Market Action and Reaction

June 24, 2009 – 9:56 am

Forces come in pairs. For every action, there is contrary reaction. The primary thing that comes to mind is those purchasers were willing to buy at higher and higher prices. While one certainly can have one seller selling to several buyers, they can also have multiple sellers selling to one buyer that would cause rising prices. So it is not the number of buyers to sellers that cause price to rise. Rather, it is the readiness of buyers to acknowledge higher and higher asking prices from the sellers.

‘Buyer perception’ varies among businessmen. It is the potential buyers do not buy the vehicle because they perceive a commodity as not unworthy it for them at the asking cost. Of course, they may think that the asking price is fair, but they didn’t like the color or the make. Yet, those prospective buyers may have bought the car anyway had the price been much lower. For those prospective buyers that did not buy, there may be a price that would turn them into buyers.

Presume you had ten potential car buyers out looking at the same car. At the present asking price, maybe only one of the ten feels it is worth buying at the asking price and would buy it. As you keep lowering the price, however, more and more may then consider it a good buy and want to buy it. Perception is a mental function. Therefore, we must address the ‘mental’, the ‘psychological’ angle of buying. When we consider the psychological aspect, we must consider the ‘emotional’ aspect as well. Our mental perception is mostly affected by information.

Working back from the actual buying and selling to the effects that may show the way to those final actions, you get a better accepting of the inner workings of market price action. The market trader can also reach a point of making highly accurate forecasts of market behavior, enough so as to be able to increase ones odds of getting on the right side of most trades.

By TradingMentor | Posted in Articles, Technical Analysis | Tagged , | Comments (0)

Gap Trading in the morning

June 24, 2009 – 9:06 am

The Art of Trading the Morning Gap

Open trade is a fantastic opportunity for the smart trader who knows how to identify supply and demand. Most of the time, our entry is within seconds to minutes of the opening bell. Prices gap up because there are more buy orders at the open morning than there is available supply at the prior day’s closing price. They gap down because there are more sell orders at the open than willing demand at the prior day’s close. Therefore, market prices are almost always at price levels where there is a supply and demand imbalance at the open in the morning trade technique.

The input is to not stare at candles on your screen as red and green pictures and patterns. You must recognize what is happening behind the scenes in the morning trade. Whether you’re trading stocks, futures, options, or forex, the logic and rules never change. Again, the market imbalances are greatest at or near the open of trading in all markets. By the end of the first hour of trading each day, a large amount of novice trading capital is simply transferred into the accounts of the astute trader. If you can’t see the novice trader in markets, you most likely are the novice trader.

The dramatic price decline can only happen because there is much more supply at that level than willing demand. The dramatic rate of decline suggests a strong supply and demand imbalance at that level. Now, notice what happens the morning of the upgrade. Our job is to find this novice trader and simply take the other side of his or her trade and make the best of morning trade.

When you enter markets at price levels where supply and demand are out of balance in a big way, especially at or near the open of trading, moves in the market are typically very fast. This trade and the thoughts and rules that went with it are not meant to impress you. I mean to impress upon you the importance of looking at markets for what they really are which is simply an ongoing supply and demand equation. Opportunity exists when this simple and straightforward relationship is out of balance. Everything else in and around markets is just noise that is meant to invite you into markets at the wrong time and in the wrong direction.

By TradingMentor | Posted in Articles, Statistical Analysis, Strategies, Technical Analysis, Technical Trader | Tagged , | Comments (0)

Portfolio Diversification

June 23, 2009 – 11:30 pm

Many investors go to snooze each night feeling protected and sheltered because their asset portfolios are properly diversified. Conventional diversification challenges to reduce jeopardy and offer more opening for the average investor. However, when we observe conventional diversification protocol through the objective eyes of pure supply and demand, it becomes quite clear that conventional diversification actually increases risk and decreases opportunity.

The Foundation: Quantify Supply and Demand

The movement of cost in any and all free marketplace is a task of the regulations of pure deliverance and claim. Low risk/high reward exchange emerges when this simple and straight forward relationship is out of balance.

The Simplicity of Markets

Trading and investing market consists of three components: buyers, sellers, and a widget being bought or sold. These widgets may be shares of a stock, S&P futures, foreign currencies, bonds, and many more corporeal and insubstantial “widgets”.

