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.Tweet: Attain more of a reality based trading edge.

Trading Basics: Answers to your trading questions.


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).


Free Trading WorkshopIt 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.


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?


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.


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.


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.

Sam Seiden –

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Trading in a Low Volatility Enviroment

At the time of this writing the S&P 500 index has closed higher for 9 consecutive trading days, and with these higher prints, this alpha index continues to carve out new All-time highs.  This is quite impressive, and unusual, as it indicates very little supply (sell orders) in the market.  Interestingly, this comes after the panic selling triggered after the Brexit vote late June 2016. Since there aren’t many new sellers in the market, and all the shorts are being squeezed out, buyers have to bid prices higher until a willing seller comes along to take the other side of that trade. That’s the mechanism that enables the stock market to continue its ascent. And one must be ready, as this dynamic can change quickly.

If you’re not familiar with the term “short squeeze” this simply means that short sellers are forced to cover as the market moves higher. In the case of Brexit, there were an inordinate amount of shorts in the market because of the uncertainty surrounding the vote. These shorts needed to cover to take profits or cut their losses as the rally extended, thus proving more bids (buyers) under the market.

Another consequence of the persistent rally in stocks (and by extension Equity index futures) is the collapse in volatility. In other words, the daily range in the S&P futures is shrinking. As an example, in days subsequent to the Brexit vote the daily range in the E-mini S&P was close to 40 points (as we can see in chart below).

How to trade when there is little volatility in the market

Fast forward to this week and the range has contracted to 12 points (seen in the lower chart).

What is a short squeeze and how do you deal with it?

That is quite a difference in price movement. The more important question to ask is, how does the rate of change in price effect how a trader makes decisions?Tweet: Does the rate of change in price effect how traders make decisions?

First, the core strategy of finding supply and demand levels to enter low risk, high probability trades does not change.  However some adjustments can be made. One that can be made in this low volatility environment is to reduce profit zone expectations.  Since the moves are smaller, the profit zones will also shrink. The good news for traders that find this type of environment challenging is that markets are never constant. Volatility will pick up again. Until then, staying patient is truly a virtue.  In addition, there are other non-correlated markets to look at.  Futures traders should be flexible, and have the skill to branch out into different markets.

The grains (Soybeans, Wheat and Corn) are great markets with plenty of movement, especially around the summer and fall as they are closer to harvest season. The metals market (Gold and Copper) are also excellent markets that have ample volatility. And lastly, the energy complex (Crude Oil and Natural Gas) can also produce many opportunities for the skilled trader.

Should every trader engage in these markets? Of course not. These are alternative markets for those that know what’re doing.  Because the opportunities are limited in the equity stock futures one must look to greener pastures.

Free Trading WorkshopThe bottom line here is that traders need to be skilled enough to participate in the full spectrum of the Futures markets. If you find you’re self limited to only certain markets because you lack confidence or don’t have a good process, then I would encourage you to expand your horizon, but do it slowly. Learn other markets. Their characteristics, tick values, trading times, and what other markets will affect them. In addition, have a low risk, high probability method to participate in these markets.  There’s always a market moving somewhere, you just have to find it, and more importantly have the skill and knowledge to participate.  Food for thought…

Until next time, I hope everyone has a great summer.

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