There is a question that I am often asked in both classes and online: “What is the difference between supply and demand as you call it and the old support and resistance levels we have always heard about elsewhere?” This is a common question for those novice traders who have not been exposed to the institutional style of trading. I proceeded to show the students the classic definition of resistance and support from a popular financial website.
Paraphrasing the definitions, the site described them as an area where price has historically had trouble moving through. They said support is where lots of buyers tend to enter the stock and resistance is where sellers tend to enter. The definition also stated that the more times the level is tested the stronger it can become.
Looking at a chart you can locate the levels based on what the site and popular trading books would have you mark. Graduates of Online Trading Academy know that these points are not the same as the supply and demand zones that we use to enter and exit trades. Most of the so called support or resistance levels would have been no better to trade than a coin flip.
Knowledgeable traders need to look for true supply and demand in order to be successful. We want to trade as the professionals do, not the retail investor. It is true that we buy in area where buyers are likely to enter the stock. But not just any buyers: institutional buyers. Ironically, it tends to be the same place that the retail traders and investors are exhausting their supply. That is what defines demand. It is an imbalance between buyers and sellers that displays certain characteristics that we can readily identify on a chart with the proper training.
When we see that demand is weakening and selling pressures overtake it in a price level, it also makes a distinctive pattern on our price charts. We look to this as supply. By knowing where these levels have been in the past, we can enter into trades with high confidence since we know that there is likely to be leftover institutional orders that will help us profit in our trade direction.
Novices often do not have patience when trading or investing and chase prices when their emotions take over. The institutional traders use computers to work large orders and look to enter or exit based on an average price. These leave “footprints” on a chart that the patient trader can use to their benefit.
You may have noticed that I was a bit vague in my definitions of supply and demand. I also did not explain the exact patterns or “Odds Enhancers,” that Online Trading Academy graduates use to determine the best trading opportunities. This wouldn’t be fair to the students for me to simply give away in an article. But our instructors will give them to you in one of our Professional Trader Courses. Come visit us today.