Lessons from the Pros

Featured Article

Has The Stock Market Really Changed?

I remember my days on the trading floor of the Chicago Mercantile Exchange. My job was to facilitate institution order flow. Each day, I would take orders from banks, institutions, money managers, and so on and facilitate the execution of those orders into the various markets. Having the real buy and sell orders from the institutions in front of me, you could clearly see where the strongest demand and supply was in the markets. If I wanted to know where the S&P was going to stop falling and turn higher, all I had to do is look in front of me and see where the largest amount of buy orders were below current price, the markets real demand and vice versa for supply. Each day, price just moved from where the significant buy orders where (demand), to the price level where significant sell orders were (supply).

Today, we don’t have much in the way of paper orders anymore like I dealt with on the trading floor. Just about everything has gone electronic with the stock market. However, from my 30,000 foot view of how people understand and trade the markets today, it is so clear what has happened over the years. What is such a simple and obvious equation has turned into complex math driven strategies, endless combinations of indicators, PhD level economics, and much more due to the technology boom of the past decade. While technology has advanced so much and change happens almost daily, how we make money buying and selling in markets has not changed one bit. What caused price to turn and move many years ago is exactly what causes price to turn and move today. It is still 100% the simple supply and demand equation as it always has been.

OTA Supply/Demand Grid

OTA Supply/Demand Grid, August 5/6, 2014

Therefore, we use price charts to figure out where those orders are, the demand and supply. At Online Trading Academy, we look for the picture that represents those orders as that is where prices turn which is the origin of any market move. To do this, we use a checklist called “Odds Enhancers.” Above is the Supply/Demand grid in the Mastermind Community, a service for our graduates each day. Notice last week, the grid identified where banks were buying Euros. Let me share some Odds Enhancers with you here that helped identify this key level for our grads. I will do this in hopes of improving your short term trading for income and long term wealth.

1) How Did Price Leave Level?

The stronger the move in price away from an area, the more out of balance supply and demand is at the area. This is what causes the strong turn and move in price in a market, a big supply and demand imbalance.

2) How Much Time Did Price Spend At The Level?

At price levels where supply and demand are most out of balance, you always get the least amount of trading activity. Therefore, the less time price spends at a level, the more out of balance supply and demand is at the level. So, don’t focus on where price traded at but instead, become more interested in levels price could not trade at or had trouble trading at.

3) First Retracement?

Most trading books tell us when we are buying at support or selling at resistance, don’t take the first retracement. Instead, let the level be tested a few times to make sure it’s strong. I would suggest the opposite with Odds Enhancer number three. We want to enter the position on the first retracement because it is at that point that supply or demand is strongest. With each successive retracement in price, the level is getting weaker, not stronger like the trading books suggest. Remember, it’s all about the orders.

There are more Odds Enhancers of course such as “profit zone” which is key but these are some that allowed us to determine where the significant demand and supply was July 5th in the Euro, above. Seeing where these orders are on the price chart is the key to everything we do. It is how we are able to attain the lowest risk, highest reward, and highest probability entry (and exit) in any market and time frame. The hardest part is realizing that how and why prices turn and move in markets has never changed, no matter how far technology advances. Faster and better number crunching will never be more important than knowing where banks are buying and selling. Keeping things simple is the single greatest challenge for the average person from my experience.

Written by: Sam Seiden

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.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.