Trading Basics: Great Question

I have been writing articles each week for almost a decade now. My goal is to slowly help the misinformed traders and investors gain an edge that levels the playing field between the novice hard working public and the “Wall Street” professional. As I have said many times, money is simply transferred from the misinformed novice who does not understand the reality of how money and markets work to those with proper “edge building” education on the reality of how money and markets work. This is nothing new, this transfer of wealth from those who don’t know to those who do has been going on since before the Babylonians. While they were the ones credited with the first use of paper notes and receipts, forms of currency had existed for quite some time already; and if currency existed it was changing hands. My hope is to help readers gain enough of an edge to become a recipient of the transfer, not a blind donor. Today’s piece is meant to cover some trading basics, answering questions from you with the goal of helping you attain more of a reality based trading edge.

Question:

For someone who is REALLY just beginning, is there a good book you would recommend for orienting oneself with the terminology and basics?  (I read what you wrote about not reading too many books).

Answer:

It depends as there are two buckets here when speaking about learning trading basics. One is “learning the mechanics of trading and investing.” The other is “learning how to be a profitable market speculator.”  The first is information that I would recommend obtaining from the internet or a book. This includes trading platform tutorials, information from an exchange on the specifications on the products you will be trading, and much more. The second bucket, learning how to become a profitable market speculator, is a topic I would be very careful with. To start with, find your old “economics 101” book. Dive into the basic concepts of supply and demand. Make sure you thoroughly understand this simple yet important dynamic. Your next logical quest will be to quantify supply and demand on a price chart. I have thoroughly explained this many times in prior articles which I encourage you to read and reread if you need to. The focus here is taking the basic laws of how you profit when buying and selling anything and transferring this onto a price chart. If you think about it, most who read this piece already know how to be a smart buyer and seller in our everyday life, at the grocery store, when we buy a car, and elsewhere. The goal of learning how to become a consistently profitable market speculator needs to begin here, not with faulty pattern recognition and high risk indicator based conventional technical analysis, which is exactly what you will find in books and on the internet, so caution. Simply learn to see the difference between retail and wholesale prices on a price chart. For this information, you can go back and read about this in my prior articles for free. If you want more of a hands on learning experience, you can always consider joining the Academy. Next, find and wipe the dust off your “psychology 101” book. Proper trading and investing is a mental game. Those who master these trading basics: the concept of supply and demand, how to find supply and demand on a price chart and mental and emotional discipline, have everything they need to be successful.

Question:

Regarding identifying the supply and demand imbalances I noted from your articles that a)  It cannot be in the middle of a move and b) the more times it hits the imbalance the less reliable it becomes because the supply has not yet been absorbed. Are there additional criteria for identifying the supply and demand imbalances?

Answer:

Yes. This is a topic we take very deep in the Extended Learning Track (XLT), our online live trading rooms, as there are a few key points in identifying key price levels where supply and demand is out of balance, in a big way. The key is knowing our proprietary Odds Enhancers. For example, one thing you should consider in your search for supply and demand imbalances when looking at a chart is a focus on “how price leaves a price level”. Consider this… The more out of balance supply and demand is at a given price level, the stronger price will move away from that level. The less out of balance supply and demand is at a given price level, the more gradual price will tend to move away from that level. So, when looking at a chart, you may want to start your search for quality supply and demand imbalances with looking for periods of momentum and then focusing on the origin of that momentum as that is likely where the supply and demand imbalance is, if it meets our specific criteria.

Question:

I have a question regarding daily supply/demand zones concerning trend.  I am using a 50 period sma on the daily chart to tell me what side of the market to be on in the 4hour and 60min charts.  In your trading, do you trade all supply/demand levels on the daily chart or are you using another moving avg to gauge trend for the daily charts.  It seems that if the R:R is good then I could still buy in a down trend on the dailies.  I use set and forget entry orders so perhaps I should bypass price moving out of a zone on the dailies.

Answer:

Using a moving average to quantify trend is ok but be careful; I would use this as a very secondary decision making tool. As a primary consideration with trend, focus on where price is with regard to larger time frame fresh demand and supply levels as this is where every uptrend and downtrend begins and ends. That said, I don’t take every supply and demand level on a chart as a trading opportunity. I only focus on the opportunities that offer fresh levels and large profit zones, the ones that meet the minimum requirements in my trading plan. When I find it, trend is a distant consideration.

Thank you for the email feedback year after year. If you have ideas for articles that you would think would help you, whether trading basics or more advanced, please send me an email and let me know. Of course, the purpose will never change, which is to help you obtain an edge in the market place with the goal of living a happy and healthy life today, tomorrow, and during retirement.

Hope this was helpful, have a great day.

Learn to Trade Now