A market is always in one of three states:

First, it can be in a state where claim surpasses supply which means there is rivalry to buy and that leads to higher prices. Second, it can be in a condition where supply exceeds claim which means there is rivalry to sell and this leads to waning prices. Third, it can be in a state of stability. At equilibrium, there is no rivalry to acquire or vend because the market is at a price where everyone can acquire or vend as much as they want. However, as the market moves away from equilibrium, competition increases which forces price back to equilibrium. In other words, competition purges itself by forcing markets back to equilibrium.

The greater the supply and demand disparity, the greater the opportunity

While many “professionals” would have you broaden your horizons and portfolio by buying many different stocks or a “ladder” of bonds for example, a much more efficient, lower risk/higher reward approach is to recognize the markets with the greatest supply/demand imbalance and risk your hard earned capital there. The thresholds in markets where prices turn are the price levels where supply and demand are out of balance, period.

By TradingMentor | Posted in Articles, Strategies | Tagged | Comments (0)

Forex Scams – How to Spot them a Mile Away

June 23, 2009 – 10:00 pm

In recent years, investors have observed increased number of savings opportunities and offerings.

1. Promises of Little or No Risk
If you come upon a Forex firm that alleged to have developed a foreign currency trading strategy that carries very little or no risk, stay away. The Forex market is very unpredictable, and, without good money management, an investor can lose most if not all her money within few days. Thus, individuals and firms who make claims that are far from market realities, as is risk less Forex trading, are really after your money.

2. Guarantees of Large Profits
Be cautious of firms that assure large profits in Forex trading. The Forex market, as most financial markets, is very volatile.

3. Employment Ads for Forex Traders
Many Forex trading firms use service ads to draw individuals with assets to trade using their systems. The employment ads, which frequently appear in newspapers and on the Internet, state that a foreign currency trading firm is looking for individuals to educate how to trade the foreign currency market using firm capital. Those who respond to the ad are convinced by the firm that they will make a fortune trading currencies if they participate in the firm’s training program. Regardless of the firm’s assessment of the novice trader as a brilliant newcomer, no firm capital is provided to the trader, instead the excited novice is told to use her own capital to trade using the firm’s platform.

Adding to various fees forced on traders using the firm’s platform, the Forex firm makes money as an introducing broker. Each time the novice trader trades through the firm’s system, a good part of the spread charged by the broker is shared and goes into the firm’s coffers.

By TradingMentor | Posted in Articles, Forex | Tagged , , | Comments (0)

Let Your Profits Ride

June 23, 2009 – 9:21 pm

Most strategies are based on trend trading. If the trend falls short, a well managed timing approach will exit to cash, or overturn position, with only a petite loss. When the trend keeps going, that same well managed timing strategy rides the trend as far as the trend goes. This is where the supremacy of trend trading is seen. By never misplacing a trend, and staying with the trend, trend following market timers make huge profits over time.

By no means let losses breed. If your strategy gives a buy or sell indication, and the indicators then go into reverse: reverse your position immediately. If you look at our various strategies, trade histories rarely take a loss of more than a few percent. It is easy to make back a small loss. Never set a profit target. Stay with the trend as long as it is profitable and never limit profits.

There is constantly a rationale to doubt a trade. The emotions caused by losses. Stick to the trading plan. Trade with the trend, slash your losses short and let your profits ride, and never, but never, listen to others.

By TradingMentor | Posted in Articles | Tagged | Comments (0)

Trading account – Do’s and Don’ts

June 23, 2009 – 8:12 pm

Traders continuously hunt for new and improved methods on their mission for a proper and successful trading system. Proper pacing means you run with the market. When the market is running rapid out, so should the trader. When the market begins to crawl, so should traders. Traders believe that a method need be working in all market conditions at all times throughout tough times. When the method doesn’t produce consistent results, the blame usually falls on the method or on the trader. From there, comes the whole back testing and tweaking process in a tireless attempt to perfect/optimize the method. With each tweak comes a success period and subsequent failure, the trader eventually will conclude the invalidity of the method and move onto another method. This continues until the trader eventually blows out or gives up. This should sound familiar because it happens to everyone.

