Today I want you to learn a trick to buy, sell, cash out and repeat. This will show you techniques that builds on some core concepts that active traders used to buy stocks, sell, cash out and repeat the process. I will seek to quickly review cash flow, discuss stock predictable patterns, the process and practical strategies to utilize the process.
The learning outcome of today’s post is to show you how professional traders make cash flow by simply trading the market remember in the last post, we mentioned that cash flow is king.
There is a distinction between cash flow traders and equity traders, the equity traders trade to increase their equity position in their portfolio while the cash flow traders trade to increase cash pound for pound or dollar for dollar deposited into their account.
The reason is that cash flow is king as a person can have zero net worth, but cannot live more than a week without cash flow. The active trader secret is you make money when you sell the stock and that is cash flow. So, you LONG or SHORT a stock which means buy low and sell high or sell high to buy low.
Imagine you contract someone to build a house for
you; the contractor asks you what is your planned outcome and you say you want a 4-bedroom detached house. If the contractor asks you if you want a pile foundation or a raft foundation; you would in real sense reply him that the contractor should specify or follow the designs. Same with the outcome of active trading, you are not bothered the tool such as Exponential Moving Averages, Fibonacci and many others if you make money because It is the real outcome.
Let me ask you this question.
Why do Casinos make so much money, all the time? I can answer by saying casinos understand human behaviour and are in a great position to take advantage of human behaviour and casinos play the odds. You can learn from these to trade for cash flow.
Trading Casino Style – Scenarios
Let’s look at these scenarios;
A stock rose from $45 to $85 in 3 years and B stock rose from $10 to $12 in the same period. Obviously, the A stock is exciting here is the next question;
The answer is the B stock because you can see predictability in the B stock.
Fear of loss of capital drive traders to sell when stock is high and Fear of loss of opportunity drive the trader to buy when stock is low. Sounds more like market speculation causing the cycle to continue thereby creating a pattern of behaviour that is predictable just like for the casinos.
If only you can recognize it and trade using this style of trading because you
would have profited approximately $16/share (see second images below for proof) and doubled it if you short the stock with no big risk by just understanding the pattern which is predictable. Predictable Pattern
A good pattern is profitable and probably more profitable as a trend trade. This is buy at support, sell or cash out at resistance and repeat the process as many as possible. This is simply trading a channel on a predictable human behaviour. See post on support and resistance here.
Support is a price point where the stock attracts more buying pressure than selling pressure and the buyers drive the price of the stock higher. Identify your support, you set this as the buying point for your trade.
Resistance is the price point where the stock attracts more selling pressure than buying pressure and the sellers drive the price of the stock lower. This is up high and when identified can be set as the point to cash out and wait for the next cycle.
The law in trading market is not that there are more buyers or sellers in the market but it is the buying pressure or selling pressure that moves the market.
To identify a support or a resistance, simply connect the dots of at least two points ideally, I will go for 3 similar price points. I will use a line chart, then use the candlestick for additional confirmation. It forms like a grid at various turning points in the price points.
Place a line on the extreme high and extreme low, then beginning to zoom in frame by frame. Stock prices shape up in little trends that are not sustainable followed by sideways corrections followed by little trends that are not sustainable followed by sideways correction leading into a longer-term trend. All stock trade in this style because of the human behaviour.
Your challenge is that when a stock is trending, you
must trade it like a trend and when it is channelling you must trade it like a
channel. Some traders trade channels alone and some trade trends alone, both traders are right and your job is to trade a trend as a trend and a channel like a channel to make you money.
You trade a channel by buying at support and selling at resistance. To buy at support, you buy at a price a little above the support just to be sure it is not false. Good traders trade with stop loss.
Casino Entry and Exits
To trade in a channel, the best indicator to use is called a stochastics because it helps to time your entries. It is spot on in timing channel trades.
When you are in a channel and the stochastics are in oversold it is a good time to buy and if overbought it is a good time to sell.
StochD is the indicator below the chart, the 12,7 in bracket are the range for overbought and oversold. These range can be set accordingly but I prefer 13,7.
KITS is my acronym for Keep it Trade Simple. Keep it Trade Simple you cannot get it massively wrongs.
How do you KITS? Play all your trade using a trade journal with a simple process I have used, simply analyse your trade, then chose a strategy, write down the plan such as your entry point, stop loss and a target; then measure against your plan – did you follow the plan or did your emotions get in the way and do I make any adjustment.
This is a strategic document to help you with your trading plan. Do not over think your strategy just keep to the KITS. Know the market structure and apply a strategy.
In a non-trending trade sell options such as sell covered calls, naked puts, iron condor or scalp. Remember to subscribe and I can send you a copy of my KITS tool.
Let me send you my KITS trade journal. Drop me a comment and I will send you a copy.
Decide what kind of trader you want to be, you want to be an income trader for cash flow. Learn the skills describe above by analysing the market, pick a direction and apply one of the strategies applicable to the market direction.
See you soon!