If you have been reading Lessons from the Pros for any time now, or if you have graduated from an Online Trading Academy course, you know that to execute trades, we rely on supply and demand levels. The biggest question that most traders face when determining whether or not to enter a trade is whether the price will bounce or break a level. Fortunately, there are certain clues that may help you determine whether or not to take action and the direction of that action.
First of all, let me state that I am a proponent of trading bounces of supply and demand rather than chasing breakouts. If you read most trading books, they are filled with examples of breakout trades. However, how many people do you know that have become rich from trading after reading a book? The truth is that many if not most breakout trades tend to fail. I’m sure you will now flood me with email examples of breakout trades that netted great gains in the markets. But for every successful breakout, I can find at least six failures.
We want to trade with the highest probability and should stick to those trades that tend to work out more often. Besides, most breakouts turn into bounce trades to shake out weak investors who don’t know how to set stops properly. Patience allows us to enter with a more favorable price.
So, what are the clues to look for to determine a bounce or break of supply or demand levels?
- Look to the candles. If you are seeing small candles, this indicates lack of momentum, and when this occurs near these levels, it is hard for price to break through. Large candles could mean momentum to carry through a level. However, there are exceptions.
- Topping tails on candles indicate selling pressure. Seeing this on candles near supply makes for reversals much of the time. Bottom tails near demand also indicate this as well.
- Volume is a major indicator. To break out to new levels, you would expect to see increasing volume to carry you through. Be careful, a spike in volume could be capitulation and a reversal sign.
- The markets and sectors confirming. The markets and sectors have a large influence on the direction of individual stocks. Watch them for leadership or confirmation.
That covers the basics. There is a bit more to it, but with the proper guidance from Online Trading Academy’s instructors and a bit of practice, you can become an expert in the bounce or break game. Until next time, trade safe and trade well!