Few important points for a new approach to be inserted into a trader’s mindset:

  1. A method doesn’t have to be successful under the required circumstances
  2. Not every trading day will be beneficial and profitable
  3. If it don’t fit, you must a quit
  4. You can’t control the market, only your actions
  5. The market sets the pace, you need to adapt
  6. No method works in a flat market, so stay out of them

The trade market starts off like a 40yard dash form 9:30am -10:30am EST. It then proceeds to slow down but maintains a steady pace until 11:45am – 12:30pm EST. The markets then slow down into a dead zone until 2:30pm – 3:00pm EST for the final dash into the close. This is how the market pretty much paces itself every day. The next step is to examine when the method is most effective for a trading account.

Proper pacing with the market breaks down like below:

  • 9:30-10:30am EST – Fast pace market (trader can play hard)
  • 10:30am-12pm – Market slows down (trader should tighten his method filters and slow down)
  • 12:-2:30pm – Market in Dead Zone (trader needs to leave the screens physically)
  • 2:30pm-3:30pm – Market starts to speed up (trader can start to look for prime setups again)
  • 3:30-4pm – Market fast pace dash into the close (trader looks for final trades for the day)

The market day in a nutshell always has few exceptions. Exceptions are illusions meant to suck traders into a false model. Exceptions are for losers. When they happen, you accept them for what they are and get right back to the norm. I personally feel it’s easier to pace when it’s done as a group. This is one of the key benefits of having membership in our trading pit. Every day, I constantly reinforce the pacing element by physically calling breaks through dead zone and instilling some ‘tough love’ on members that aren’t pacing. We practice what we preach. The biggest enemy is usually boredom, but that’s a cheap trade off compared to the abyss and a blown out account. Remember that making the profits are not the hard part, keeping them is. Proper pacing will help you keep the green!

By TradingMentor | Posted in Articles | Tagged | Comments (0)

Automatic Trading Systems

June 23, 2009 – 7:12 pm

Technology advances helps change trade systems and nourishes the growth in this world of speculation. One of the many recipients of faster and stronger technology is system trading as high speed computers now help retail and institutional traders develop systems, crunch numbers, and back test hypothetical results in seconds. Traders need to question themselves with this question, “With explosive advances in technology and market information, why is system trading so difficult for most who give it a try?”

The key to a proper trading strategy drills down to the foundation of that strategy. To have the proper foundation, a solid understanding of how markets work and why price moves as it does is to be understood. Trading system should not have any flaw in thought process the existence of which lead to poor trading results. If we want a consistently profitable trading system, we had better make sure that the person on the other side of our trades is a consistent losing trader. Our system had better be an expert at finding a novice trader or we are in trouble. We don’t need to know the exact person on the other side of our trade, we just need to know if they are a consistently profitable trader or a consistent losing trader, and the chart will give us most of this information.

A proper trading system need to have reality based logical rules.

  • Buy Rule
  • Sell Short Rule

    • Failure à Success
    In reality, a proper trading system means a simple transfer of accounts from those who do not realize market logic to the accounts of those understand the market logic. Trading systems just accelerate the process.

    Most traders who develop trading systems don’t take this approach or think in the simple terms. Most traders do not begin their knowledge path by managing institutional order flow. The huge majority of traders will begin with a trading book or tutorial developed by a writer or speaker. It sure will NOT be from a real market speculator. Unlike real trading system, books are filled with conventional use of indicators and chart patterns that may not work. If so, the author would certainly not be selling the book to you. Instead he may be a leading trade broker in the market now. When designing your trading system, make sure you bring your foundation back to the basics of how and why price moves in any and all markets.

    By TradingMentor | Posted in Articles, Automated Trading, Trading Systems | Tagged , | Comments (0)

    Trading Discipline – Do you Have It?

    June 23, 2009 – 6:26 pm

    Training anticipated creating a particular character or pattern of behavior. Controlled behavior ensuing from such training. A state of order based upon submission to rules and authority.

    To grow, we need to constantly confront with rules of one type or another. We need to receive rules in proper hygiene way, to address other people, to respond to various signs on the road, etc.

    Of course, there are eras when awful rules made, or when following a rule it does not protect us from what it originally was intended for. But this is the exception rather than, excuse the expression, the rule. The thing about rules is that they will not do us any good if we do not have the regulation to follow them.

