During my time on the floor of the Chicago Mercantile Exchange I noticed many things that helped shape my thought process and strategy that I still employ today. I started on a very busy trading desk right next to the trading pits and my job was to facilitate institutional order flow. One of the many things I noticed was that most of the trading action happened very early in the day. Furthermore, bank and financial institution profits and retail trader losses happened at that same time, very early in the day. I realized that most of the time, when an institution was buying in a big way, there were many retail sell orders on the other side of that trade and vise versa, when the institution was selling it would be to retail buyers. This was clear insight into the fact that this whole trading and investing game is a massive transfer of accounts each day from the people who don’t know what they are doing (retail novice traders and investors), into the accounts of those who do (financial institutions). I started to think… If I could just learn to identify where institutions were buying and selling in a market by looking at price charts, wow, this could be a really nice way to earn a very healthy living. Just trading two hours a day early in the morning was icing on the cake and I love icing. This is exactly what I taught myself to do.
Let me explain how this works… Most people are told not to trade the open of a market. They are told to let the market open and let it settle down for a bit before taking a trade. This is good advice if you are a novice trader; but if you do know what you’re doing, you absolutely want to trade at and around the open as this is where the most predictable profits are for the day trader or “two hour morning trader.” Institutions have big buy and sell orders in the market at specific price levels and most people think you can’t figure out where those buy and sell orders are, think again…
The screen shot below is of our Supply/Demand grid. This is a service for our members where we give supply and demand levels for all the major markets around the world each day. This was a supply zone in the S&P early in the morning, around the market open. Keep in mind that when I say supply and demand levels, I mean price levels where supply and demand are out of balance in a very big way, where banks are buying and selling. I am not talking about retail supply and demand, there is a big difference. The key is knowing what that picture looks like on a price chart and that all comes down to the “Odds Enhancers” we use at Online Trading Academy.
Supply/Demand Grid: S&P Shorting Opportunity – 7/21/15
On a typical morning it takes me about 30 minutes to analyze the markets we trade, identify the institutional demand and supply levels and put the buy and sell orders into the market. After that, there is no reason to spend time in front of the trading screens. After all, these days you can put your entire order into the market and leave it alone. We call this “set and forget” at OTA. During the session shown in this piece, we identified that banks were willing sellers in the 2122.50 – 2125 price level (supply).
As you can see, price rallied back to our predetermined supply level where Mastermind members were instructed to sell. At the point of entry however, there was no reason to be in front of the computer screen if you put your entire order into the market. The supply level is over to the left. You may be asking yourself, what is so special about that area, that picture… The odds enhancers tell us that there was plenty of willing supply in that area. Could the trade have not worked out? Sure, but that’s ok because the loss would have been very small.
How do the profits work? Let me explain… Let’s start with the supply level, where the two black supply lines begin and the yellow box. Price falls from that level because supply exceeds demand. Do you or anyone you know have an account size to create a supply level like that in the S&P, one of the biggest equity index markets in the world? Probably not. So, if it’s not your supply, whose supply is it? It’s a big bank or institution’s supply. Next, let’s focus on the circled area on the chart, when price rallies back to the area which is where we are sellers according to our rule based strategy. Let’s specifically focus on the buyers. Who is buying in the circled area when we are selling? Is it a consistently profitable buyer or a novice buyer? Only a novice buyer would buy after a rally in price like that and into a price level where supply exceeded demand. So, what you have at that moment is a novice buyer buying against financial institutions’ sell orders. Really think about that for a moment. At that moment, it’s like the Patriots against the Jaguars (no offense Jacksonville fans), the Blackhawks against the Ducks (no offense Ducks fans, I live in Chicago), Mayweather against my 94 year old grandmother (she is a fighter but not that strong), I think you get the point. You have the smartest most profitable seller selling when the most novice buyer is buying and the outcome of that battle is VERY predictable. This very unbalanced equation or battle almost always takes place in the first two hours of a trading day.
This strategy takes about an hour or so a day to employ, in the early morning, if you have the time. The key is knowing what the picture of institutional demand and supply looks like on a price chart, understanding the simple rules of the strategy and having two hours in the morning to execute the analysis and strategy. Then, go live your life.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org