The Proper First Step for New Traders

01/21/2012 11:00 am EST

Focus: TRADING

Sam Seiden

Chief Education, Products and Services Officer, Online Trading Academy

Most new traders start off on the wrong foot and must work to recover and fix their trading, but instructor Sam Seiden explains how to develop proper trading habits from the onset.

We're talking about trading techniques today with Sam Seiden. Now Sam, what are some of the important mechanics that investors and traders need to know about?

I think it's a very important question because what most people are going to do—just about everybody out there—they're first step in the world of trading or investing is to go buy a book at the bookstore or get some information on the Internet. 

The unfortunate thing is they're going to end up with conventional information. If trading was as easy as reading the books or some information on the Internet, I think everybody would be making money, but unfortunately, it's well known that most active traders lose and most longer-term investors don't come close to achieving their financial goals.

Why does that happen? The proper way to trade is exactly how you properly buy and sell anything in life: buying low and selling high. 

Everybody says that, but when you look at people's actions in the markets, even the short-term traders and longer-term investors, they all do the same thing. They make the biggest mistake.

If you think about how everybody's taught to buy into a market and take stocks for a minute, everybody's taught to make sure it's a good company, make sure they have strong management, good earnings, a healthy balance sheet, make sure the stock is in a nice uptrend. What do you think the price of the stock is when all those things are true?

I mean, those are the mechanics that everybody invests their hard-earned money in the market with, or trades with. The price is never low; it's always high. What people don't realize is they're taught to buy high and sell low if they follow conventional methods.

See related: The Most Common Portfolio Mistake

NEXT: How to Develop Good Habits from the Start

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So what's a good way to break people of some of these bad habits?

A good way is to just forget about all that stuff and just use your simple logic. For example, I started my career on the floor of the Chicago Mercantile Exchange, so I got to see firsthand how the stuff really works. 

My job in the beginning was to facilitate institutional order flow, taking orders from banks, institutions, money managers, and so on, so all day, what I had in front of me were there market's real willing buyers and sellers; you know, demand and supply. The buy order is a market’s demand, the sell orders is the market's supply. 

It was pretty simple: when prices fell down to levels where demand exceeds supply, that's where you buy; when they rally to price levels where supply exceeds demand, that's where you sell. That's all that happens all day long.

I was taught the real-world way of doing this in the beginning, which was buy at demand levels and sell at supply levels. How we quantify that in the markets and on the price charts, those are the mechanics that are key. 

If you focus on, again, the strategy of how you make money buying and selling anything and apply that to the trading and financial markets, now you're going down the right track, and there's a big difference there.

See related: 4 Mental Keys for Better Trading

So just simple supply and demand equations. It's really about the basics.

It's just about the basics. The same way you properly buy things at the grocery store, that's what we want to do in the financial markets, but everybody does it opposite. Everybody does it backwards, and that's the problem.

So Sam, how does this notion of supply and demand play out in how you teach people to trade?

Now we're going back to the mechanics. What I start with when I work with people is training their eye to identify price levels where willing supply exceeds willing demand. That's where prices always stop rallying and turn lower.

Also, the picture on a price chart, that represents more willing demand than supply. That's where prices stop falling and turn higher. Learning to identify what that picture looks like on a price chart, those are the mechanics that allow you to really buy low and really sell high. 

But make sure you understand that those terms and what I'm talking about are very different from the textbook version of support and resistance. That's not what we're talking about. 

Again, if you go down that path, then you're including indicators and oscillators and all these other things that lag price.

An indicator or oscillator is just a derivative of price, so if we add anything to our decision-making process that lags price, all we're doing is increasing risk and decreasing profit margin. 

You would never do that in any other part of your life. Why do it here in the trading world? People think, “Well, I'm going to get rid of all my indicators,” and that's scary, but that's what you need to be doing.

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