    In trading it is no dissimilar. There are numerous rules that are the consequence of precedent trading experiences. Experienced traders have been prey to many accidents in trading over their careers and have come up with specific or general rules to help others avoid or minimize the impact of such accidents.

    Be consistent in how you trade. This rule is somewhat comprehensive. It refers to all aspects of ones trading. A trader must be reliable in his advance to the markets.

    Most traders adhere to it. They lack the obligatory discipline to stick to them on a consistent basis. It is human nature to feel that we can do better than the rules would allow us to do on certain situations, yet to only use them sometimes and not others makes them ineffective for the purpose they were created for, to protect us and allow a chance to succeed.

    By TradingMentor | Posted in Articles | Tagged , | Comments (0)

    Trading – Technical or Fundamental?

    June 23, 2009 – 5:56 pm

    This learning process is for us to study about two different kinds of traders; fundamental and technical trader. For us to succeed as an online trader the differences need to be understood clearly. Both are different in their views in the methodology they use to evaluate the market trend.

    Though there is some binding, we need to be at ease with each other. This terminology is evergreen all through this sector. Though there are vast variations in the approach, it is quite safe that most outsized financial institutions now employ both methods. Do remember that both have their own weaknesses and strengths.

    The Trading Approach
    A fundamental trader strongly believes that a share’s best performance is purely based on the fundamentals of the company like PE ratio, balance sheets, and profit/loss, ratios and business predictions. The technical trader believes that the future performance depends on simple information, namely the instrument price chart which encapsulates the company’s entire information.

    A concept to be understood is that a technical trader will mainly be studying charts. Use fundamental analysis to define the business economy and therefore which industries offer the best growth future. This information is used to identify groups of target stocks. This finally uses technical analysis of the price charts to follow trends and select prospects.

    Charts – Analysis and its components

    Technical online trading is primarily about the study and analysis of charts. All charts are from share scope parcel. The various components of the chart are explained. The left and right hand side show the price of the share in pence. Along the bottom is the timescale. The chart itself has two colored bars, yellow and red called the candlesticks that represent the daily movement of the price of the share. It also shows the opening and closing price on the day. At the bottom of the chart is one of the most important pieces of information that you will use in your analysis, and this is volume. The numbers up the left and right hand side are the scale in millions, and indicate the number of shares traded on the market during the day. They are displayed as bars so that they are easy to read. You can instantly see where the volume is high, low or just average.

    By TradingMentor | Posted in Articles, Fundamental Analysis, Technical Analysis | Tagged | Comments (0)

    Break the old trading rules

    June 23, 2009 – 4:28 pm

    ‘Break the old trading rules’ does not imply or direct traders to push aside the old rules and ideas. It is only the old ideas that have not proven effective and prevented many traders from progressing towards a positive goal, these need to be shed.

    Few of the old rules and ideas are;

    • The futures and commodity markets cannot be forecasted because the patterns are random
    • Success cannot be achieved at trading unless you know the fundamentals of the market you wish to trade
    • To make a success you must depend on what everyone else is using in common.

    Some of the rules and ideas are very useful. Everyone is using them and most of them are failing miserably in the process. The old ideas have not lived up to all the expectations. If you hold fast to these old ideas, you may be holding yourself back from reaching your full potential as a trader

    The world around has many secrets waiting to be exploited. As today’s corporate preaching goes ’think outside the box’ and this will help you break the old trading rules that are really not worth following. Many traders have a hard time gaining confidence in their own trading and not achieving their goals in this business often find themselves relying on others to tell them what to do.

    Traders should do something different, something that may even be against their grain. If what you are doing now is not changing anything to your liking, do you think continuing to do the same thing is going to produce a different result? Trading is no different. Because it is heavily psychological, our thinking may reach a plateau because we keep to old ideas. Now if you are happy with where you are, then by all means you don’t want to make any changes. Since we are addressing those who have no confidence in their trading and have reached a plateau in their trading skills and development, it is time to shock the system and break the old rules of trading for better efficiency.

    Turn to cycle analysis for your timing needs and you sure will at least have expanded your prospect. But do not stop there, keep expanding, keep shocking your mind and body. Each plateau you overcome will bring you closer to becoming a more confident trader. It will also make you a better conversationalist over coffee or wine.

    By TradingMentor | Posted in Articles | Tagged | Comments (0)