Master Instructor Blog Newsletter
OTA instructor Rick Wright likens them to the x-rays you get at the dentist’s office, to see what’s happening “inside.” Sam Seiden makes the comparison to going to Vegas with an unfair advantage in your favor. And Brandon Wendell tells his students to think about a scalding glass of hot water that you will quickly let go if you grab it. They’re the Online Trading Academy odds enhancers—and they’re a key consideration in applying the patent-pending supply and demand trading strategy we use to anticipate market turns with a high degree of accuracy.
The full set of odds enhancers (there are eight altogether) is only available to students who have enrolled in the eXtended Learning Track (XLT) and have the trading experience and fundamental knowledge to apply them effectively. But you can read more in some of our Lessons from the Pros articles from OTA instructors.
For example, Brandon’s analogy to the glass of hot water illustrates the importance of watching the strength with which price leaves a supply or demand zone. If you grab a hot glass you’ll release it immediately. Similarly, when prices touches a level where there is an extreme imbalance of supply and demand, then it will leave that level quickly and in a strong move. Seeing that activity on a chart, combined with correctly defining the supply or demand zone to begin with, improves the odds that the trade will move in your favor.
Another important odds enhancer—which can be applied by even the novice trader, once you know what you’re looking for—is to analyze the risk/reward ratio of the trade you’re considering and be sure there is at least a 3:1 probability of the trade moving in your favor. In other words, if the distance between current price and your protective stop (the point at which you’ll exit if the trade goes against you) is 2 points, you’ll insist on at least a 6 point potential move in the opposite direction. This quite literally changes the odds in your favor and ensures you can be “wrong” on some trades and still make money.
While you’re perusing our educational content, be sure to check out the other topics on trading essentials, risk management, specific asset classes and more. These articles are a great place for the new trader to start and a useful refresher course for the more advanced trader. And best of all, they’re free.
The S&P declined 8.2% in 2010 and 6.3% in 2012. In 2011 it was flat but down 9.4% by the end of the summer. No wonder many pundits have revived the adage “Sell In May, Then Go Away” as worrisome advice for the buy-and-hold investor. This year the SPY was up the first few days in May—in fact it recently hit a record high—but there are plenty of reasons to be worried. A still-struggling economy… the possibility of contagion from much worse economic conditions in Europe… new inflation fears pressuring the bond market… the possibility of a ground war in Syria… how would any buy-and-hold investor NOT consider cashing in their chips after a great run and taking their profits in this environment?
There are solid macroeconomic reasons that May-through-summer is not a robust time for the markets: school’s about to let out, many people will be on vacation, there are no major retail initiatives as there will be in the fall. Companies seem to weight their bigger announcements toward the earlier months of the year so the net effect is that there’s less to boost a good market, allowing the “Nervous Nellies” to create selling pressure. That’s the theory anyway.
And, for those following historical performance, since 1950 the DJIA has averaged just a 0.3% gain between May and the end of October, compared to 7.5% the rest of the year. In 11 of those years the Dow fell 10% or more between May and the end of October, but in only three November-April periods did it fall 10%. (Stats are from Stock Almanac as cited by Matt Krantz in USAToday).
At Online Trading Academy, of course, we take all this with a huge grain of salt. We never advocate buy and hold investing (or “buy and hope”, as many of our instructors term it) because that means missing all the market fluctuations and profit opportunities which are available to any trader or active investor willing to follow our simple rules-based strategy for entering and exiting the market based on an imbalance of supply and demand. One pundit, Seeking Alpha’s Dr. Duru, says the real concern in May and summer is increased volatility. At Online Trading Academy, we see volatility as a good thing.
In July 2012, Netflix CEO Reed Hastings announced that his company had delivered over 1 billion hours of streaming video in a singe month for the first time ever. The statement sent the stock higher. It also raised eyebrows at the Securities and Exchange Commission (SEC) because the announcement was made not in a press release or analyst call—but on Twitter.
After some soul searching, the SEC decided Hastings’ tweet did not violate rules against selectively disclosing information. A report explained, “We appreciate the value and prevalence of social media channels in contemporary market communications, and the commission supports companies seeking new ways to communicate.”
