As promised, for my first article of 2016 we are kicking things off with a simple yet powerful review of the Online Trading Academy Core Strategy. Now sure, I know I have written about this many times before but I have also learned to appreciate the power of reinforcement and repetition in all walks of life; and when it comes to market speculation enforcing simplicity and consistency is a major key to ongoing success. I would like to take this opportunity to look into the logic behind why we teach our students to trade this way and the questions we should take into consideration every time we look to take a trade in the currency markets.
As a trader, you must learn early on that there is a huge difference between the way the largest banks and institutions approach the market and how the retail public do so. Most of the general public struggle to make money trading and investing, yet the banks are always on the right side of profitability. Of course, they do have more resources and tools at their disposal but this is not the deciding reason why they make money trading. Rather, it is because they see the markets for what they really are. They see them as a way to make money, and making money is their business. How does any business make money you ask? Well, simply from buying a product or providing a service at wholesale cost and then selling the product or service at a retail price. Buy low and sell high is the name of the game. You can see them attempting to do this over and over again if you know what to look for on a price chart, irrespective of what the news or fundamentals may be saying at the time. You too can learn to see the footprints of their activities when you learn to understand the power of supply and demand on price.
The simple law of price change dictates that when demand exceeds supply, then prices must rise. On the flip side of this, when supply exceeds demand, then prices will fall. There is no getting away from this simple yet powerful dynamic. Let’s take a look at a recent chart we were studying in the ongoing XLT program:
As you can see in this chart of the GBPCAD, there was a significant high put in with a significant drop in price from the area. The question to ask is, “why did this happen?” Most market speculators would give you a variety of news based and fundamental reasons why this move happened, but this is nothing more than guess work. In reality it is impossible to know every time why prices moved based on news or fundamentals, and does it actually matter anyway? You could know why it dropped but what are you going to do with that information? You can no longer make money on this trade because the move has already happened after all. Why not take a look beneath the surface of the candles themselves?
What we do know is that it was institutions who caused that drop in the first place. How can I make that statement? Well, do you know any retails traders with deep enough pockets to trade that size and cause that kind of move? We also know that these guys were attempting to sell a ton of British Pounds and there were nowhere near enough people willing to buy them. If there were an equal amount of buyers and sellers, then prices wouldn’t have moved. It is because of the unfilled sell orders and lack or buy orders that created a glut of supply without enough demand to satisfy it, hence prices fell sharply.
That is all we need to know. I do not know the reasons why the banks were selling here and I never will. What I care about is where they are buying and selling. This tells me where I should be buying and selling as well. Knowing there are unfilled orders in this region leads me to want to sell here if prices return to the level. If they were willing to sell there once before, then they could well want to sell there again in the future if prices return. We have our level of supply and now we trade it:
The results of the trade provided us with a quality set and forget setup which also had a decent risk to reward profile as well. Sure, there are more trades than just this one but that also depends on your personal style of trading too. Some people want to be very hands on, others a little more hands off. Just remember that more trades do not steadily equate to more profitability. In 2 weeks join me for a continuation of this discussion and how to filter out the best from the rest.