Trading Starts with Supply and Demand

Summary

In this discussion, Sam explains that a single set of trading principles applies across all asset classes and strategies, emphasizing the importance of market timing. He highlights how consistent profits stem from identifying supply and demand levels where prices turn, regardless of market conditions or news events. Sam argues that traders often misinterpret investing, reacting to news instead of focusing on core principles. He encourages investors to apply the same logic they use when buying everyday goods—buying low rather than waiting for good news or market uptrends.

Takeaways

• 💼 There's a belief that one single set of trading rules applies across all asset classes, strategies, and situations.
• 📉 The goal for all traders and investors is low-risk, consistent profits, regardless of asset class or timeframe.
• 🕰️ Market timing, especially identifying market turning points in advance, is key to success in any trading strategy.
• 📊 The core of trading strategy is understanding supply and demand in the market, as that drives price changes.
• 🔀 Strategies should remain consistent across different markets like stocks, futures, Forex, and options.
• 📰 News events, while impactful initially, tend to drive prices to levels where demand exceeds supply, often leading to strong rebounds.
• ❓ Traders often ask whether to pull their orders during major news events, but as long as their orders are placed at key levels, they should stay put.
• 📉 Big news events often lead to a quick price drop followed by a strong rally due to the lack of remaining sellers at lower price levels.
• 🧠 Investors are encouraged to rethink traditional strategies taught in books, as real-world trading behavior often contradicts this advice.
• 🏠 People tend to avoid overpaying for items in everyday life but do the opposite in markets—waiting for good news before buying stocks at higher prices.

Q & A

What is the main argument Sam presents regarding trading rules across different asset classes?

Sam argues that despite the belief that different asset classes require different strategies, the same basic set of rules and principles apply across all asset classes. These rules focus on identifying market turning points and quantifying supply and demand.

How does Sam define the goal of all investors, regardless of strategy or asset class?

Sam states that the primary goal of all investors is to achieve low-risk, consistent profits, which can be accomplished by following the same basic principles across different asset classes and timeframes.

Why does Sam emphasize market timing in his strategy?

Market timing is crucial because it involves identifying market turning points with high accuracy. Sam believes that understanding where prices will turn is key to successful trading, regardless of the asset class.

How does Sam respond to the belief that the average person can't time the market effectively?

Sam disagrees with the belief that the average person can't time the market. He argues that while the industry says this, it’s not true, as market timing is based on the quantifiable relationship between supply and demand.

How does Sam explain the impact of news events on market strategies?

Sam believes that news events initially cause markets to drop due to panic selling. However, these events drive prices down to levels where demand exceeds supply, often resulting in strong rallies. Therefore, he advises against pulling orders from the market during news events.

Can you give an example of a news event that Sam mentions and how it affected the market?

Sam mentions events like the British Petroleum oil spill and the London subway bombings. In these cases, markets initially dropped sharply, but then quickly rebounded as demand exceeded supply at lower price levels.

What analogy does Sam use to explain why people struggle to apply trading rules in the market?

Sam compares trading to buying a house or car. People typically try to buy these items for the lowest price, but when it comes to the stock market, many wait for uptrends and good news, which often leads to buying at higher prices.

What mistake does Sam highlight that many investors make when following traditional investing advice?

Sam points out that many investors follow conventional advice, waiting for good news and uptrends to invest, which contradicts how they would approach buying anything else in life. This leads to disappointment when they don’t see profits.

Why does Sam believe people struggle to make money in the market despite following traditional strategies?

Sam argues that people struggle because they follow strategies based on theory rather than real-world practices. Traditional strategies often go against the basic principle of buying low and selling high, which leads to losses.

What is the core message Sam wants to convey to investors?

Sam’s core message is that investors should focus on market timing and quantifying supply and demand, rather than following conventional advice. By doing so, they can make better decisions and achieve consistent profits.