Supply and demand is not a new concept… Adam Smith wrote of it extensively in many of his publications, including his prized work entitled The Wealth of Nations. There are many theories regarding how and what affects supply and demand. The entire goal of this quest is to figure out where price is going. Just watch 15 minutes of CNBC, Bloomberg or Fox Business News and you will likely hear just enough theories and viewpoints to become very confused.
Most of us would agree that in any market, the movement of price is simply a function of an ongoing supply and demand equation. Where everybody differs in opinion is the question of what is affecting supply and demand, and this also happens to be what everyone focuses on. This is the talk that dominates financial news channels and the internet 24/7 around the world: talk of Greece, Syria, the whisper number for Apple this quarter and so on. Smart phones run out of battery life trying to keep up with all the economic data coming at us. Again, the focus on all the influences on supply and demand is an attempt to determine where price is going to turn and where it is going to go.
What I do very different than most is simply ignore all those influences. I mean I literally ignore any and all of the news, data and information that has an influence on supply and demand. 100% of my focus is on one thing, the actual supply and demand itself. Why should I care about the reasons people and institutions are buying and selling if I know where they are buying and selling by focusing on the buying and selling itself? Price changes direction at price levels where supply and demand are out of balance, so my focus is identifying the supply and demand imbalance itself, not trying to figure out what is going on in China or behind a closed door OPEC meeting. And even if I did spend some time dissecting the Greece issue or Microsoft’s balance sheet, I would end up with the same information millions of other people already have so there would be no edge for me. I have enough trouble trying to figure out how they light the cheese on fire in the Greek restaurant. I’m kidding but you get the point…
Specifically, I am focused on where big institutions and banks are buying and selling in markets. Many people will say that’s not even remotely possible. If you’re in that camp, I respectfully disagree and that’s ok. You can identify where big institutions are buying and selling in markets if you know how to quantify and identify institutional demand and supply on a price chart.
Let’s take a look at a recent income trading opportunity from the OTA Supply and Demand grid in Gold. We equally active trade for income and position trade for wealth. For the purposes of this piece, let’s look at this active income opportunity in Gold.
OTA Supply/Demand Grid: Oct. 9, 2015 – Gold Futures
Above is the OTA Supply and Demand grid that we share with our members prior to the market open. It contains the institutional supply and demand levels in many of the major global markets, only 10 are shown in this screen shot. We determined prior to the markets getting going that Gold supply was at 1151 – 1154.
After the market got going, price rallied into our predetermined supply level where our students are instructed to sell short. How did we know that there was institutional supply at that level? Look at the supply level shaded yellow. It is supply because price declined from that level in strong fashion, as I write about in so many of my articles. We also had the specific picture (pattern) that represents supply (RBD). Think about this… Do you or anyone you know have an account size to cause a supply level like that in the Gold market? Probably not, so… if it is not your supply, whose supply is it? Banks and institutions. That’s where they are selling and that’s where I want to sell. I don’t care about why they are selling there at all; why would that matter?
Hmm… We just predetermined where the market would stop rallying and turn lower and we didn’t have to consider ANYTHING that had to do with economic reports, balance sheets, Greece, earnings reports or any of that stuff… In other words, we spent 0% of our time focused on what almost everyone else spends 100% of their time focused on.
I started my career on the floor of the Chicago Mercantile Exchange facilitating institutional order flow so I know what that picture looks like on a price chart. The more you understand how to quantify institutional demand and supply in any and all markets, the less you need to focus on anything else. The point of this piece is to make sure you are focused on the right information when building your trading and investing strategy. If not, you may find one day that you have figured out everything there is to know about the issue in Greece (including how they start the cheese on fire) only to realize that this in no way, shape or form is going to help you make money speculating in the financial markets.
Hope this was helpful. Have a great day.
Sam Seiden – firstname.lastname@example.org