In the Professional Trader courses at Online Trading Academy, we discuss how to properly identify the strongest supply and demand zones. One of the criteria for our entry into a trade is that the supply or demand zone we are planning to enter on should be fresh level. This means that it should not have been used before. The more times a zone has been used for a bounce, the weaker it becomes and that lowers our probability for success when trading it.
A common question that is asked in class when this topic is covered is, ‘How far back should I look to see that the level is fresh?’ This is indeed a good question. If you look back on most charts, you will discover that most levels have been used many times in the past, but seem to resurface again as a new supply or demand level.
I refer back to the psychology of why these levels work. Sure it is demand because buyers are more aggressive and will raise their bid to get the limited amount of supply at the level. Supply is caused by the aggressive sellers dropping their offering prices to offload shares to a lack of demand. But the true motivation for traders and investors to buy or sell at a level is either pain or pleasure.
People will take action at a particular price level if they had experienced the pleasure of gaining profits there before or expect to since they missed out on a previous opportunity. Or they will be motivated to act to avoid the pain they had felt by not taking action the previous time the price reached a level.
Think about how you felt when you saw the price drop from your purchase price. You may have thought, ‘Please just go back to break even!!!!’ Once prices did reach that level, you were either motivated by fear to exit, or greed (potential for pleasure) to hold on. Which decision was right was dependent on the trend and outcome of the trade.
Now, to answer the question on how far we must look back to verify the level is fresh. We look back until we see that no one cared about that level. I will look back until price has traded through that level in both upward and downward directions.
This would be the same for a supply level as well. If you see that the level has been used, then it is not fresh and it shouldn’t be used for trading.
So, look back to make sure that the level you are trading on is fresh so that you have the best opportunity to profit in the markets.
– Brandon Wendell – firstname.lastname@example.org