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Lessons from the Pros

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Whose Supply and Demand Is It?

Wed, Nov 26 2008, 05:47 GMT
by Sam Seiden

Online Trading Academy

When I use the terms "supply" and "demand", I am simply replacing them with the terms "resistance" and "support". Why do this? Understand that the words resistance and support mean many different things to different traders. For one trader, support may be a Fibonacci price level. For another, support might be a pivot low, and for someone else, support may mean a pullback in price to a rising moving average. There is really only one definition of supply and demand, however.

Demand: A price at which someone is willing and able to buy something.

Demand = (Support) = where to buy.

Supply: The price at which someone is willing and able to sell something.

Supply = (Resistance) = where to sell.

The markets are purely a function of supply / demand, and human behavior. Trading opportunity exists when this simple and straight forward equation is out of balance. The logical question is: What does this look like on a price chart?

In the Online Trading Academy Extended Learning Track (XLT) class, I make sure students learn to look beyond the green and red candles on the screen and instead, understand the supply, demand, and order flow responsible for the creation of the candles. This takes the trader to a deeper level of understanding and helps them attain an edge in a career where owning the edge means the difference between success and failure.

Having started my career on the institution side of trading, I can confirm what you already know: Institutions derive profits from retail traders and investors. Therefore, wouldn't it be nice to know where institutions are buying and selling? Most traders are in search of sophisticated, expensive software and fancy algorithms to help them identify where all the large banks and institutions are buying and selling. If you know what you are looking for, simple price action on charts reveals everything you need to know.

Notice the three candles that are basing sideways just above the numbers 100 (for sellers) and 2000 (for buyers). That sideways price action gives the illusion that supply and demand are in balance at that price level. The truth is, that equation was always out of balance. It simply takes a period of time for that unbalanced equation to play out. Once the last seller sells and you have buyers left at that price level, price must rise. Who is the main source of demand at that level? It's not retail, I can assure you of that. Retail traders don't have the buying power to cause a rally in price like that. Institutions certainly do, however. How do I know this? My career began on the floor of the Chicago Mercantile Exchange handling institutional order flow. I quickly learned to spot what bank/institution/central bank demand and supply looks like on a price chart. Ironically, where the smart money buys is where retail sells. Where smart money sells is where retail buys.

Published on  Wed, Nov 26 2008, 05:47 GMT