Daniel Bustamante, Instructor CFOT
I would venture to say that most of the retail investing done today is based on news or your 'gut feel'. We've all seen it through financial news networks, Twitter and newsletters that each year on opinions based on 'funnymentals' and opinions but rarely do we ever see them talk about the simplest concept ever: Supply & Demand. ON the other hand you have the school of though to which I believe in and what we teach here at Landshark; Price charts & technical analysis.
If you've ever read a technical analysis trading book it can get really confusing, in fact, trading books are out dated in today's day and age and I can say that learning from them is not a viable way to find your 'edge'. When we host our Trading 101 Class meet great new people and they share there stories and strategies; what's worked and what hasn't. The interesting thing that I find is that they get so focused on risk/reward, indicators and the strategy that they forget to understand the simple concept of what it is that we're doing: Why do stocks actually trade higher and lower?
There is a simple way to look at this, so simple it may have been staring you in the face and you just failed to realize it.
1. What creates value? Demand.
2. What makes a stock or asset fall? Supply.
When you have demand for something price rises. So think of it this way. If you buy a case of water from Costco to sell at your hot dog stand outside of the ball game your goal is what? To sell the bottles of water for more than you bough them for. You buy the bottles at a wholesale price and you sell them at a retail, marked-up price.
But then let's throw this into the mix. Let's say 5 other hot dog stands decided to show up near you. Now you have too much supply and prices for that water bottle likely decrease. These are how the markets work, regardless of news or opinions from journalists.
The difference in financial markets vs. your hot dog stand is that you can bet against the water bottle price going down and make money. That being said, let me show you what this looks like on a price chart.
MU Short Trade Set Up 6/30/2017
Micron Technology just beat earnings as of the time of this post and it is now ready to be sold or, in the trade I made, shorted via the purchase of put options. Now most people overthink this because the news just and the conference call just had good things to say about the company. It has great fundamentals and the trend is higher. All these factors make this too complicated. The price chart below you makes this very simple.
The stock at the time of writing this is down -5% and I expect it to trade to $26-$24 a share. The sell zone above was pre-determined, before this earnings event came out. The zone has already told you that $32-$31 a share was being rejected by too much supply. Now obviously we can turn to rationalizing this again by telling ourselves a story about the company to why it is lower today (and likely to continue lower) or we can look at the real reason; The price chart is overbought and there is too many shares being sold, aka supply.
Think of it from this point of view: If you are an institution and you bought this at, let's say, $12/share, would you too not be taking profits after this tremendous of a run? People are taking profits and SUPPLYING the market with their shares. MU is a perfect example of this. If you think that now is the time to buy and you think that others are thinking that now is the time to buy because of great earnings report then you're missing the basic concept of how markets work. Good earnings or news articles do not translate into anything except for high expectations that are rarely met.
The green box below on the chart above is on of my target areas for this trade. We call them PTA's or Potential Trade Areas. This is an area on the price chart where I believe that demand or support for the stock will come into play. Again all of this is done ahead of time and this is the power of ridding news and strictly following the price chart. Learning to do this is very simple it's the mental part of getting over the bad habits that plague many investors that is hard to do. We have a tendency to want to over-complicate things for whatever reason and this gets in the way but if you can learn to read the price charts then you can begin trading any asset class in the world.
You can learn more about our pricing methods through the Core Foundations of Trading program.
If you have never been to a Trading 101 Class online or on campus you can register FREE here.