Trends: A Risk Reward Trap Depending on Your Point of View

Uptrends, downtrends, sideways trend... Conventional Technical Analysis reveals the trend AFTER the trend is well underway. This is high-risk, low-reward, and low probability trading and investing. I don't want to offend any conventional technical analysis traders. My goal here is to offer you another edge-building tool.

The word "trend" has many different interpretations and definitions, usually quite subjective. All conventional definitions of trend tell you a trend is underway only after the fact. The first and foremost goal in low-risk / high-reward trading and investing is to be a part of the trend that everyone identifies with. But, we want to be a part of that trend as it is just beginning. Where do you think that is? If you said at a demand or supply level, you're starting to think like a successful market speculator.

Think about it... The average person looks at a multi-minute, day, or week rally in price and says, "This market is in an uptrend, I should buy." What's really going on is this: after a significant rally in price from a demand level, people receive a mental/emotional based invitation that has them buy into what they perceive as an uptrend. This also means many people have already bought into this market.

Wouldn't it be nice if you could be a part of the invitation that goes out to market speculators around the world that trade and invest and receive this novice invitation to buy? If you are a part of that invitation to buy, that means you have already bought and everyone that buys after you is paying you! The only way to do this is to quantify supply and demand in real time and always know where you are on the supply/demand curve. When you do this, you are quantifying trends not just in real time but before the trend even begins and this means the mass trading and investing crowd pays you! This is your reward for entering the market when the risk is low, reward is high, and the odds are stacked in your favor.

In this illustration, there are many demand and supply levels. Each white candle you see is the confirmation candle of either a demand level or a supply level. A supply level tells you objectively that there is more supply than demand at current price in the market which means that the trend of price is down (average prices falling). Supply levels will keep forming until price reaches a level where demand exceeds supply. The only price pattern that tells you this is a demand level. Therefore, on the close of the white candle in the first demand level, we can say objectively that demand exceeds supply. This means that price in the market in question has reached a price level where demand exceeds supply. You can't have a significant demand level in a downtrend and you can't have a significant supply level in an uptrend. This is real time trend analysis which ensures you will be buying before others buy and ensures you will be selling before others sell, which is key when attempting to consistently profit in any market.

In this example, the supply levels on the way down tell us objectively that prices are at levels where supply is greater than demand which means we would certainly not be an interested buyer as the trend of average price is down, supply exceeds demand. It is not until the first demand level forms that we can say price has reached a level where objectively, demand exceeds supply, the downtrend is over, and based on the profit margin, an uptrend is likely right around the corner. To keep it simple, think of it in simple terms. The rally in price out of the first demand level can only happen because demand exceeds supply at that price level, in the base. Therefore, when price declines to this demand level, we know what the next trend is likely to be, way before a significant rally in price which is what everyone else looks for, before buying into a conventional uptrend.

Some people, including many so-called professionals you see on TV use moving averages to identify what they perceive to be the current trend of prices. Had you used that novice approach in the example here, you would have certainly ignored the low-risk high-reward shorting opportunity at supply when it was offered to you. The novice market player looks at the slope of the moving average and comes to a conclusion. If the slope is up, they conclude that an uptrend is underway and would never consider selling until the moving average begins to slope down.

Notice here that the 50-period moving average (black line) is sloping up as price rallies right up into supply for a low-risk / high-reward short entry. The 200-period moving average is also included here, shown as the red line on the chart. It is also sloping up, suggesting this market is in a healthy uptrend when price reaches the supply level. Anyone watching the so-called market experts on TV would certainly be warned not to sell as the mighty 200-period moving average is sloping up and that price is above it. While that is novice and wrong, it's great for us as these same people will likely sell after price has crossed back below the 200-period moving average, which is way after we sell at the supply level (thus paying you, the astute market player!). In other words, those waiting for novice confirmation of prices above or below the 200-period moving average to buy or sell will be paying us and rewarding us for our low-risk / high-reward buy and sell entries.

The demand and supply levels shown in this article are not necessarily levels to enter positions at. In the Extended Learning Track (XLT) program at Online Trading Academy, we have a very strict set of rules that quantify acceptable supply and demand levels meant for "entry". The purpose of this article is to open your eyes to a very simple reality of trends. Consistently profitable market speculators buy and sell at demand and supply levels, well before trends are obvious based on conventional technical analysis rules on trends. The novice market speculator buys and sells after conventional uptrends and downtrends are well underway which provides a healthy low risk income for the consistently profitable trader. If you're sitting there thinking that all this is counter trend and crazy information, think of how you properly buy and sell things in every other part of your life. Do you buy things after prices rally? Do you sell things after prices decline? Of course not... You would be broke if you did.