Are You Making This Basic Trading Mistake?

I have been trading for more than 20 years and was a fund manager for half that time, beginning on the floor of the Chicago Mercantile Exchange. If I had to list the top three mistakes I see most traders make, one that would for sure be on the list is when people enter the market. Simply put, one of the worst things you can do is buy after price has moved higher and sell after price has declined, yet these are two actions people take in the markets every day. It’s no wonder ‘trading’ gets a bad rap as this is a recipe for losses.

Before getting into the details of the mistake and correcting it, it’s important to understand two key components of markets.

Why do prices move in any market? Price in any market turns at price levels where demand and supply are out of balance. The consistently profitable trader is able to identify a demand and supply imbalance which means knowing where banks and institutions are buying and selling in a market. By quantifying institution demand and supply areas on a price chart, you can identify market turns and market moves in advance with a very high degree of accuracy.

Who is on the other side of your trade? Trading is simply a transfer of accounts from those who don’t know what they are doing into the accounts of those who do. The consistently profitable trader can tell that a novice trader is on the other side of their trades by where they are entering and exiting trades.

The Mistake

Let’s take a look at a trade from a recent live trading session I delivered for our students in Crude Oil. Notice area A. Area A is the origin of a decline in price and qualified as a supply zone for us, meaning financial institutions were selling Oil at that level. Next, we wait for price to return to the supply area. When it does, at B, I am a very interested seller as I am confident I am selling to a novice buyer. I know this because the buyer at B is making the two mistakes that every consistent losing (novice) trader makes. First, they are buying after a period of buying, as I mentioned above, and second, they are buying at a price level where supply exceeds demand, where the big smart money is selling.