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.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Editors’ Picks
EUR/USD stays in positive territory above 1.0850 after US data
EUR/USD clings to modest daily gains above 1.0850 in the second half of the day on Friday. The improving risk mood makes it difficult for the US Dollar to hold its ground after PCE inflation data, helping the pair edge higher ahead of the weekend.
GBP/USD stabilizes above 1.2850 as risk mood improves
GBP/USD maintains recovery momentum and fluctuates above 1.2850 in the American session on Friday. The positive shift seen in risk mood doesn't allow the US Dollar to preserve its strength and supports the pair.
Gold rebounds above $2,380 as US yields stretch lower
Following a quiet European session, Gold gathers bullish momentum and trades decisively higher on the day above $2,380. The benchmark 10-year US Treasury bond yield loses more than 1% on the day after US PCE inflation data, fuelling XAU/USD's upside.
Avalanche price sets for a rally following retest of key support level
Avalanche (AVAX) price bounced off the $26.34 support level to trade at $27.95 as of Friday. Growing on-chain development activity indicates a potential bullish move in the coming days.
The election, Trump's Dollar policy, and the future of the Yen
After an assassination attempt on former President Donald Trump and drop out of President Biden, Kamala Harris has been endorsed as the Democratic candidate to compete against Trump in the upcoming November US presidential election.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.