India Markets

Breaking Down the Door

brandonwendell
Brandon Wendell
Instructor, CMT

As traders, we are taught to buy in/near demand zones and sell in/near supply zones. The main thing that we must identify is whether or not the zone is likely to hold or break. We obviously do not want to enter a trade that is likely to be stopped out immediately. This is a waste of time and money.

In the Online Trading Academy courses and Extended Learning Track, we teach the Odds Enhancers that go beyond investing for beginners.  These scans and ratings we apply to the price charts allow us to take only the highest quality trades and pass on those that would likely cost us money or waste time.

When we are looking at price approaching a supply or demand zone, we can make certain assumptions about the likely future of price by the way that price is approaching that zone.  For instance, when price is going to reverse at a supply zone, there should be a fast move into that zone with large green candles that exhausts the buying pressure just as we reach the area where selling pressure outpaces the buying pressure anyway.

We can see a completely different picture when we look at the next chart.  Notice how the price paused just shy of the supply zone.  This did not exhaust all of the buyers going into the supply zone.  They were allowed to catch their breath and build support to break through the supply zone.

I like to think about this price pause as though it were a person trying to break through a locked wooden door.  If the person runs right up to the door, stops at it and then tries to break through by leaning on it, they are not likely to find success.  There is a better chance for breaking down the door when you pause before the door, pull back to get momentum and then carry it through.

We see this pause and momentum breakout in the following chart of Reliance.  As price approached demand, it paused with some buying pressure so that it could gather more selling pressure and break the demand zone.

The same thing typically happens when we are testing a supply or demand for the second or third time.  Online Trading Academy graduates know how to trade the strongest retests of the zones.  Subsequent tests weaken the zone and when presented with the evidence of a pause to build momentum before testing the zone, we are more likely to break through.

So now you have another tool that you can use to analyze price action and potential future action in your charts.  Learn all of the odds enhancers by joining us in a course or investing seminar at Online Trading Academy.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.