Recently I was walking the streets of Manhattan, looking for my hotel. I thought I knew where I was going, identifying some landmarks and asking people for directions, but in the end I was lost. I tried one more path but that was unsuccessful and didn’t lead to my destination. What was I to do? I noticed a few feet away from me was a bus stop and on the wall was my solution: a complete map of Manhattan. You see, the map gave me a very big picture view of Manhattan which I was not able to see or comprehend from street level, as I was focusing only on my near-term surroundings.
If you are a short-term trader making buy and sell decisions on a five-minute chart without paying attention to where price is in the larger time frame, my guess is that you are losing money. The key to proper low risk, high reward, and high probability trading and investing is having a complete view of both the larger and smaller time frames of the market. This allows us to:
1) Know where current price is in relation to the larger time frame supply/demand curve, which tells us whether price will go up or down (buy or sell).
2) Obtain a very low risk/high reward entry into the market by combining larger time frame location with smaller time frame supply and demand levels.
Let’s take a look at how we handled the recent big move in the S&P. Monday, June 18th, I was leading a live Extended Learning Track (XLT, graduate trading room) session for our students. We were live in the markets going over a daily chart of the S&P (red box). Price had rallied all the way up to a “fresh” supply level, meaning the likely next move in price was down. This is significant because it is a larger time frame, the daily chart.
Live XLT Session – Mon. June 18th – S&P Into Supply
This supply level was from 1348 – 1360. Again, this is the larger time frame supply and demand curve you see above. With price at larger time frame supply with larger time frame demand much lower, the likelihood is that price will decline significantly.
Live XLT Session – Thurs. June 21st – The Short Entry
During a live XLT session that Thursday, price again was sitting into the daily supply level but on this day, a small time frame supply level formed which meant a very low risk and very high reward opportunity. During the session, as you can see on the chart, the XLT instructor sold short at 1351.25 with a protective buy stop at 1354.50 with a target much lower.
Soon after selling short, the S&P fell more than 25 points and the Dow declined more than 250 points in a very short period of time. The key to precisely timing this major decline in the market was properly combining the larger time frame supply level and significant downside profit zone with a smaller time frame supply level (within the larger time frame supply).
In Manhattan, I could not figure out where I was going while walking down streets until I looked at those streets on a larger map view of the whole city. Knowing where price is on the larger time frame supply and demand curve, we are able to pinpoint turning points on larger time frames with big profit potential. Without this, it is difficult. I think it was the Mad Hatter from Alice in Wonderland who said: “If you don’t know where you’re going, any path will take you there.”
Hope this was helpful, have a great day.