Sam Seiden
Independent Analyst
Newton’s first law of motion states that every object in a state of motion tends to remain in that state of motion unless an external force is applied to it. For trading, the two “forces” are supply and demand. While I often discuss the forces in articles, another key piece that I have wrote about the past two weeks is identifying price levels in a market where there is a major lack of supply and demand (force). At Online Trading Academy, we call this “profit zone” but it’s the same thing.
It is important to find price levels where there is a major supply and demand imbalance as that is where prices turn. However, it is equally important to find price levels where there is very little demand or supply (force) as these are areas where price will move through with ease. Let’s look at a recent example from last week’s Extended Learning Track Live Trading session to illustrate this point.
XLT Live Trading: 6/11/14 – S&P Trade, the Setup
Notice the chart above. During a live trading session with our Director of Instructor Development, Chuck Fulkerson, he identified a price level where supply exceeded demand, where financial institutions were selling the S&P. This level scored out as a 9 according to our rule based Odds Enhancers and one of the most important reasons was the “profit zone.” The setup was to sell short if and when price rallied back to that supply level. In that case, someone would be buying after a rally in price, into a price level where supply exceeded demand, near QQQ larger time frame supply, and so on. We are more than willing to sell to that novice buyer. The risk is low, reward high, and the odds are stacked in our favor as the seller. Next, we would have to wait to see if anyone thought the S&P was worth buying at that price.
XLT Live Trading: 6/11/14 – S&P Trade, The Result
Later in the day, price rallied back to the supply (the force), allowing banks and OTA students to sell short to buyers who thought the S&P was worth buying at that level. Price then turned lower and kept falling because there was NO FORCE (demand) to stop it. The lack of force was evident prior to entering the trade and this information is a must in my opinion. Identifying the lack of force is just as important as identifying the force. The nice part is that once you completely understand this concept, there is nothing else to consider when predicting market turns and market moves. This is the key to short term trading for income and long term trading for wealth.
Hope this was helpful, have a great day.
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Editors’ Picks
EUR/USD breaks below 1.1800, two-week lows
EUR/USD’s selling pressure is gathering pace now, breaching below the key 1.1800 yardstick to hit new two-week troughs on Wednesday. The pair’s pullback comes on the back of marked gains in the US Dollar following US data releases and ahead of the publication of the FOMC Minutes.
GBP/USD reaches multi-day lows near 1.3500
GBP/USD reverses its initial upside momentum and is now adding to previous declines, approaching the 1.3500 region on Wednesday. Cable’s downtick comes on the back of decent gains in the Greenback and easing UK inflation figures, which seem to have reinforced the case for a BoE rate cut in March.
USD/JPY holds gains near 154.00 ahead of the Fed’s minutes
USD/JPY retraces Tuesday's losses and returns near weekly highs in the area of 154.00. The US Dollar trims losses in quiet markets with all eyes on the Fed's minutes. Weak Japanese GDP data resurfaced concerns about Japan's fiscal stability and halted JPY's recovery.
Editors’ Picks
EUR/USD breaks below 1.1800, two-week lows
EUR/USD’s selling pressure is gathering pace now, breaching below the key 1.1800 yardstick to hit new two-week troughs on Wednesday. The pair’s pullback comes on the back of marked gains in the US Dollar following US data releases and ahead of the publication of the FOMC Minutes.
GBP/USD reaches multi-day lows near 1.3500
GBP/USD reverses its initial upside momentum and is now adding to previous declines, approaching the 1.3500 region on Wednesday. Cable’s downtick comes on the back of decent gains in the Greenback and easing UK inflation figures, which seem to have reinforced the case for a BoE rate cut in March.
Gold battle to regain $5,000 continues
Gold is back on the front foot on Wednesday, shaking off part of the early week softness and challenging two-day highs near the $5,000 mark per troy ounce. The move comes ahead of the FOMC Minutes and is unfolding despite an intense rebound in the US Dollar.
Fed Minutes to shed light on January hold decision amid hawkish rate outlook
The Minutes of the Fed’s January 27-28 monetary policy meeting will be published today. Details of discussions on the decision to leave the policy rate unchanged will be scrutinized by investors.
Mixed UK inflation data no gamechanger for the Bank of England
Food inflation plunged in January, but service sector price pressure is proving stickier. We continue to expect Bank of England rate cuts in March and June. The latest UK inflation read is a mixed bag for the Bank of England, but we doubt it drastically changes the odds of a March rate cut.
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