Lessons from the Pros

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Putting the Puzzle Together

I know what you’re thinking… You just saw the Lesson from the Pros email with this week’s articles and as you opened it you thought, “Not another article on supply and demand”… Before you get too worried, let me assure you we will take the information to the next level in this piece and add some key concepts to your trading tool kit.

I want to go over a trade we identified in our live All Asset Mastery XLT (all asset class trading room) and walk you through all the deciding factors that led to a quality trading opportunity. First, notice the middle chart on the bottom row with the smaller of the two arrows pointed to it. This is a very large time frame chart of the S&P. On this chart, you will see that price has rallied to an area of supply that the arrow is pointed at. When price is at or near larger time frame supply, we only want to think about shorting when we are intra-day trading or longer term trading. Next, our focus was on the black chart in the upper right corner. During the early part of our live trading session, price was basing sideways and then there was a quick decline. I pointed that out to the XLT members and suggested there was a shorting opportunity when price rallied back up to the supply level because this represented institution/bank supply. Sure enough, this happened about five minutes later as you can see on the chart. When price was into the level, it was time to short, but that’s not all. We would never just sell short because price was into a supply level. We need to make sure there is no significant demand anywhere close to current price. In other words, there has to be room for price to decline. The circled area on the chart represents that picture. There is nothing in that circled area that represents demand, there is just clean space for price to fall through. Lastly, we looked at the chart of the US Dollar in the upper left corner. Notice that while there was supply above current price, there was still room for price to rally before it reached supply. That US Dollar information was a hint that S&P prices were likely to decline. Quantifying institution supply and demand is the key to getting this right and accurately predicting price movement in any and all markets, and that’s all we are doing here.

Figure 1

Setting up this trading opportunity in advance is also very important, because it takes all the emotion out of the decision making process and it also means we don’t have to sit in front of the computer screen all day which no one wants to do.

During the trading session, price declined from that institution supply level and reached our profit target (blue line). As you can see, one of our students made just over $1,500 on the trade. I chose the blue line area as a profit target because it was just above some demand in this market. Identifying fresh institution demand and supply, properly correlating markets, and then executing our rule based strategy is the key to making this work.

Figure 2

Hope this was helpful, have a great day.

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.