Hello traders! In this week’s newsletter I’d like to explain how your shopping skills can make you a better trader, those skills you’ve developed over the course of your life.
Let’s say you are a huge fan of crab legs. You can’t get enough of them and you look to buy crab legs whenever you go to the grocery store – if the price is right. Since you shop for crab legs every week, you know (in this example) that they are normally priced at $20 per pound. Every time you go to the grocery store your first destination is the fish counter; but this week the crab legs are priced at $40 per pound. Disappointed, you walk around the store doing your regular shopping trip. As you venture around the store the fish counter guy comes over the store’s intercom and you hear your favorite phrase: “Attention shoppers, for the next 5 minutes crab legs are only $10 per pound! Come on down and get them while they last!”
So what do you do? I would imagine that you would immediately sprint back to the fish counter; your half-filled grocery cart with the wobbly wheel squeaking and creaking as you race through the store. You breathlessly get to the counter and buy your favorite food – on sale! You then happily go about the rest of your shopping trip.
Another interesting example of buying things on sale is something we have in the States called “Black Friday.” The day after Thanksgiving many stores in the United States have huge percent markdowns on a large number of their popular products. The huge crowds are legendary as tens of thousands of shoppers jam into stores trying to buy their favorite toys/gadgets/gifts at deep discounts. Why do people do this, wading through the mass of humanity, pushing and shoving to buy things in this environment? The answer should be obvious: people want to save money! Buying something at half off lets you save a lot of money, or even purchase other items. Seems obvious, right?
Then why do people very often do the exact opposite in the world of trading? When prices are going down, getting cheaper, why do many novice traders throw out their tried and true grocery store shopping experiences and AVOID buying? Many novice traders are actually SELLING things that are cheap, which is the exact opposite of what they do in every other buying/shopping experience! When prices are already high and moving higher, why do novice traders start buying? “Crab legs for $100 per pound, come and get them!” Would you go sprinting to the fish counter to buy those high priced crab legs? Of course not!
The answer as to WHY should be a bit obvious: the overwhelming emotions of fear and greed cloud traders’ judgments when looking at their trading screens. Here is what I would rather have you do. At the very least, attempt to minimize/manage your emotions in trading (reading Dr. Woody Johnson’s articles on psychology should help you with that!) The next thing I would have you do is apply your grocery shopping experience to get a better forex price when you’re trading; buying things when they are cheap and selling them when expensive. (I still haven’t figured out how to short crab legs when priced high at the grocery store!)
So what do high/expensive and low/cheap prices look like on a chart? Let’s take a look.
In this GBPUSD 180 minute chart, I’ve marked a supply zone and a demand zone. When prices are cheap, on sale, what do you do at the store? You look to buy! When forex prices are cheap, in one of our quality demand zones, I’m hoping you already know what to do! (That would be to buy.) When prices are expensive, not on sale, in fact marked UP in price, what do you do at the store? You aren’t buying! (Please tell me how to short crab legs at the store if you know how!) As a trader, when forex prices are expensive, in one of our quality supply zones, you should be looking to sell.
So there you have it, how your shopping skills can make you a better trader. By applying your skills of shopping at the grocery store and using our supply and demand zones, you should become a better “shopper” for good prices in the market, hopefully making you a much better trader!
Until next time,
Written by Rick Wright, Online Trading Academy Instructor. Rick Wright’s goal as an Online Trading Academy Instructor is to accelerate the student’s learning curve, whether they are interested in High Frequency Trading or Investing for Beginners. He teaches classes on Online Stock Trading, Forex Trading and Futures, among others. Rick studied economics and psychology at Iowa State University, and entered into the brokerage business in 1992. He earned the NASD Series 4,7,9,10,24,55,63, and 65 licenses. He helped grow an online brokerage business which was eventually sold off. Rick has also held positions as broker, branch manager, and several VP positions in the brokerage business. Rick began trading equities in 1997, and was introduced to the Forex market in 2002. Currently trading from home in Dallas, Rick is also a frequent contributor to various TV and business talk radio shows.