The Mad Hatter and Market Illusions

Remember the first time you saw the Alice and Wonderland movie or read the book when you were just a kid? Did you even understand the story? Do you completely get it now? The first couple times you hear the story, you’re constantly trying to figure out what is real and what is not. Trading is not all that different. Every market on the planet is made up of willing buyers and sellers, period. When demand exceeds supply, price goes up. When supply exceeds demand, price declines. This is the simple ongoing equation that has always been responsible for price movement in any and all markets. Price charts clearly show us this ongoing supply/demand equation in real time yet many people never see this simple picture on a chart because of all the illusion creators that distort a simple reality that is always right in front of you. Like the story, it is important that you pay attention to the reality of what is happening around you. Being aware of the simple things in life that most people ignore is one of the most important components to desirable outcomes and achievements.

If you think what I am suggesting is a waste of time and just another article on trading psychology, think again. Think of one or two of the biggest mistakes you have made in your life. It could be in trading, a failed relationship or marriage, a bad choice that caused you your job, losing part of your nest egg to a bad investment, and so on. I bet the ultimate reason you made this mistake is because you were not paying attention to a reality that was right in front of your eyes. Do you look back on that mistake these days and say, “How could I have done that?” “How did I not see that coming?” It all seems so obvious after the fact. It all comes down to simply paying attention to what is happening all around you, being aware.

I talk about this in the Extended Learning Track (XLT: our live trading rooms). We focus more than anything else on paying attention to the reality of what the PRICE ACTION is telling us and not thinking too deep but more importantly, paying close attention to the simple supply and demand information the market is always conveying to us. What is important for you to understand is that this important market information is only given to those who listen to it which means knowing what to listen for.

Live XLT Trading Session, June 5th. 2014: The Setup

This picture is a screen shot of a live XLT trading session from last week. The chart/trade being discussed was a buying opportunity in the S&P Futures. Notice the demand zone price had declined into. This area was demand because all of a sudden, price rallied from that level with a big green candle, as you can see above. What the market was telling those who were willing to listen at that time was simply that demand greatly exceeded supply at the origin of that rally in price which is why we drew two lines around the cluster of trading, at that origin to the left. This is where banks/institutions were buying. In the XLT, we call this a “Demand Zone (DZ).” This set up is a quality trading opportunity for those who were paying attention.

Once price declined back to that level and after we planned out the low risk, high reward, and high probability buying opportunity, it was time to buy. What also helps makes this a high probability buying opportunity is understanding who is on the other side of your trade, the seller in this case. The seller who sold when price revisited our demand zone was making three key mistakes. First, they sold after a decline in price. Second, they sold at a price level where the chart already told us demand exceeded supply. Third, they are taking all this novice action in the context of a larger time frame uptrend. These three actions tell us that these are novice traders who take action when the odds are stacked against them, they are selling when the market is telling them they should be buying. Was Alice supposed to eat the green or red candy that made her big or small? Hhmm… By taking the other side of that low odds trade, we are taking the high odds trade. The S&P buy went on for strong gains for our XLT members who took the trade. Not every trade works out; this is why we first and foremost focus on objectively assessing risk, reward, and probability. However, when we follow our rules, the winning percentage should be high.

Live XLT Trading Session, June 5th. 2014: The Result

Being able to consistently identify market turns and market moves in advance, with a very high degree of accuracy is the key to low risk and high reward market speculation. This begins with being able to objectively quantify demand and supply in any market and time frame. To get to that point, you must have to be able to do something most people can’t and that is paying attention to the right information.

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 that advice, not from trading… Pay attention to what is happening in front of your eyes. Pay attention to what is happening around you. The Mad Hatter created plenty of illusion for Alice but she finally figured things out and so can you. It all depends on your point of view. Make sure that point of view is only on real information, void of illusion. Have you any idea why a Raven is like a writing desk? Don’t answer that or even think about it, it doesn’t matter. However, if you allow him, he will keep asking.

Oh, and one last thing. If someone tells you that you can’t do this (or anything in life), they are telling you that because they can’t do it. Success is a choice. If you want something in life, just go make it happen.

Hope this is helpful, have a great day.

Learn to Trade Now