with the conventional concept of higher highs to identify uptrends and lower lows to identify downtrends. I strongly disagree with this conventional way of assessing trends. It is a lagging school of thought that typically leads to high risk, low reward trading and investing. Instead, I choose to use very mechanical "real time trend analysis" as this offers a huge edge, but this is a topic for another day. A little tool I can share today has to do with assessing the strength of a trend. It is important to assess how healthy the current trend is and when and where it may end. While we typically use supply and demand levels to determine this, there is another way... One way to do this is to measure the distance between the lows of the pivots during the uptrend. Notice the uptrend in the chart below; the distance between the pullbacks (pivot lows) is decreasing as the trend moves higher. The logic behind this is that a strong trending market does not pullback often. If it does, it is not a strong trending market anymore. Keeping with our constant supply and demand theme, remember that a trend on any time frame is really a supply and demand imbalance moving back into balance. This is a larger time frame chart but the assessment can be done in any market, and any time frame.
Logic:
Uptrend: When the distance between the pivot lows is decreasing, this suggests price is nearing a supply level, the trend is becoming weak, risk to buy is increasing, and profit potential for buying opportunities is decreasing. The uptrend is likely almost over.
Downtrend: When the distance between the pivot highs is decreasing, this suggests price is nearing a demand level, the trend is becoming weak, risk to sell short is increasing, and profit potential for shorting opportunities is decreasing. The downtrend is likely almost over.
Figure 1 Volume
Volume, in my opinion, is one of the most misunderstood pieces of information when used for assessing trading and investing opportunities. While there are many misunderstandings with volume, I will focus on one today. Most of the books say, "Look for above average volume turning points." In other words, most books on trading suggest that a major turn in price should always be accompanied by high or climactic volume. My short comment - don't believe everything you read. If you think the simple logic through and focus on the real concepts of supply and demand, you will find that the exact opposite is actually true. Your most significant turns in price are almost always accompanied by low volume. Price movement in any and all markets is simply a function of an ongoing supply and demand relationship. Low risk, high reward trading opportunity exists at price levels where this simple and straight-forward relationship is out-of-balance.
Logic:
The most significant turns in price will happen at price levels where supply and demand are "most" out-of-balance. The more out-of-balance supply and demand is at a given price level, the less time price spends at that level. The less time price spends at a level, the fewer the transactions (trades) at that price level. The fewer transactions, the lower the volume. So, the larger the supply and demand imbalance at a given price level, typically, the lower the volume.
As you can see in the example below, at the turn in price, there is actually very low volume and this is because supply and demand are soooooo out of balance. Again, don't take my word for it; put your conventional technical analysis book down and think the simple logic through on your own. Then, go back and look at charts and you will see this is the case. When I use volume in the Extended Learning Track (XLT) class and for my trading, often I will want to see below average volume at my demand or supply entry point as that suggests a strong supply and demand imbalance.
Figure 2 Instead of reading all the trading books and learning to buy and sell in markets when everyone else buys and sells (no edge)... Instead of acting on the advice of others who likely get paid from advice, not from trading... Pay attention to what is happening in front of your eyes. Pay attention to what is happening around you. Pay attention to all the simple realities that others never see. Changing your ways and getting what you want out of life requires two difficult tasks for the individual. First, you must think like you have never thought, which will lead to doing what you have never done. Life is too short for you to stay in the comfort zone of conventional thought. Think in reality-based terms and build a life edge that delivers the positive results you desire.
Hope this was helpful. Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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