I remember my days on the trading floor of the Chicago Mercantile Exchange. My job was to facilitate institution order flow. Each day, I would take orders from banks, institutions, money managers, and so on and facilitate the execution of those orders into the various markets. Having the real buy and sell orders from the institutions in front of me, I could clearly see where the strongest demand and supply was in the markets. If I wanted to know where the low in the S&P was going to be, all I had to do was look in front of me and see where the largest amount of buy orders were below current price, the market’s real demand, and vice versa for supply. Each day, price just moved from where the significant buy orders where (demand), to the price level where significant sell orders were (supply).
Today, we don’t have much in the way of paper orders anymore like I dealt with on the trading floor. Just about everything has gone electronic. However, from my 30,000 foot view of how people understand and trade the markets today, it is so clear what has happened over the years. What is such a simple and obvious equation has turned into complex math driven strategies, endless combinations of indicators, and much more due to the technology boom of the past decade. While technology has advanced so much and change happens almost daily, how we make money buying and selling in markets has not changed one bit. What caused price to turn and move many years ago is exactly what causes price to turn and move today. It is still 100% about where the simply supply (sell orders) and demand (buy orders) are.
OTA Supply/Demand Grid, December 5, 2012
Therefore, we use price charts to figure out where those orders are, the demand and supply. At Online Trading Academy, we look for the picture that represents those orders. To do this, we use a checklist called “Odds Enhancers.” Above is the Supply/Demand grid in the Mastermind Community, a service for our graduates each day. Notice that on December 5th, the grid identified where institutions were buying and selling in the S&P. Let me share some Odds Enhancers with you here that helped identify these key levels for our grads. I will do this in hopes of improving your short term trading for income and long term trading for wealth.
1) How did price leave level?
The stronger the move in price away from an area, the more out of balance supply and demand are at the area. That is what causes the strongest turn and move in price in a market, a big supply and demand imbalance.
2) How much time did price spend at the level?
At price levels where supply and demand are most out of balance, you always get the least amount of trading activity. Therefore, the less time price spends at a level, the more out of balance supply and demand is at the level.
3) First retracement?
Most trading books tell us that when we are buying at support or selling at resistance, don’t take the first retracement. Instead, let the level be tested a few times to make sure it’s strong. I would suggest the opposite with Odds Enhancer #3. We want to enter the position on the first retracement because it is at that point that supply or demand is strongest. With each successive retracement in price, the level is getting weaker, not stronger like the trading books suggest.
There are more Odds Enhancers of course but these are some that allowed us to determine where the significant demand and supply were on December 5th, above. Seeing where these orders are on the price chart is the key to everything we do. It is how we are able to attain the lowest risk, highest reward, and highest probability entry (and exit) in any market and time frame. The hardest part is realizing that how and why prices turn and move in markets has never changed, no matter how far technology advances. Faster and better number crunching will never be more important than knowing where institutions are buying and selling. Keeping things simple is the single greatest challenge for the average person, from what I see.
Hope this was helpful, have a great day.