Featured Article

Market Timing in XLT

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Sam Seiden
Online Trading Academy, Chief Education, Products, and Services Officer

I often talk and write about “Market Timing” but why is it so important? The main reason you would want to know how to time the markets turning points in advance is to attain the lowest risk, highest reward, and highest probability entry into a position in the market. Think about it, by entering as close to the turn in price as possible, you enjoy three key factors:

1) Low Risk: Entering at or close to the turn in price means you are entering a position in the market very close to your protective stop. This allows for maximum position size while not risking more than you are willing to lose. The further you enter the market away from the turn in price, the more you will have to reduce position size to keep risk in line.

2) High Reward (profit margin): Similar to number one above, the closer your entry is to the turn in price, the greater your profit margin. The further you enter into the market from the turn in price, the more you are reducing your profit.

3) High Probability: Proper Market Timing means knowing where the real buyers and sellers are in a market. When you are buying where the major buy orders are in a market, that means you are buying from someone who is selling where the major buy orders are in the market and that is a very novice mistake. When you trade with a novice, the odds are stacked in your favor.

So how do we time the markets turning points in advance? It all begins and ends with understanding how to properly quantify real supply and demand in any and all markets. Once you can do that, you are able to identify where supply and demand is most out of balance and this is where price turns. Once price changes direction, where will it move to? Price moves to and from the significant buy (demand) and sell (supply) orders in a market. So, again, once you know how to quantify and identify real supply and demand in a market, you can time the markets turning points in advance, with a high degree of accuracy. To better understand how to do this, let’s take a look at a recent trading opportunity that was identified on December 5th in our online graduate program, the Extended Learning Track (XLT). The XLT is a two hour live trading session with our students three to four times a week. During the session shown below, our lead XLT trading instructor Sam Evans identified an area of Supply noted with the two purple lines on the chart. These two lines create a “sell zone”, allowing us to apply our simple rules for entering a position. This was an area of supply for a few reasons. First, notice the strong decline in price from the origin of that decline (the supply level). Also, notice that price declines a significant distance before beginning to rally back to the supply level. These two factors tell us that supply greatly exceeds demand at this level. The fact that price declines a significant distance from that level before returning back to the level clearly shows us what our initial profit margin (profit zone) is. These are two of many “Odds Enhancers” we teach in our graduate program. They help us quantify the real supply and demand in a market, which is the key to knowing where the significant buy and sell orders are in a market. The plan with this trade was to sell short if and when price rallied back to that area of supply. This trade was high probability but how do we know that? Well, being very sure that there is significant supply at that level, this tells us that we will be selling to a buyer who is buying at a price level where supply exceeds demand. Buying after a rally in price and at a price level where supply exceeds demand is the most novice move a trader can take. They are buying with the odds stacked against them which means they are stacked in the seller’s favor like our XLT members in this example.

Figure 1

As you can see below, what happens next is price rallies up to our pre-determined supply level where XLT members sell to buyers who are paying extreme “retail” prices. They are buying after that big rally in price and into that price level where supply exceeds demand.

Figure 2

Notice that there is a small time frame uptrend that brings price up to our supply level and that price is above key moving averages when we sell short. Every trading book would say we are breaking the most important rules in trading by selling short under those circumstances. Well, how many people do you know who read trading books that make a consistent low risk living year after year? I would be surprised if you knew one so don’t believe everything you read. The trading book version is conventional thinking which has you buying high and selling low, so be careful. Don’t take my word for it however, read a trading book and ask yourself if how that book is teaching you to buy and sell in markets is the same as how you make money buying and selling anything. If there is any difference, good luck trying to profit from the information. Like anything in life, there is the book version way of learning to do something and the real world way. All we are doing at Online Trading Academy is simply sharing the real world way with you. We are not trying to reinvent the wheel. How you make money buying and selling anything in life is exactly how you make money buying and selling in markets.

Figure 3

Shortly after selling short in the XLT, price declined and met the profit targets shown on the chart. This is market timing and while it does not guarantee that each trade will be a profitable trade, it does offer the lowest risk entry, highest reward with that entry, and highest probability of success. How well your winning percentage is with the strategy depends on your ability to identify key supply and demand levels.

I sometimes hear people say, “I am only trying to catch the middle of the move.” They are trend followers and say that as if doing that is somehow easier. If price is already moving higher, for example, and you want to buy, where do you enter, where is your protective stop, and so on… I would argue that catching the middle of a move and making a consistent low risk living is harder than proper market timing. I am not suggesting the trend is not important. I just want to be in the market well before the trend is underway. Another thing I hear people say so often is this: “I wish I knew where the institutions were buying and selling.” Every time I hear this I say: “You can see where they are buying and selling, if you know what to look for.” It all comes down to supply and demand, just like buying and selling anything else in life.

Have a great day.

- Sam Seiden sseiden@tradingacademy.com

Disclaimer
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. Reprints allowed for private reading only, for all else, please obtain permission.