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Lessons from the Pros

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Foolsville, Part 2

Tue, Oct 6 2009, 10:16 GMT
by Sam Seiden

Online Trading Academy

Typically, I write these articles from the comforts of my home, when things are nice and quiet, and after plenty of thought. Not this time... As I am writing, I am on an airplane cruising at 34,000 feet on my way home from Foolsville. This trip was such an experience, I could not wait to start writing and sharing it with you. I was there two days and really made the most of my time. In the end, I finally figured out something I have been wondering about for a long time. I will go over that in a bit.

Day 1

I arrived and immediately went to pick up my rental car. I had a meeting with members of the finance committee. Being the Director of Online Education at Online Trading Academy, I was able to land this high-level meeting with them. When I got to the car rental counter, I asked what types of cars were available. They told me they only had blue, four-door sedans. "You must be very busy," I said to the desk clerk. He replied, "No, those are the only cars we rent." When I asked why, he replied, "That's the car everyone drives;" I knew I was in Foolsville... I thought it was a bit strange that all the rental cars were exactly the same until I drove out of the parking lot and onto the main road. The more I drove, the more I realized that all the cars on the road were blue, four-door sedans - amazing!

I arrived at the Foolsville Finance Committee Center, all ready for my big meeting with the smartest Fools in town. The agenda for me was to gather information on their trading and investing strategy and let them know what I thought of it. One of the gentlemen informed me that the only thing that would interrupt the meeting was if a buy or sell signal came up in the markets. Other than that, I had their full attention.
Before we went over strategy, they informed me that the entire town pools their funds when it comes to trading. I asked them what the purpose of this was and they replied, "Since everyone is taught to buy and sell at the same time and we all have the same philosophy, we decided it made sense to combine all our funds and make one big trade at a time." The Foolsville trading strategy is a very rule-based scoring system; let me explain. They have seven pieces of criteria that may or may not be present for a trading opportunity. Each one of the seven criteria is worth ten points. The higher the score, the better the trading opportunity according to their strategy. So, a seventy pointer was the best trading opportunity they could have. I will explain using an example of a Foolsville Sell Setup, where the action is betting on a down side move in price, selling short.

Foolsville Sell Setup

After explaining the sell setup to me, they went on to explain the buy setup which was just the opposite of the sell setup. While this was certainly not a strategy I would ever consider using, I did connect with it for some reason, though at the time, I could not figure out why. I had some questions... Why would you Fools buy after a period of buying? "Because others are buying, the candles are green, there is an uptrend in price, good news, and good earnings," they said. I asked them where price was when an opportunity scored out to be 70, a really high odds trading opportunity, according to the Foolsville trading strategy. They replied "very high." Next, I hit them with a bombshell question which was this: "If all your criteria are true, your buying opportunity is a 70, price is high, and you Fools buy, who buys from you?" As I looked across the table at these nice and friendly Fools, they were all speechless with this question. It was as if they thought the world was flat and someone just walked in the room with proof that it was actually round. They began to look around the room at each other, searching for an answer. As I sat during this period of confused and uncomfortable silence, I thought to myself - "These poor Fools have never considered the basic principles of how you profit buying and selling anything!" When you buy, others have to buy after you at higher prices or there is no way to profit. Finally, one committee member said, "We don't really care Sam as long as we are entering the market allllllllllllllllllllllllllllllll together." At that point, the meeting was coming to an end and it was time for me to give them my opinion of the Foolsville strategy. As we stood up, I thanked them for a most informative meeting. My final words to them leaving the meeting were, "Fantastic strategy, keep up the great work."

