Who Really Makes Money?

Posted March 28th, 2011 by Sam Seiden in Education

Who Really Makes Money?

Have you ever wondered why the percentage of people who fail at trading is so high? I have heard that 90% or more of people who dive into the trading world end up losing their money. What about average investors, do they really do that much better? Consider for a moment, the average trader or investors returns to the average Wall Street firms returns. We would probably all agree it's a lopsided equation. But, what does the average trader or investor do? The average person "buys stock." What is the primary business on Wall Street? If you said "selling stocks," you're correct. So, one group is buying stocks and the other is selling and the sellers are making all the money. Understand that I am not suggesting we should all stop buying stocks and start selling them. I am, however, strongly suggesting that you start thinking and acting like the average Wall Street firm (or consistently profitable trader) who is laughing all the way to the bank, typically with your money.

Why is this profit equation so out-of-balance? Why do the masses lose and the few successful traders do so well? To answer that question, you need to think about how the average trader or investor is trained and conditioned to "buy" into market, a stock for that matter. This includes you, me and anyone else you know. Take yourself back to grade school, high school, collage, grad school and include just about any trading book you have ever read. I remember the lessons on how to buy into a market. When it's a stock, we are taught to make sure:

   1. It's a good company
   2. It has strong management
   3. It has a healthy balance sheet
   4. It has very strong earnings, especially compared to competitors
   5. The stock is in an uptrend

When all these things are present with a stock, where do you think the price of the stock is? Do you think it's ever low? It can't be by definition. When all those items are true, the price of the stock (market) is always high and typically, at price levels where the average Wall Street firm or consistently profitable market speculator is selling. People don't realize that almost everyone from a young age is taught and conditioned to do this completely backwards. I mean, think about how you profit buying and selling anything else in life. We always try and buy things when they are cheap and sell when price is high. Why is it then when people put their hard-earned money in the market, they do the exact opposite? The core reason is because of a mass illusion which is this: People think that how you buy and sell things in other parts of your life is somehow different from how you properly buy and sell in trading markets. The truth is, there is no difference! This is the single most important edge the consistently profitable trader (or Wall Street firm) has.

Who Really Makes Money?

Figure 1

Consider the two pictures above on the left and right. Ask yourself, who really makes consistent profits? Let's start on the left. Many traders load their charts with indicators and oscillators, so many that it becomes hard to see the candles on the chart. I have also listed a few of many conventional Technical Analysis items below the chart. Now, truly ask yourself this question: Do you really know anyone who makes a consistent living with the chart or items on the left? I already know the answer to this question which is no. This is because there is a major flaw with that school of thought. Everything you see there lags price and only gives buy signals after price has moved higher which guarantees you are not going to buy low and sell high. Instead, this school of thought has you buying high and selling low which is exactly what the consistently profitable trader wants people to do. What about the picture on the right, do they make consistent profits? You bet they do. Walmart makes more money than some countries print. How do they do it? What is their big secret? They buy at wholesale prices and sell at retail prices and people line up day and night to pay the retail prices they are offering. What a great trading company! What I pride myself on in trading is acting exactly like Walmart. It may not be fun, exciting or sexy to desire being like Walmart but trust me... In trading, you want to be Walmart because like the average Wall Street firm or consistently profitable trader, they are laughing all the way to the bank.

Gold Trade (GC)

Figure 2

There are two very important components to consistently profitable trading. First, understand that how you make money in any other part of life, buying low and selling high, is exactly how you profit when speculating in trading markets. Second, learn to identify wholesale and retail prices on a chart. Once you can do this, just buy at wholesale prices (demand levels) and sell at retail prices (supply levels). Let me walk you through a trade I took in Gold Futures to help you begin to identify the buying and selling patterns of Walmart. First, look at the level identified as Supply (shaded yellow). We call this a supply level or "retail" price level because price could not stay at that level and declined from that level. This happens because supply exceeds demand at that level. Below, notice the area identified as Demand (shaded yellow). We call this demand or "wholesale" prices because price could not stay at that level and had to rally away. This can only happen because demand exceeds supply at that price level. The distance between the demand and supply level on the chart is the "profit margin." Am I analyzing this market or product any different than Walmart would? Nope... The trade I took which is shown was simply selling short at predetermined retail prices (supply) to someone who was willing to buy at that price. Then taking profits by buying back the short position at predetermined wholesale prices (demand) from someone who was more than willing to sell at wholesale prices.

How is this any different than how Walmart profits each day? What I do may be boring because I am doing the same thing every day, buying at wholesale prices and selling at retail prices, but I am not in the trading and investing world for excitement. The main idea to take from this piece is to understand that how you make money buying and selling anything is exactly how you make money in trading. There is no difference. Also, if you're thinking that I should stop writing about this concept because too many people will catch on, and then the supply / demand strategy will not work for the rest of us anymore. Have no fear... There are an endless amount of people who will always be willing to buy at retail prices and sell at wholesale prices. Everyone is taught to do this backwards from a very young age; the conditioning is so strong. If you want more comfort, just go to the bookstore and read a trading book. Almost all of them have you buying after price has already rallied. Let go of dangerous conventional thought and embrace the opportunities that come with reality-based thinking.

Hope this was helpful. Have a great day.

- Sam Seiden

About Sam Seiden

Sam brings over 15 years experience of equities, forex, options and futures trading which began when he was on the floor of the Chicago Mercantile Exchange where he facilitated institutional orderflow.. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.

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