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How Hot is the Glass?

I receive a lot of emails from students wanting to know how to tell if a supply or demand zone is likely to hold or break.  Understanding this is critical for trading, for if we buy or sell at the wrong time, we give up the opportunity to make greater profits, or worse, we lose money.

In the Professional Trader Course as well as the Extended Learning Track, we stress the importance of the Odds Enhancers as a way to filter out weak opportunities and find the best trades that we should take.  There are many Odds Enhancers but with knowledge and practice, using them becomes second nature and your consistency in the markets generally improves.

An Odds Enhancer that we look at when determining the strength of a zone is how price left that zone.  Think of a glass of water sitting on a table.  If you were to grab the glass only to find it filled with scalding hot water, you are likely to release your grip very quickly.  But if the glass was filled with room temperature water, you could hold the glass as long as you would like or even take a sip.

Price works the same way.  Traders need to focus on the strength at which price left the origin of the supply or demand zone.  If price leaves quickly, it shows a large imbalance of supply and demand and therefore a stronger zone.

Looking at the following chart, we can see that we left the demand zone with large green candles when demand was formed.  This means that this is an area where buyers are much stronger than the sellers.  The glass is hot!  When price returns to that level, we would have a high probability buying opportunity since the sellers are weak there and price is likely to rise again.

bwendell 20120403 - US-strong-demand

What happens if we leave the area slowly?  We would likely see smaller candles and/or a mix or red and green candles.  The battle between buyers and sellers is pretty even and no one side has the major advantage.  Without clear direction in this zone, prices are less likely to bounce fast.

bwendell 20120403 - US-weak-demand

The same can be said for supply zones.  For the zone to offer us a higher probability selling opportunity, we would want to see a fast drop from that level.  On the charts this would be characterized  by large red candles, gaps down, and/or topping tails on the candles.

bwendell 20120403 - US-strong-supply

If you do not see that occurring, you would have a lower probability of success in selling at those levels.

bwendell 20120403 - US-weak-supply

So now you are aware of one of the Odds Enhancers we can use to increase our chances for success in trading any market and any time frame.  To learn the others, join us at one of our worldwide education centers and increase your knowledge.

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.

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