Hello traders! You are welcome. In my last article, “Which Dirty Shirt Today?” I mentioned at the end of the article that the Yen pairs were all running into supply levels that were 3-5 years old, and would prefer a significant retracement before going long. Since the time of that writing and the time of this writing, the USDJPY is down over 200 pips, and the EURJPY is down 700 pips. While not mentioned in the article, the GBPJPY is also down 700 pips. Hopefully you took the hint and avoided the amateur mistake of holding on to long trades when prices are moving against you and breaking demand zones! If you took any short trades and made a few extra pips in the past two weeks, nice work!
The point of this newsletter is not to pat myself on the back. This week’s newsletter is to address a very common mistake that I see in nearly every Online Trading Academy class that I teach. The mistake is how many new students are drawing in their supply and demand zones. Very often new traders draw in a chart that looks like this:
Nice and easy, the high and the lows are drawn on the chart. With a little prodding, the new student starts adding in each and every turn in the market, until their chart looks like this:
As Margie, a student in Philadelphia commented, “The chart looks like a zebra!” Indeed it does! What is really showing up on the chart is nearly every turning point that has happened since mid-January-both good and bad support and resistance lines. Notice I said “support and resistance.” This is a bit different than our “supply and demand zones.” Our goal at Online Trading Academy is to eliminate the weaker support and resistance lines, and concentrate on the stronger supply and demand zones. In our opinion, this will give you fewer and better trades. If you could make the same or more money taking fewer trades, would you do it? I know I would.
So what does the title of this article, “Stairsteps”, have to do with our zones? When looking at a chart drawn by one of our instructors or students, very often our zones look like stairsteps-both up and down.
Notice the pattern that the yellow zones are showing, and let’s ignore the blue zone for now. See how the demand zones look like stairs going down? That is because we have a process for finding the “next” zone. The basics are as follows: find your current price, look in the past and down to find the next high quality demand zone. Our high quality supply zones are found nearly the same way-from current price, look into the past for the sharp moves to the downside. This may be quite a bit different than what you have seen in other resources about trading, be it books, magazines, or other websites. As most of the other instructors here have said at least once, if you do what everyone else does, do you really have an edge? The answer is no. As we look into the past to find our next high quality supply or demand zone, we must decide when to “ignore” a previously valid level.
Now take a look at the small blue zone on the last chart. Notice the swing low that it was drawn from. Many amateur traders/chartists will continue to use that level as future supply or demand, but we at Online Trading Academy know that the level is no longer valid. The very basic reason is the fact that since it was a demand zone, and would indicate a level where people will continue to buy, the fact that price has broken through the level headed down indicates that anyone who wanted to buy at that level has certainly been filled! What about the old phrase “what was resistance becomes support, what was support becomes resistance?” This is true, but everyone who wanted to sell at that level has also been filled on the next move through the level! Once price action has moved through the level in both directions is when I will remove it from my charts.
If you don’t have a rule in your trading plan for when to remove a level from your charts, eventually your charts will look a bit like the zebra instead of the stairsteps you see here.
Until next time,