Day 2

I really didn't sleep well, tossing and turning much of the night. This is odd because I always fall asleep in a matter of minutes and sleep very well. I could not figure out why but I had this restless energy ever since my meeting with the finance Fools. Anyway, it was my last day. The plan was for me to lead an Online Trading Academy Extended Learning Track (XLT) session from an office near the Fools' finance office from the day before. It was a day trading session in the XLT - Stock Mastery class. As I began to do my pre-market analysis, one of the finance Fools poked his head in the office and said "Good morning, Sam. I am monitoring our accounts in the office next door, let me know if you need anything." I then put my headset on and began walking our XLT members through our market analysis, setting up trading opportunities for the morning. That morning, there was some pre-market news about a trade dispute between China and the U.S. and this was causing some pre-market selling in the S&P and NASDAQ markets.

Pre-market News – September 11, 2009

This morning's stock futures are pointing to a lower opening on Wall Street amid reports of an escalating trade dispute between China and the US. - Source: Zachs

I took a picture of the XLT that morning to share with you here. As I was going over the markets with my students, I pointed out that the NASDAQ (QQQQ) had a clear demand (support) level a bit below the prior day's close, the chart from my trading workspace seen below. If price reached this demand level once the market opened, we would be interested buyers. This is our low risk, high reward, and high probability buying opportunity for a day trade.

As the market opened, price moved around quite a bit. Eventually, it began to decline, moving closer and closer to our pre-determined demand level which is where we want to buy. All of a sudden, it reached our demand level and just as it did, I heard a scream from the room next door. "Sell Short," said the Fool. "Sell Short quickly," he yelled again, "The market is going lower!" This is when it hit me; I instantly figured out what was festering in my mind this whole trip. After so many years of wondering who was on the other side of my trades, I had finally figured it out - it was the Fools! They were selling when we were buying, right at demand. This question has been in my head for more than 10 years. Who exactly would buy after a period of buying and right into an objective supply level? Who exactly would sell after a decline in price and right into an objective demand level like the XLT NASDAQ trade above? It was my new friends, the Fools from Foolsville. Finally, after all these years, all my trading questions had been answered. Price hit our demand level and moved significantly higher. Our trade worked out well and the Fools lost money quickly. As I mentioned in Foolsville, Part One, these foolish trades are how and why money is transferred out of Foolsville and into everyone else's accounts.

Before leaving, I had a chance to sit down with the Mayor of this town filled with friendly Fools. He was an ancestor of a great line of Fools.
His name was Mayor Franklin Fool IIII. He was a proud man who loved his town and the people he served. We spoke for a bit. I thanked him for having me as a guest from Online Trading Academy for a couple days. As we were wrapping up our chat, I asked him what the key component of his leadership was? I wanted to know more about the belief system that was leading this town of Fools. After all, he had been the Mayor for a long, long time. He put his arm around me and pointed to a plaque on the wall which had written on it, "The Foolsville Belief System." It read: "Make decisions based upon the actions of others, after they make it." After reading this message, all I could think about was getting out of this place as fast as I could. After all these years, I had finally found the people who are on the other side of our trades. The people that I write about, talk about, lecture about in XLT. I actually shook their leader's hand! This was a huge experience for me.

I arrived at the Foolsville Airport and as I entered the check-in area, I noticed there were two check-in counters. One had a huge line, and the other had no line at all. I asked someone in the big line why everyone was in this long line and no one was going to the counter where the attendant was free? He replied, "Because everyone is in this line, silly." "Yikes," I thought, "Get me out of here!"

If you happen to live in Foolsville and want to change, it's not going to be easy, but here is what you need to do to get started. You have to start with changing your thoughts. You have to think like you have never thought before. Then you will act like you have never acted before. Don't think in conventional terms, think in reality based terms.

Instead of reading all the trading books and learning to buy and sell in markets when everyone else buys and sells (no edge, that's Foolsville)...

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 of how markets really work and how you profit from buying and selling anything; this is what most people never see even though it is always right in front of their faces. It is fascinating how people tend to focus on the past and think about the future, yet ignore the simple realities of the present. In the highly competitive world of trading, what side are you on? Do you trade like a Fool or do you trade with a Fool?

Published on  Tue, Oct 6 2009, 11:24 GMT