The SEC was acknowledging a situation that has been in existence for some time: social media is influencing trading on Wall Street just as it is impacting every other aspect of our lives. A good example is the “Fake AP tweet” on April 23, 2013 that caused the markets to plummet, then recover almost immediately, on news that an explosion had occurred in the White House and President Obama had been injured.
A New York analytics firm, Dataminr, was one of the first to alert clients about a potential crisis when its algorithm discovered a tweet that combined the words “White House” and “Explosion.” Of course, that tweet turned out to be false; a fake AP Twitter ID had been established by the Syrian Electronic Army, a self-described “group of enthusiastic Syrian youth.” Dataminr’s algorithm quickly identified the tweet as suspicious based on a lack of corroboration; unlike the very real tragedy in Boston earlier in that week, in D.C. there was no sudden increase in panicked tweets from people located near the White House.
But meanwhile the DJIA had plunged some 145 points and the market lost some $200 billion in value as automated trading programs kicked into effect. It may be that fairly few trades were executed as buyers dropped their bids and no sellers were available to match them, and the market recovered its losses within minutes. Yet according to Commodities Future Trading Commission member Bart Chilton, “Somebody lost money, and not everybody who got out got back in.”
So what does all this mean to you as a trader following the rules-based strategy taught at Online Trading Academy? If you’re closely following those rules you’re probably okay. Most of our entries require price to enter a zone but then either establish itself in that zone or retrace the entry point; if price continued plummeting (or shooting upward) we would not have a trade. If you owned a position on April 24 and had a protective stop on the way down and it got filled you may have lost, but that’s a misfortune similar to being hit by lightning. You can’t predict it or prepare for it.
For savvy traders, social media will become one more market indicator you’ll watch as part of a broader trading plan. The basics still hold true: when there is an imbalance of willing buyers and willing sellers price is about to change direction, often dramatically. And not even the Syrian Electronic Army can change that.
Inside the Mind of a Mastermind Trader: Words of Wisdom from Senior Trader Ed “Cash” McCall
Ed “Cash” McCall is a charter member of the Mastermind Community on Power Trader Nation, an elite group to which only the most accomplished traders are admitted. He previously ran his own website and Skype chat room with 3-400 traders participating, and continues to encourage new traders by sharing his knowledge. Here he shares a bit of his story and philosophy:
WHAT I TRADE: The Russell 2000 and I’ve recently added crude oil. I used to trade all over the place, then got advice from my OTA advisor to stick with one product, learn it, then add size as you get consistent. I chose the Russell because its movement at that time was similar to Apple.
TRADING PHILOSOPHY: I have a favorite Bruce Lee quote, “I fear not the man who’s done 10,000 kicks; I fear the man who’s done one kick 10,000 times.” Choose one thing and learn to do it well. I only make 1-2 trades a day. I look for a swing low or swing high and a potential movement of 5 points with a risk to reward that is flattering. Gaps on the Russell close 71% of the time the same day so if it gaps up in the morning, I’ll look for it to move down.
ENTERING AND MANAGING MY TRADES: I will use a 50 moving average on any time frame to find a trend. If I want to short, I’ll look for all green candles representing solid buyers, then a wick at the top as it enters a zone. That’s where the last buyer is at that moment in time. If you take it down to a five minute time frame, you will see a wick there too. That’s what opportunity looks like, when momentum has dried up and sellers are about to enter the market. I market in, not limit in, to make the most of the trade. If the trade goes against me, I use the top of the wick as my stop.
Once I get into the trade I have a trade plan that defines how to manage this trade. For the Russell it’s typically two points. That’s my first target and if I have four contracts I will take two off after a 2-point move. I’ll typically use a 20 and a 50 moving average against a 377 tick chart to manage my trade and let the trend do its thing and use the 20 moving average as my trailing stop. Once it closes above the 20 (uptrend) I’ll take the third contract off, then take the fourth off once it closes above 50.
