Once in a while, I will get an email from someone saying, “I like your supply and demand strategy but what strategy should I use in trending markets?” This person thinks the strategy is only for markets going sideways where they use supply and demand to pick tops and bottoms. What this person doesn’t realize is that we use supply and demand as the core strategy for any market, time frame, and market condition. We always want to buy at price levels where demand exceeds supply (where banks and institutions are buying) and sell at price levels where supply exceeds demand (where banks and institutions are selling).
The grid above is a good summary of what action to take in each of the three types of trend/market conditions. The ideal trade for the Online Trading Academy trader is to buy a pullback to a fresh demand level in the context of a larger time frame uptrend. Conversely, to short a rally in price to a fresh supply level in the context of a larger time frame down trend. For a real live trading example of trading with the trend, let’s go to a live Forex Extended Learning Track (XLT) on April 12th, 2012.
First, notice the entire chart, it is clearly in a down trend. The series of lower highs and lower lows suggests a down trend meaning more supply than demand is coming into this market. At Online Trading Academy, we do employ our “real time” trend analysis but that is beyond the scope of this article. The supply level pointed out in that XLT was the entry with a target of the demand level below as seen on the chart. Based on our odds enhancers, they told us that banks were likely selling AUDUSD at that level which means we want XLT students selling at that level. But, who would buy at that supply level?
The Setup – AUDUSD April 12, 2012
The larger time frame trend offers us a key odds enhancer to better our odds. If and when price rallied up to that XLT supply level, we would be selling short but again, who would we be selling to, who is the buyer? The buyer in this case would be making three key mistakes that only a novice retail trader would make. First, they would be buying after a rally in price which is never a good thing. Second, they would be buying into a price level where our strategy determined banks are selling AUDUSD. Last but not least, they would be doing all this in the context of a larger time frame downtrend. The laws of supply and demand ensure that this buyer will lose most of the time taking that action which means the odds are stacked in our favor as the seller.
The Result – April 12, 2012
Shortly after that trading opportunity to sell short was identified, price rallied up to that level and retail buyers committed those three mistakes and bought. Again, anyone who buys after such a big rally in price, at a price level where banks and institutions are selling, and in the context of a larger time frame downtrend is going to lose most of the time. This is where we want to sell. Price then fell to reach our target at demand. Selling at retail prices (supply) and buying at wholesale prices (demand), this is how you make money buying and selling anything.
Trading with the trend is great but you have to know exactly where to buy into an uptrend and sell into a downtrend. Fresh supply and demand levels offer you the lowest risk, highest reward, and highest probability entry into a trending market which is why we focus on them so much. To identify quality and acceptable levels, know your odds enhancers.
Hope this was helpful, have a great day.