Lessons from the Pros

The Tale of Two Emotions

Think about it…

You walk into your favorite store to buy your favorite item. Maybe it’s ice cream, new shoes, your dream car, the latest gadget at the Apple store, your favorite drink at Starbucks, a perfectly ripe avocado or watermelon, whatever… As soon as you enter the store, to your surprise, there is a sign that read: “Today only, your favorite item is on sale for half price and there are only 3 left, and they are in the back of the store!” How would you feel after reading that? What would you do next? You are probably going to do two things, smile and run! How many are you going to buy when you get to the back of the store? All three, of course, unless it’s the dream car but at half price, who knows… After you leave the store, the first thing you’re likely to do is call everyone you know and tell them about the deal you just got because you’re still so excited.

Now think about this…

You hear about a hot stock from your smart friend who dabbles in the markets. You then call your broker and ask about the stock because you want to buy it. He mentions that the stock recently had some bad news and follows that up by telling you that the stock price has been declining for a few days and is trending lower. You start to get a bad feeling about buying this stock and then, the broker pulls up a chart and shows you a picture of what he just described. What you see is actually worse because the decline in price is getting steeper, showing big ugly red candles that are getting bigger each day. To the left, you see that price is nearing a prior low where it rallied from before, but he tells you that was in the past; the news is bad and getting worse. He then mentions that they are reporting earnings the next day. You tell him thanks for the information, but you are not interested in buying now because of the reasons he just mentioned. The next day, the company reports earnings that miss expectations and the stock price falls more. Do you buy the stock? Or, do you focus on the bad earnings and let that confirm your decision to not buy the stock? The vast majority of people will do the latter of the two and not buy the stock. Furthermore, they think those who would buy the stock are crazy.

Finally, understand this…

Think of what the charts would look like with both of the examples above, your favorite item on sale and the stock falling on bad news. Wouldn’t the charts look EXACTLY the same? Of course, they would. However, because of how people are taught to trade and invest, they take the opposite action in the two examples. When prices are down for your favorite item, you are very excited to buy it. However, when prices are down in a market because of bad news or whatever, you are trained to not buy, but worse yet, sell.

At Online Trading Academy, what makes us different and our approach to trading and investing unique is that we realize that there is absolutely no difference between how you properly buy and sell things in every other part of your life and how you properly buy and sell in the trading and investing markets. When you approach the markets from this realistic perspective, market timing is not that difficult and low risk, high reward, and high probability opportunities become achievable and consistent. Ironically, this simple approach is 100% different from conventional technical and fundamental analysis. It’s really an opposite approach from those traditional ways of thinking markets and trading, yet these two forms of analysis are what most people use because that’s what all the books write about and schools teach. This is the reason most traders fail and most investors never achieve their financial goals.

Figure 1

Let’s take a look at a recent Pro Picks trade to see this reality in action. First, Pro Picks is our Stock, Futures, and Forex picking service where we tell you where to enter, place your stop, and profit target/s for day, swing and position trades. These picks are all delivered in a very educational way as the goal is to teach you how to do this on your own. This service is for graduates only, but I can share a trade with you here to help you understand trading better and help build your skill set. The pick above is a stock CTSH (Cognizant). Price was declining fast with big scary red candles. However, price was nearing what we would call a “fresh demand level.” Given the distance from the demand level below to the supply level above, this told us we had a low risk, high reward (profit margin) and high probability buying opportunity. You now have two choices… You can focus on the bad news, ugly red candles, and downtrend and that will lead you to either do nothing or sell. Or, you can focus on the reality of how you make money buying and selling anything and realize that you just walked into your favorite store and your favorite item is on sale that day only, but this time, it’s a 70% off sale! I bet you would run very fast and buy as much as you could. That’s how a consistently profitable trader thinks which happens to be exactly how a smart buyer of anything thinks.

Figure 2

CTSH reaches the demand level, turns higher and rallies to reach the profit target at supply for a Pro Pick gain of $2,783.00. Another way to say this: Pro Picks bought at “wholesale” prices (demand) from people who are trained and conditioned to sell at wholesale prices. Then, Pro Picks sold at “retail” (supply) prices to people who are trained and conditioned to buy at retail prices.

Recently, I received an email from one of our readers that supports the information in this piece. It is a message we receive often…

Hi Sam,

Read your article, Motion into Mass, Revisited, in particular, I appreciated your simplified technical analysis into the idea of buying at wholesale and selling at retail. I’m currently a finance student and as much as I love what I study, we still manage to turn something very simple into something very complicated. For example, we are currently studying technical analysis and were building automated trading systems. Now if my lecturer told me what I’ve just read in your article, it would make the whole learning experience a lot easier.

Regards,

Kah

This reader has it right and understands something that is not that difficult to grasp if your focus is in the proper place. However, the fact that most people around the world think in opposite terms when it comes to how you properly buy and sell things in every other part of your life and how you properly buy and sell in markets is truly amazing. Everyone has it wrong. I suppose this provides a wonderful opportunity for those who think this simple concept the right way…

Hope this was helpful, have a great day.

- Sam Seiden sseiden@tradingacademy.com