Lessons from the Pros

Pay Attention

I say those words often lately to Online Trading Academy students. It’s not that I am asking them to pay attention to me, though I am happy when they do. What I am suggesting is that they (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 cost 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.

We talk about this in the Extended Learning Track (XLT) program. We focus more than anything else on paying attention to the reality of what the PRICE ACTION is telling us. 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.

Live XLT Futures Session, June 16, 2009

Figure 1

This picture is a screen shot of the XLT on June 16th, very early, hours before the US stock market opened. We were looking at the S&P E-mini Futures and discussing this market during the session. In the first part of the trading and analysis session, we go through the markets we trade and show people how we find and set up low risk, high reward, and high probability trading opportunities. The two lines on the chart are drawn around a cluster of trading. During that period of trading, price was not moving much, supply and demand appeared to be in balance. All of a sudden, price collapsed from that level with a big red candle, as you can see above. What the market was telling those who were willing to listen at that time was simply that supply greatly exceeded demand at the origin of that decline in price which is why we drew two lines around the cluster of trading at that origin. This is where the sellers were. In the XLT, we call this a "supply zone" or "sell zone." This set up a quality trading opportunity in the near future, for those who were paying attention.

Figure 2

Once the market got going that day and well after we planned out the low risk, high reward, and high probability shorting opportunity in the XLT, price eventually rallied up to that level where we drew our lines. This is where we look to sell short. What makes this a high probability shorting opportunity is best understood when you focus on who is on the other side of your trade, the buyer in this case. The buyers who bought when price revisited our supply zone were making two key mistakes. First, they bought after a rally in price and second, they bought at a price level where supply exceeded demand. These two actions tell us that these are novice traders who take action when the odds are stacked against them. By taking the other side of that low odds trade, we are taking the high odds trade. The S&P short went on for big gains for our XLT Futures members who took the trade. Not every trade works out, this is why we first and foremost focus on objectively assessing risk and then reward. Below is part of an email from one of our hard working XLT members who took this trade in his account:

Email from Zak, an XLT Futures Student

ES 923.00 Short s/o at 923.75 -0.75 points (it looked like it was going to hit my stop at 924) closed the trade manually looking for a better price,

The market was choppy and I could have gleaned a few points on these 2 trades but was expecting a drop and ended by stopping out.

I didn’t get a better price so I re-entered. Prices after opening the next trade ranged from 923- 919 to 924.25 then down to the close at 909.75 WOW!

ES 923.00 Short- out at 909.75… +13.25 points

Zak

Being able to consistently identify turning points in markets 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. To get to that point, you must be able to do something most people can’t and that is pay attention.

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.

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

Have a great day.

- Sam Seiden sseiden@tradingacademy.com