Trading Starts with Supply and Demand

MoneyShow

5 Jan 201203:29

Summary

TLDRIn 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.

Outlines

00:00

📈 The Universal Trading Rules

Sam discusses the common misconception that different asset classes and strategies require unique sets of rules. He argues that all investors, regardless of their approach or the assets they trade, are essentially seeking the same goal: low-risk, consistent profits. To achieve this, Sam emphasizes the importance of understanding market timing and turning points, which can be identified through real supply and demand analysis. This approach is applicable across asset classes such as stocks, futures, and Forex.

📰 Impact of News Events on Trading Strategy

Sam explains how major news events affect market behavior and addresses a common concern among traders about whether to pull their orders in response to these events. He advises that as long as trades are placed near key supply and demand levels, there is no need to remove them. Using examples such as the BP oil spill and the London subway bombing, Sam illustrates how markets often react to bad news with an initial decline, followed by strong rallies once prices hit demand levels where buyers outnumber sellers.

🤔 Rethinking Traditional Investment Advice

Sam encourages investors to forget much of what they’ve learned from traditional investment strategies, which often fail to generate profits. He points out that in everyday life, people don’t overpay for goods like houses or cars, yet they often buy stocks at higher prices during uptrends. He emphasizes that the key to successful investing lies in buying low and selling high, as one would do with any other purchase, and cautions against following outdated or conventional market advice.

💡 The Key to Smart Investing

Sam wraps up by reinforcing the importance of approaching the stock market with the same mindset used when buying any product in life. He argues that many people struggle with investing because they follow what they’ve been told to do or what they’ve read in books, but these methods often don’t work. Instead, investors should focus on buying when prices are low and selling when prices rise, just as they would when purchasing anything else of value.

🎥 Conclusion and Thank You

The discussion concludes with a thank you message to Sam for sharing his insights on trading strategies and market behavior. The video is part of the MoneyShow.com video network, which provides expert financial advice and trading tips.

Mindmap

Keywords

💡Trading Rules

Trading rules refer to a set of principles or guidelines that investors and traders follow to make decisions in financial markets. In the video, Sam suggests that there is a universal set of rules that apply to all investors, regardless of the asset class, focusing on low-risk, consistent profits.

💡Market Timing

Market timing involves predicting the best times to enter or exit a market to maximize profits. Sam argues that identifying market turning points in advance with high accuracy is a fundamental rule for success, applicable across various asset classes and strategies.

💡Supply and Demand

Supply and demand represent the forces that determine price levels in any market. Sam emphasizes that prices turn when demand exceeds supply or vice versa, and this principle applies universally to assets like stocks, futures, and options.

💡Consistent Profits

Consistent profits refer to stable, regular returns from investments or trades. Sam discusses how the main goal for all traders, regardless of the asset class, is to achieve consistent profits by following the right set of trading rules, primarily based on understanding market supply and demand.

💡Economic and Political Events

Economic and political events are major news events that can impact market movements. Sam explains that while these events may cause initial sharp declines in prices, the markets often bounce back when prices reach demand levels, leading to strong rallies.

💡Limit Orders

Limit orders are instructions to buy or sell an asset at a specific price or better. In the video, Sam advises not to remove limit orders during significant news events as long as they are placed at key demand or supply levels, as the market is likely to rebound after the initial reaction.

💡Real-world Trading vs. Textbook Trading

Real-world trading refers to strategies based on actual market behavior, while textbook trading follows academic theories. Sam contrasts the two, emphasizing that real-world trading is about understanding supply and demand, while textbook methods may not lead to consistent profits.

💡Market Turning Points

Market turning points are moments when the market changes direction, either rising or falling. Sam argues that the ability to identify these points accurately is key to success in trading, as it allows investors to enter or exit trades at optimal times.

💡Asset Class

An asset class is a category of financial investments, such as stocks, futures, Forex, or options. Sam argues that while different strategies may exist for different asset classes, the core trading rules remain the same, focusing on low-risk and consistent returns.

💡Demand Levels

Demand levels are price points where buying interest is strong enough to prevent further price declines. Sam highlights that after major news events, prices often fall to these demand levels, where the market stabilizes and rallies.

Highlights

There is one set of trading rules that applies to every investor, every situation, and every asset class.

Low-risk, consistent profits are the goal for everyone, regardless of the asset class or timeframe.

Market timing and identifying turning points in advance with high accuracy are crucial for success.

The basic rules of trading revolve around quantifying real supply and demand in the market.

These principles apply universally, whether for stocks, futures, Forex, or options.

Even during big news events, if orders are placed in the right areas, there is no need to pull them.

Bad news events cause an initial drop in the market, but they often lead to strong rallies.

News events like the British Petroleum disaster or the London subway bombing illustrate how demand levels drive strong market recoveries.

Price drops during bad news create opportunities where demand exceeds supply, resulting in price rebounds.

Understanding supply and demand at key price levels is a highly quantifiable process.

Many people invest contrary to how they would normally buy things in their daily lives, leading to poor decisions.

Investors often wait for uptrends or good news, instead of buying when assets are 'on sale' or undervalued.

Following traditional advice or textbook strategies often doesn't yield profits, which confuses many investors.

The focus should be on making money by buying and selling in the same way people do in their everyday purchases.

Sam advocates for a more practical, real-world approach to trading, rather than relying on theoretical models.