The Psychology of Trading and Investing, Part Two
The Psychology of Trading and Investing, Part Two
Continued from Part One.
"Last night, Intel (NASDAQ: INTC) said quarterly earningsquadrupled to 43 cents per share, topping the consensus view of 38cents per share. Revenue rose 44% to trump forecasts as technologyspending has increased among consumers and corporations." - AP
Beware of good news when price is at fresh supply.
Above is a VERY positive earnings report for Intel Corp. (INTC) alongwith a daily chart of the stock. This picture and opportunity wasidentified by me and presented to Online Trading Academy graduatesduring a live Hour with The Pros session, April 15th, 2010. Priceopened after that report, with a huge gap to the upside from the priorday's close. While the news was very real and the stock was in a stronguptrend, that equated to major losses for those who bought based on thenews of the strong earnings report for INTC. How can a real positivenews announcement for the company equate to such a severe drop in pricefor the stock? Simple, price reached a level where objectively, supplyexceeded demand as seen on the chart. We know supply exceeds demand atthat level because of the strong decline in price from the level to theleft. When price revisits that level on the right, this is the firsttime price advances back to the supply level. Again, we can now saythat these buyers are buying after an advance in price, and at a pricelevel where supply exceeds demand, the two mistakes novice marketspeculators make.
Had you taken the good earnings news as an invitation to buy like somany did, you would have let illusion again blur the reality that wasright in front of you and lost your hard-earned capital. Had youfiltered that invitation to buy through the laws of supply and demand,you would have done nothing or recognized the opportunity to sellshort. To be blunt, over time, the capital of those who fall forthe illusion trap typically ends up in the bank accounts of those whofocus on the reality of pure supply and demand in markets. Theobjective supply and demand relationship in markets is revealed mostclearly in price and price alone.
What you perceive to be a rational decision-making process is actuallyyour emotions reflected by a set of behavioral patterns you likelydon't even know exist. The process that all humans operate under is aprocess whereby emotions are reflected from ingrained patterns ofbehavior. The buyers of INTC shares have a belief system that has themthinking they were making a rational decision to buy. As rational as itseemed to those buyers, it certainly was not logical. That rationale,again, is due to a faulty belief system that is not in line with thereality of how markets really work, nor how you profit from buying andselling anything. The reality was that INTC share prices were atextreme retail (supply) levels which means the low risk, high reward,and high probability opportunity was to sell short and profit from adownside move in the stock. Selling short at that supply level meantfinding a buyer who "believed" INTC was worth buying at that level. Theearnings report helped send that illusion.
How can we benefit?
BP shares fall to new low over Gulf spill ñ AP, Thursday June 24th, 2010
BP fell hard on the news, right into our demand zone. The reason forthat demand zone is because that area is the origin of a strong rallyin price. That rally only happens because demand exceeds supply in thatarea. In reality, price simply dropped down to deep discount wholesaleprices, which is where anyone would be an interested buyer if you lookat it that way. Think of it this way... You walk in the store and yourfavorite item is on sale for half price. Naturally, you're going to getexcited and probably buy more than you typically do. Your emotions aregoing to drive you to buy more of this item and so on. The greatestmental edge in trading and investing is to realize that this is EXACTLYhow you have to think when trading or investing. Amazingly, most peopletake the exact opposite action when putting their hard-earned funds atrisk in the markets. This is because they are focused on the bad newsfrom the oil spill. Don't get me wrong, that news is very real and veryawful! It is truly a horrible event, but that is a separateconversation from the buying opportunity that news presented.
Below is an email from one of many Extended Learning Track (XLT) classmembers who took advantage of this low risk, high reward, and highprobability opportunity and bought shares of BP at the demand (retail)price level. Who did he buy from? He bought from a seller who focusedon the bad news as a strong invitation to sell. Whether our XLT studentbelow is trading the markets, shopping at the grocery store, buying acar, or anything for that matter, he realizes that how you properly buyand sell things in any other part of life is EXACTLY the same as howyou should be buying and selling when it comes to trading and investing.
Sam,The natural invitation to buy is completely inversely related to howyou make money buying and selling anything. It is certainly not inalignment with supply and demand. Most people, however, are notnaturally invited to buy when the objective low risk / high rewardbuying opportunity is in front of their face. As you can see in thislast example, PRICE MUST DECLINE in order for it to reach an objectivefresh demand level. The vast majority of people are only comfortablebuying after a period of rising prices, not declining prices. Also,most people are not comfortable buying when the news is bad. Remember,pretty green candles, uptrends, and good news rarely if ever bringprice down to price levels where demand exceeds supply. This is allquite ironic if you think about it because if you take your averagetrader or investor out of the market environment, they act almostopposite when buying and selling anything else. For example, when we goand buy a car, we try and get the best deal we can. The astute carshopper finds a car and knows what price he or she is willing to payand attempts to get that price. If that dealership is not willing todrop the price to the desired price of the buyer, that potential buyertypically goes from dealership to dealership to find someone willing tosell the car at the lower price. In trading and investing, however,people for some reason wait for good news and higher prices beforedeciding to buy; this makes absolutely no logical sense if your goal isto buy low and sell at a higher price. It is completely inverselyrelated to how we profit when buying and selling anything.
I sold my shares of BP yesterday @ 38.47 for a realized gain ofeleven dollars. I'm doing an average of 800 a day now. I would like topersonally thank you. Thanks a ton!
Mark H.
Whether you trade or invest in stocks, bonds, futures, currencies,options, or anything else, how you profit in these markets and how youquantify supply and demand never changes. Furthermore, a trading andinvesting strategy that works is one that is not market-specific ortime-period-specific. The strategy that offers consistent low riskreturns is one that mechanically filters the vast amount of illusioncreating information by objectively quantifying fresh supply and demandin any market and at any period in time. Don't let the shadow ofillusion distort the reality of a governing dynamic that is alwaysright in front of you.
The good news is that you already have a belief system inside you thatknows how to properly trade and invest in markets. You use it every dayat the grocery store, appliance store, car dealership, and so on. Thinkabout how you operate when buying and selling anything in your lifeoutside of the trading and investing markets. You try to get deals andbuy things as cheap as you can. The key is to now use this exact samebelief system to make decisions in the trading and investing markets.If you happen to be someone who actually cuts coupons, you have abelief system capable of producing above average returns as a trader orinvestor. I think you get the point.
Hope this was helpful, have a good day
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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