Stocks

Supply and Demand, Isn’t That Support and Resistance?

BrandonWendell
Brandon Wendell
Instructor, CMT

While teaching a Professional Futures Course in San Jose last week, I received lots of compliments from returning students on the high quality of our more recently published course material. These students were retaking the Professional Trader Course as well as the futures course after having been gone from Online Trading Academy’s family for many years.

One of the students remarked at the beginning of the course, “What is the difference between supply and demand as you call it and the old support and resistance levels we have always heard about elsewhere?”  This is a common question for those novice traders who have not been exposed to the institutional style of trading.  I proceeded to show the students the classic definition of resistance and support from a popular financial website.

Paraphrasing the definitions, they described them as an area where price has historically had trouble moving through. They said support is where lots of buyers tend to enter the stock and resistance is where sellers tend to enter.  The definition also stated that the more times the level is tested the stronger it can become.

We then looked at a chart and started to locate those levels based on what the site and popular trading books would have you mark.  The fun part was the student’s reactions when they realized that they were not in the same places that they would have marked demand and supply based on Online Trading Academy’s core concepts.  Furthermore, most of the so called support or resistance levels would have been no better to trade than a coin flip.

Knowledgeable traders need to look for true supply and demand in order to be successful.  We want to trade as the professionals do, not the retail investor.  It is true that we buy in areas where buyers are likely to enter the stock.  But not just any buyers: institutional buyers.  Ironically, it tends to be the same place that the retail traders and investors are exhausting their supply.  That is what defines demand.  It is an imbalance between buyers and sellers that displays certain characteristics that we can readily identify on a chart with the proper training.

When we see that demand is weakening and selling pressures overtake it in a price level, it also makes a distinctive pattern on our price charts.  We look to this as supply.  By knowing where these levels have been in the past, we can enter into trades with high confidence since we know that there is likely to be leftover institutional orders that will help us profit in our trade direction.

Novices often do not have patience when trading or investing and chase prices when their emotions take over.  The institutional traders use computers to work large orders and look to enter or exit based on an average price.  These leave “footprints” on a chart that the patient trader can use to their benefit.

You may have noticed that I was a bit vague in my definitions of supply and demand.  I also did not explain the exact patterns or “Odds Enhancers,” that Online Trading Academy graduates use to determine the best trading opportunities.  This wouldn’t be fair to the students for me to simply give away in an article.  But our instructors will give them to you in one of our Professional Trader Courses.  Come visit your local center today.

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.