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Are You Prepared to Trade by Sam Seiden

Sunday, January 6, 2008

Often, people take a new year as an opportunity for a fresh start. For the trader, perhaps that means deciding that you will always focus on risk first and take every stop loss according to plan. Others may conclude that they are going to increase share size because they have been doing well. From some recent emails, I have noticed that some traders are going to add futures trading to their plate in 2008. Whatever you decide to do in 2008 as a market speculator, there is one governing dynamic to markets that you had better make sure you understand: Supply (resistance) and Demand (support). Average market volume is not likely to be back to normal until Monday so there should be no big hurry to jump back into the markets. This means there are three full days to ask yourself some simple questions. If you are not sure of any of these questions, why would you be willing to put a dime of your hard earned money at risk? Believe me, the market speculators on the other side of your trades know the answers to these questions without even thinking.

1) Do you have a trading plan?
a. The best traders always have a plan and more importantly, stick to the plan.

2) Is there discretion in your plan?
a. If there is discretion in your trading plan, this means there are unanswered questions. It is best to turn those questions into RULES.

3) Is all your analysis based on objective information or is some of it subjective?

4) Do you understand how to quantify supply (resistance) and demand (support)?
a. Or are you focused on a lagging indicator which can lead to high risk and low reward trading?

5) Have you reviewed your trading results such as average win to average loss and your winning percentage?

While I have many more important questions for you, it is best to address these one at a time as this will allow you to really deal with the main issues and get on the path toward your goals. As a concerned educator, I would suggest you NOT even think about trading until all these issues are taken care of. As a market speculator, go ahead and ignore the questions and keep on trading. Never forget, in trading, it's almost always the novice trader providing income for the consistently profitable trader.

Let's review some markets:

Session Chart

Above is a chart of the SPY, the ETF for the S&P. As I have tried to point out over the past few weeks, this market has plenty of room on the downside for a decline. While there appears to be support at the lows marked support 1, be careful buying at that level if and when price reaches it again and here is why. Price has revisited this level a number of times already as seen on the chart. Each time price revisits this level, more willing buyers that make up the demand (support) get to buy. This means support is getting weaker, not stronger. A lower risk and higher reward area to buy would be the lower support level marked support 2. This is really the origin of the demand, the 200 MA is in this area, and price has not revisited this level yet.

Session Chart

This is a chart of the QQQQ, the ETF for the NASDAQ. Above current price, we find a resistance level that has not been revisited yet. Swing and day traders may find a low risk/high reward shorting opportunity in this range. Also, notice the dramatic decline in price from this level suggesting that supply and demand are very much out of balance at the resistance level. The down sloping 200 MA shows the downtrend which means it's okay to sell short at the resistance level seen above. If you don't know how we enter these trades and where we put our stops, join us in our Pro Trader course where we spend plenty of time on this issue. You can always email me as well.

Session Chart

This market, the XLF (ETF for the financial service sector) has been declining at a very rapid rate due to all the credit related problems with lenders. While the selling is likely to continue, there is a demand (support) level below that has not seen price revisit it even once. This suggests a move higher when price reaches it. If you're trading financial stocks, it may be a good idea to time your longer term buys in those stocks with the demand level seen on this chart.

Posted by MOHAMED SAID at 10:31 PM  

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