I have been involved with the markets for almost 20 years. I started on the institution side of the business, but have spent plenty of time trading and building educational content for retail traders and investors. While I truly feel I am speaking the truth when it comes to the supply and demand strategy, I am and likely will always be very outnumbered when it comes to popular belief regarding strategies, and that is perfectly fine with me. It really comes down to two schools of thought. Should your trading strategy focus on market timing which means identifying market turning points in advance and then taking action at those turning points like I am always suggesting? Or, should you focus on conventional trend trading and try and capture part of the meat of the move in the middle which is popular belief.
When most people hear my ideas for the first time, the initial words I often hear are: “Seems high risk,” “Is this contrarian?” “Picking tops and bottoms can’t be done,” and so on… Most people focus on “trend” trading and staying away of market turns. I understand this because that is what the trading books tell people to do. It’s also what Wall Street professionals tell the public is best for them. Two problems with that though… First, people who read trading books and employ conventional technical analysis and such tend not to be very profitable. Second, what Wall Street suggests is typically better for them, not for you. Still though, the vast majority want to focus on the middle, the trend, and not the turning points and I get that.
Not long ago, a friend sent me an email with a quote from someone who is regarded as one of the best traders in our life time, Paul Tudor Jones. If you don’t know him, look him up. The email said “Sam, your going to love this quote.” My friend was correct. When I read this quote I could not believe it. It was like the words in the quote were coming right out of my mouth only they were not from me. They were from someone who is worth over $3,000,000,000.00 (yes, that’s 3 billion according to reports). The quote said exactly this:
“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” - Paul Tudor Jones (source: Business Insider)
I could not agree more with Mr. Jones. Being in the trend is great but I try to get in at the turn, before the trend is under way. I honestly can’t figure out how you would even enter into a trend after it is well underway, while price is moving higher and keep the risk low and reward high. To me, conventional trend analysis and conventional trend trading is VERY high risk and low reward trading. Where do you enter; how in the world do you properly manage risk and reward? Let me share a recent example with you from a Lesson’s From The Pro’s article I wrote July 30th. There was a rally underway in Gold. However, above current price was a classic “supply” level as I noted in that article. Also, the chart showed us that significant demand was quite a bit lower. To take advantage of this potential downturn in Gold, you could have done one of two things. First, you can simply sell when price reaches the supply zone (retail prices). Or, you can follow conventional trend analysis and wait for price to turn lower at supply and form a series of lower highs and lower lows like conventional trend analysis and the trading books suggest.
July 30th Lessons From Pros Chart: Gold – Weekly Chart
Gold September: Weekly Chart – Over 100 Point Decline
Gold: Daily Chart – With Conventional Trend Analysis
As you can see from the second chart, once price reached our predetermined supply zone, it fell over 100 points and continues to fall as of the time of this article. The third chart (just above) shows the decline only on the daily chart. If we apply conventional trend analysis, we are supposed to identify two lower highs and two lower lows (circled); that tells the conventional trend trader there is a confirmed down trend. Then, the strategy says to sell on a break of the low (blue line).
Believe me, I am not trying to twist your arm or beat up trading books. As someone involved in the very unregulated world of financial education, I feel it’s my responsibility to share these ideas and different views with you. Do I want to be in the trend and get paid from the trend? Of course, that’s how you make money trading. The difference is that I, like Mr. Jones want to be in the trend before others when the risk is low and reward is high. The question is never trend or no trend… The difference is how you enter the trend. The entire trading and investing strategy at Online Trading Academy revolves around profiting from a trend. Where our strategy is unique is how we enter the trend. The goal is to enter when the risk is lowest, reward highest, and before the masses enter. This is the whole reason for market timing, supply and demand analysis.
Each entry as you see in the articles is getting in at the turn, just like Mr. Jones is suggesting. The reason why my ideas are the opposite of the masses is because I didn’t learn to trade like the masses. I learned to trade from the institution side of the business, on a trading floor, dealing with some of the biggest order flow in the market. From that experience, there is only one way to do it. You buy where there is significant demand and sell where there is significant supply. Again, just like Mr. Jones is suggesting. The masses learn to trade from trading books, seminars, the internet, and so on. Also, keep in mind that I am not just talking about short term trading for income. I am equally talking about long term trading for wealth.
Hope this was helpful, have a great day.
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.