Supply and demand is not a new concept. Adam Smith wrote of it extensively in many of his publications including his prized work entitled; “The Wealth of Nations”. There are many theories regarding how, and what effects supply and demand. The entire goal of this quest is to figure out where price is going. Just watch a few minutes of CNBC, Fox Business, CNN Money, Bloomberg, or just about any other news outlet in the morning and you will likely hear just enough theories, opinions on what’s influencing the financial markets to become very confused. Most of us would agree that in any market, the movement of price is simply a function of an ongoing supply and demand equation. Where everybody differs in opinion is the question of what is affecting supply and demand, and this also happens to be what everyone focuses on. This is talk that dominates financial news channels 24/7 around the world – talk of interest rates, the latest issue in the Middle East, what’s the whisper number for Google this quarter, and so on. Smart phones run out of battery life trying to keep up with all the economic data coming through. Again, focus on all these influences on supply and demand is to attempt to determine where price is going to turn and where it is going to go. What I do decidedly different than most is simply ignore all those influences. I mean I literally ignore any and all of the news, data, and information that has an influence on supply and demand. 100% of my focus is on one thing, the actual supply and demand itself. Why do I care about reasons people, banks, and financial institutions are buying and selling if I have a very good idea where they are buying and selling? Price changes direction at price levels where supply and demand are out of balance, so my focus is identifying the supply and demand imbalance itself, not trying to figure out the latest scandal in Cyprus. Even if I did spend some time dissecting Europe’s balance sheet, I would end up with the same information millions of other people already have so there would be no edge for me.
Specifically, I am focused on where big institutions are buying and selling in markets. Many people will say that is not even remotely possible. If you are in that camp, that is ok, this is what makes a market. Truth is you can identify where the smart money is buying and selling in markets if you know how to identify and quantify demand and supply on a price chart.
Let’s take a look at a recent short term income buying opportunity we had in the S&P. The supply/demand grid you see below is found in the Mastermind Community at Online Trading Academy. It is one of many tools and resources used by our members. The first row (top demand row and bottom supply row) are levels found for short term income trading opportunities. The second and third rows are levels to be used for longer term wealth opportunities (larger supply/demand imbalances, larger profit targets).
S&P Demand – 1/13/14
Our supply/demand grid had a short term income demand level in the S&P at 1808 – 1811 which is where we want to buy. As you can see from the grid, the nearest significant supply level was at 1840 so there was room for the price to rally from our demand zone.
After the market got going, price fell into our predetermined demand level where our students were instructed to buy. How did we know banks were buying at that level, creating the demand? Look at the demand level shaded yellow. It is demand because price rallied from that level as I write about in so many of my articles. Think about this… Do you or anyone you know have an account size to cause a demand level like that in the S&P? Probably not, so… if it is not your demand, whose demand is it? It is the picture that represents where the smart money is buying, our odds enhancers tell us this. That is where they are buying, that is where we want to buy. I do not care about why they are buying there at all. Why would that matter?
We just predetermined where the low of the day was in the largest equity index markets in the world this is long before the market even opened. We did not have to consider ANYTHING that had to do with economic reports, balance sheets, Greece, earnings reports, or any of that stuff… In other words, we spent 0% of our time focused on what almost everyone else spends 100% of their time focused on to answer the same question. That demand level ended up producing the low of the week for the S&P which is when we bought.
I started my career on the floor of the Chicago Mercantile Exchange facilitating institutional order flow. Therefore, I know what the picture of a exceptionally smart money demand and supply looks like on a price chart. The more you understand how to quantify demand and supply in any and all markets, the less you need to focus on anything else. The point of this piece is to make sure you are focused on the right information when building your trading strategy. If not, you may find one day that you have figured out everything there is to know about economic reports only to realize that this will not help you make money speculating in the financial markets. Instead of asking what the financial reports and numbers suggest to determine where price is going to go… Skip the first part and ask yourself where price is going to go and understand the only thing that causes price to turn and move in markets is pure supply and demand.
Lastly, the trade above is from one of our newer students and it was her very first live, real money trade after lots effort and practice. She is a regular reader of Lesson’s From The Pro’s. Great job on your first trade!
I hope this was helpful. Have a great day.