This methodical and conservative approach quiets the beast in me—the fear and greed that says I should take it off here and lock in more profit. I’m trying to be a intraday trend trader and have found this calms my nerves. But if I’ve gone past five point of profit, I’ll take it down to the 8 and 20 moving averages with a ballistic move. The whole idea is to get the majority of the move without giving too much back.
MASTERING THE MENTAL GAME: I talk about the three M’s of successful trading: methodology, management and mindset, doing the basics consistently. Online Trading Academy gives you the first two, but you have to develop the third on your own. The biggest problems traders have are that they get in their own way… this still happens to me about 15% of the time.
Put another way, OTA has given me the tools and sharpened the tools, but ultimately it’s up to the trader how they use those sharpened tools. You can’t blame education for not making a trader successful because the ultimate power is in the hands of the individual.
ON LEARNING THROUGH LOSING: The first two years of my trading were losing years. I assumed that, because I’d been in business supervising 30 people, I could dictate to the market. I started with $50K and was down to $15K. I could blow the rest on a really nice vacation or bleed it dry. I realized it was time to submit. When we get frustrated enough, we can make changes and that’s when I started getting better. I came up with a trading plan—not a good one but a start. And I’ve continued to refine it from there.
To learn more about Online Trading Academy education, visit www.tradingacademy.com.
Online Trading Academy Denver consists of two campuses in Colorado, one just north of the city in Northglenn and the other to its south in Castle Rock. John Henkel, owner and manager of both centers, explains this is an optimal solution to serve the sprawling region. The most distinctive feature of the Castle Rock center, where he has his office, is the two trading rooms named for their spectacular views—Pikes Peak and Mile High, which looks out on downtown Denver. Traders often come in early in the morning to catch the market open, just as the first rays of the sun are hitting the Rockies to the west.
Coloradans tend to have an independent streak, Henkel says, and this fits the Online Trading Academy dream of achieving financial freedom through successful trading and investing. Perhaps because of the tradition of mining and agriculture in the area, the Futures classes are among the most popular. Another tradition in Colorado is independent women who want to manage their own finances, and Henkel notes that the centers have an unusually high proportion of female students and graduates.
One Denver student spends half his year in the Rockies and the other half in the Caribbean, where he trades equities and options from his sailboat in order to fund his lifestyle. Another is a Forex trader who was new to trading when he came to Online Trading Academy and learned risk management; now his trading volume has gotten so large that he has to trade through an institutional desk, like the biggest banks, to get his fills. His ultimate goal is to buy a home on the slopes of Vail, and pay for it with cash earned through trading.
Denver also has its own OTA celebrity in Ryan Watkins, who lives in the area and spends time at the two centers when he is not traveling the world to teach. Ryan, who helped design much of OTA’s core curriculum, leads a monthly meetup where he shares his market view and describes recent trades he’s made. “It’s like a live XLT recap,” Henkel says. “It’s nice to have that resource locally.” The events, usually held between 5pm and 7pm, always draw overflow crowds.
Henkel spent 25 years as a floor trader on the Chicago Board Options Exchange and the Chicago Mercantile Exchange. Wanting to make a lifestyle change, a friend recommended OTA. Henkel flew to Irvine and took a class in 2012. Impressed with the quality of the education and the professionalism of the Instructors, Henkel knew immediately that he had found his calling. Living in Denver and working with students committed to transforming their lives has been a perfect fit for his second career.
Visitors are always welcome at the Northglenn and Castle Rock campuses. Visit the Denver home page for maps and directions.
Who do you look to for financial wisdom? We’ve compiled 40 money tips from experts that you can apply to your own trading, investing, saving, and financial planning. Here are a just a few of them:
“Never enter into a trade or investment without having a thorough plan first. If you fail to plan, you plan to fail!”
“For each investment you make, you really, really have to understand the risks that you’re taking. Don’t outsource that task to your financial advisor…. If you’re not willing to do that work, you should just keep your money safely in a bank.”
“Comparison shop when it comes to choosing a primary financial institution. It’s a very basic concept, but one that many people fail to grasp. The big banks are often the default choice, yet smaller and institutions like community banks and credit unions are considerably overlooked.”
You can read the full list here.