Trading Fundamentals: It doesn’t have to be complicated
Hello! I am very happy to return back to my blog for at least these next couple months. For those who have followed me in the past, you know that I’m a college student and therefore my academics unfortunately get in the way of being able to trade and update my blog here. But many thanks to those of you who reach out to me with your questions and comments. I always enjoy it when I’m contacted during spells when I’m not able to contribute.
The topic that I wanted to address first and foremost is something that continually deserves emphasis – trading in a way that makes sense macroeconomically and according to the way markets typically tend to behave. For instance, my trading strategy is actually predicated on a basic economic principle that many have heard of and/or at least partially understand – supply and demand. I’m sure most of you have heard about support and resistance levels in the market, and these genuinely represent areas in the market where supply and demand have a robust effect when it comes to the price action.
When an asset hits an upper-bound price and won’t go any further, the price history graphically depicted on the chart will show what’s call a “resistance level.” Conversely, when price hits a lower-bound and shows a hesitancy to dip lower, the graph will delineate a “support level.” A resistance level is also synonymous with a “supply zone.” This is the point in a market where participants determine that there is a surplus of “supply” of said quantity in the market, wherein there is no need for price to increase further. A support level is often referred to as a “demand zone.” This is the general area where the price of the asset is determined by market participants to be too low. What happens when something purchaseable has an overly discounted price? Demand goes up. It’s why stores have sales. It helps them sell inventory surplus, generate greater demand for their products relative to their competitors, engender greater interest in developing a long-term interest in doing business with their company, and various other reasons. But it fundamentally reduces back down to increasing demand. Below I have drawn in examples of resistance/supply and support/demand zones on a EUR/USD daily chart.
This is why taking trades at the supply and demand zones is so popular in trading, and a strategy employed by many successful traders. Because it follows the principles of economics. It’s not about finding some gimmicky MT4 indicator to do the work for you. Basically all new traders (including me at one point) fell into the trap of searching for the “holy grail” that would make trading a breeze and guarantee a lifetime of economic prosperity. It’s never quite that simple. But by having your trading follow sound economic principles, you will greatly enhance your ability to trade well and this is one such example.
To analogize, it’s similar to how sound, effective dieting practices must follow the principles of biology. It’s not about finding that “magical pill” that will melt the pounds away while continuing to eat calorie-rich food that’s relatively devoid of any nutritional benefit. It would be the equivalent to trying to find the “holy grail” indicator in trading. Perhaps that indicator can assist you in your trading much in the same way a dietary supplement can help you in achieving fitness or body composition goals, but it should never replace the basic foundations of trading (e.g., price action, support and resistance levels, trading with the trend) or the rudimentary elements in taking care of your health (e.g., proper diet, exercise, obtaining enough sleep). And to be clear, many of these special indicators and magic diet pills aren’t very effective in helping to meet your goals anyway.
Now I realize that some people may look at my trade analysis articles and think to themselves, “Well, this guy seems to be doing pretty well according to his own strategy, but there has to be an easier way of doing things.” The way I write up my posts, I can understand, may often feel like there’s a lot of thought and effort that goes into each trade. But honestly, there really isn’t. By this point, it’s really second-nature to me. I simply identify levels in the market that could be tradeable, and then watch the price action when it gets there. If the trade sets up the way I want it to, I take it; if not, I don’t and move on. It really is that simple, in theory. I know in practice it can be very difficult, as trading well and trading profitably in a consistent manner over time is no easy task. But there is nothing gimmicky about this – just simply trading how the markets have historically tended to act and according to very basic economic principles.
But as I’ve emphasized in the past, each individual needs to find a strategy that works in accordance with his or her “trading personality.” Each brain processes information differently, so it’s important to develop a method of trading that best dovetails with these mental/cognitive propensities. The strategy that I share in my blog is a basic example. And if you’ve followed my blog from the very first entries – back in 2012 – you’ll see that my trading style has actually changed as I become more experienced and continually learn new things. I simply hope that the strategy and trading tidbits that I share here is something that others can integrate into their own trading. If my exact strategy works for another individual and works effectively over time, that’s great, but I do realize that each person will process external information, stimuli, and so forth differently from the way I do and that’s to be expected.
