For any market speculator, the most important function of your routine is proper analysis of supply and demand. This leads to the two important pieces of a trade/investment:
- Market Turning Points – For low risk / high reward entries and exits
- Large Profit Zones – Profit potential
As I have written about before, one of the most important pieces of that analysis is knowing the objective profit zone on a given trade. The other day on our Supply and Demand grid, we used our rule based supply and demand analysis to attain a very low risk, high reward, and high probability trading opportunity. I will explain for your review in hopes that you can understand how important the Profit Zone really is.
This opportunity was found in the NASDAQ futures using a very small time frame. Notice the supply level on the grid and chart #1. We know this is a supply level because price could not remain at the level and declined from the yellow shaded area. Price only declines from supply because there is more supply than demand at that level. Notice the first time price revisits supply on chart #2. Our rules tell us that novice traders are buying here. We know this because these buyers are buying AFTER a period of buying, mistake number 1, and they are buying at a price level where supply exceeds demand, mistake number 2. The objective laws of supply and demand ensure that the trader who commits these two mistakes will consistently lose. We simply sell short at the level with our protective buy stop just above the level. The lines/level represent the “supply zone”. As active traders, we determine these zones each day. As longer term investors, we do the same thing in the larger time frames.
Supply Demand Grid July 26th – NASDAQ (NQ)
Let’s now discuss the key point that made this trading opportunity such high probability. Notice the rally in price on chart #2 up to the grid supply zone. It is a strong rally built with NO DEMAND levels during the rally, just nice big green candles. This means that as soon as price reached supply, it was likely to fall very quickly back through that area. We require strong rallies in price such as this one to our pre-determined supply levels as that increases the odds of our short position working. In other words, price reached our supply level and we shorted at supply for a move down through the very clear “profit zone”.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org