Share:

Best Educational Content

So often in the trading and investing world I hear people talk about where price is likely to turn next, where is the next key supply or demand level, where is the next big turning point and so on. The question I hardly ever hear anyone asking is, “Where is the next big profit zone?” This is one of, if not THE, most important things to consider when putting your hard earned money at risk in markets.

S&P Income Trade: 4/17/15

S&P

To explain the concept of profit margin and its importance in trading, let’s take a look at a trade I took the other day from a supply level found on our Supply/Demand grid, a daily service for our Mastermind Community members. Here we are looking at a small time frame chart of the S&P Futures. Notice the supply level above. This is where we expected there to be more willing supply than demand. The strategy tells us that banks and institutions are selling the S&P at that level. The blue circled area on the chart is the “profit zone,” which is basically the distance from the supply level to the demand below. Notice in that circled area we have plenty of price action but none of it represents demand. In other words, there are no fresh demand levels to stop price from moving through that area. The trading opportunity was to sell short at the supply level above (entry in black circle) and profit from a move down through that circled area below.

The key element here is to identify where the demand and supply is, then look at current price and determine the “path of least resistance” as that is where the next move in price is likely to go. Meaning, price is likely to have a relatively easy time moving through that blue circled area, the profit zone. Keep in mind a VERY important point here: I am coming to all these conclusions BEFORE I enter the trade. You must perform your analysis in advance and make your decisions before it’s time to push the button or this will never work. Remember, when you are able to identify where supply and demand is, you are also able to identify where it is not, and that is the key to the profit zone which is the key to opportunity.

As I mentioned earlier, there are many supply and demand levels on a chart and many large and small profit zones. The key for the astute trader is to be able to identify objective supply and demand levels. Then and only then will you be able to find supply and demand levels that have huge profit zones associated with them. What I do is ignore most supply and demand levels on a chart and only focus on the ones that have a great distance (huge profit zone) between them. This does two things. First, it obviously offers an attractive risk /reward opportunity. Second and just as important, the larger the profit zone the greater the probability of the trade working out. This is because when you have a big profit zone, by definition your supply and demand levels are far out on the supply and demand curve. Entering your trades at market price extremes increases the probability of success.

To better understand the concept of profit zones in trading, think of profit margins in any other business. Think of how companies who sell products determine what to sell. Most of the decision, if not all of it, comes down to profit margin. Think about companies who produce products and how they decide what to produce. Most, if not all, of that decision comes down to profit margin. The decision on which trading opportunities to put your hard earned money at risk on is absolutely no different than any successful company. In fact, we chart profit margin in the same way.

Hope this was helpful. Have a great day.

Learn to Trade Now

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 near 1.0800 after upbeat US data

EUR/USD stays near 1.0800 after upbeat US data

EUR/USD stays under modest bearish pressure and trades near 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.

EUR/USD News

GBP/USD stays in daily range above 1.2600

GBP/USD stays in daily range above 1.2600

GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.

GBP/USD News

USD/JPY consolidates above 151.00 ahead of US core PCE Inflation for fresh cues

USD/JPY consolidates above 151.00 ahead of US core PCE Inflation for fresh cues

USD/JPY trades back and forth above 151.00 ahead of the Fed’s preferred inflation gauge. Risk-perceived currencies are facing the heat of uncertainty ahead of the US core PCE for February. Investors need more clarity about BoJ’s intervention to support the Japanese Yen.

USD/JPY News

Editors’ Picks

EUR/USD stays near 1.0800 after upbeat US data

EUR/USD stays near 1.0800 after upbeat US data

EUR/USD stays under modest bearish pressure and trades near 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.

EUR/USD News

GBP/USD stays in daily range above 1.2600

GBP/USD stays in daily range above 1.2600

GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.

GBP/USD News

Gold pulls away from daily highs, holds above $2,200

Gold pulls away from daily highs, holds above $2,200

Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.

Gold News

XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC

XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC

XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase. 

Read more

Portfolio rebalancing and reflation trades emerge into Q2

Portfolio rebalancing and reflation trades emerge into Q2

Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.

Read more

RECOMMENDED LESSONS

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.

Strategy

Money Management

Psychology