Wal-Mart Stores, Tesco Corporation, Costco Wholesale Corporation, and Sam's Club -- these are some of the biggest retailers in the world, huge operations that make fortunes in revenue. How do they do it? What is their big secret? Simple: at the end of the day, they have mastered the art of buying at wholesale prices and selling at retail prices.
Wait, this is supposed to be an article on trading, so why am I writing about the retail world of gadgets, clothes, and appliances? It's an important topic if you want to understand how to be a consistently profitable trader. Their buying and selling in their markets are no different than the actions of the consistently profitable trader. What most people don't realize is that big banks and institutions are in the exact same business. Think of any big bank or financial institution around the world. They derive profits the same way. Wal-Mart buys the plastics, toothpaste, and everything else at wholesale prices and sells them to us at retail prices. Similarly, banks and financial institutions purchase stocks and bonds at wholesale prices and sell them to the public at retail prices. They do this daily like Wal-Mart sells consumer products. There really is no difference between the business models at their core.
The good news is that traders can become a Wal-Mart or a big bank from the comfort of their own homes without dealing with employees, overhead, and the other common hassles of operating your own business. It all comes down to identifying wholesale and retail prices on price charts and then buying and selling at those levels. Let's get more specific with these actions, so you can become a better trader by the end of this article.
For Wal-Mart or Goldman Sachs Group to profit, they have to make sure that there are many willing buyers to pay the retail prices they are charging. When we trade, we must do exactly the same thing. We need retail buyers who are willing to buy at the retail (supply) levels we are charging. Take the example below from a trade executed during a morning trading session. In the session, I identified a supply level in the NASDAQ Composite. This is a price level that according to our rule based analysis had much more willing supply than demand. Another word for a supply level is "retail." Shortly after this price level was identified, price rallied up to our pre-determined supply (retail) level, which means people were convinced the NASDAQ was worth buying at that retail price (circled area). After they bought, the price declined as it should, and we bought at wholesale prices (blue line), profiting from this trade.
Again, this is really no different from paying extreme retail prices for a new car. As soon as you sign the papers and drive it off the lot, the price declines dramatically. The first step in this process is to accurately identify key supply (retail) prices in a market. The second step is to wait for someone to buy from you at that level. Just like people walk into a Wal-Mart store each day and pay retail prices, people will be more than willing to pay your retail prices in the markets. This is because most people buy on good news and in strong uptrends. In both cases, they are typically buying at or near retail prices.
Take a good look at the chart and specifically look at the supply level and then the rally into it followed by the decline. We are looking at the NASDAQ. That picture is the same picture of price movement as if you bought something at Macy's and then tried to sell it at a home garage sale. You are going to sell it for a much lower price than you paid for it at the Macy's store. Whether we are talking about a NASDAQ trade or a Wal-Mart product, the chart is identical. Just like the retail store, you must know what retail price to sell at (supply levels), and you must have the patience and discipline to wait for someone to be willing to buy at that level.
Good traders know price levels that are too low (demand/wholesale) and price levels that are too high (supply/retail). They buy at wholesale prices from people who are trained, conditioned, and willing to sell at wholesale prices. They also sell at retail prices to buyers who are trained, conditioned, and willing to buy at retail prices. Then, they just repeat the same simple process over and over for the entire life of their trading careers. When I was on the trading floor of the Chicago Mercantile Exchange, this is what traders did. No one cared about news, trend, opinions, or anything. It was simple buy low/sell high and vice versa. When I write articles that unveil the simple truth of proper trading and investing, I typically get some hate mail from people in the industry. This is not rocket science. How you make money buying and selling things in markets doesn't change. This is not to suggest that profitable trading is easy. You do need the skill to identify retail and wholesale prices (our supply/demand levels). But understanding how profits are derived is quite simple.
Editor's note: This story by Sam Seiden originally appeared on Online Trading Academy
To read more from Online Trading Academy, see:
Managing Risk With All-Time Highs
What Does a Commodity Spread Chart Look Like?
When Is a Bullish Spread Not a Bullish Trade?