Awhile back, I was walking the streets of Manhattan looking for my hotel. I thought I knew where I was going, identifying some landmarks and asking people for directions, but in the end I was lost. I tried one more path but that was unsuccessful and didn’t lead to my destination. What was I to do? I noticed a few feet away from me was a bus stop and on the wall was my solution, a complete map of Manhattan. You see, the map gave me a very big picture view of Manhattan which I was not able to see or comprehend from street level, focusing only on my near term surroundings.
If you are a short term trader making buy and sell decisions on a five minute chart without paying attention to where price is in the larger time frame, my guess is your losing money. The key to proper low risk, high reward, and high probability trading and investing is having a complete view of both the larger and smaller time frames of the market. This allows us to:
1) know where current price is at in relation to the larger time frame supply / demand curve which tells us whether price will go up or down (buy or sell).
2) Obtain a very low risk / high reward entry into the market by combining larger time frame location with smaller time frame supply and demand levels.
Let’s take a look at a recent trade in the S&P. Tuesday, Oct. 1st, the S&P rallied almost 17 points in one day, a very big move, closing near the high of the day. The news was good, a rally was under way, most people around the world were buying the biggest equity index market in the world. However, as you can see from the chart below, price had rallied all the way up to a “fresh” supply level meaning the likely next move in price was down. This is significant because it is a larger time frame, the daily chart. Also, notice all the room below for price to fall. In other words, with price at supply and little demand below, there was not much to stop the S&P from falling.
S&P Daily Chart: 10/3/13
S&P: Short Trade
One of the most important components to this trade working out well is something that that you don’t see on this chart, the larger time frame. As I have been going over in XLT’s and in a prior article, the NASDAQ reached a fresh supply level seen on the weekly time frame. With this daily S&P supply level near the NASDAQ weekly supply level, the odds were strong that price would fall. In other words, price was very high on the supply/demand curve and this is key information.
I shorted the S&P in three spots on October 1. 1683, 1685.75, and 1688 as seen on statement above. I planned on shorting more but price didn’t go high enough to meet entry. Two days later on October 3rd, I exited the trade at 1671.75 for a profit of $2,637.50 as there was some smaller time frame demand in that area.
In Manhattan, I could not figure out where I was going while walking down streets until I looked at those streets on a larger time frame map of the whole city. Knowing where price is on the larger time frame supply and demand curve, we are able to pin point turning points on larger time frames with big profit potential. Without this, it is difficult. Knowing where you are on the “curve” is so critical! I think it was the Mad Hatter from Alice in Wonderland who said: “If you don’t know where you’re going, any path will take you there.”
Hope this was helpful, have a great day.