Market Trends
|Sometimes I hear, “I like your supply and demand strategy but what strategy should I use in trending markets?” This person thinks the strategy is only for markets going sideways where they use supply and demand to pick tops and bottoms. What this person doesn’t realize is that we use supply and demand as the core strategy for any market, time frame, and market condition. We always want to buy at price levels where demand exceeds supply (where banks and institutions are buying) and sell at price levels where supply exceeds demand (where banks and institutions are selling).
I also get emails from time to time suggesting that I don’t like trend trading or something to that nature. This could not be further from the truth. I love market trends as that is where we get paid as a trader or investor. We want to enter the market at market turns when the risk is low and reward is high and be in the market when prices trend, which again is where we profit. How people enter into trending markets is where I disagree.
The grid above is a good summary of what action to take in each of the three types of trend/market conditions. The ideal trade for the Online Trading Academy trader is to buy a price decline to a fresh demand level in the context of a larger time frame uptrend. Conversely, to short a rally in price to a fresh supply level in the context of a larger time frame downtrend. For an example of trading with the market trends, let’s look at a trading opportunity in the Russell Futures from our supply/demand grid on June 27th.
First, notice the entire chart, the market trend is clearly an uptrend. The series of higher highs and higher lows suggests an uptrend meaning more demand than supply is coming into this market. At Online Trading Academy, we do employ our “real time” trend analysis but that is beyond the scope of the article. The demand level on the grid was the entry with a protective sell stop to manage risk. Based on our odds enhancers, they told us that banks were likely buying at that level which means we want our students buying at that level. But, who would sell at that demand level?
The Setup – Russell Futures June 27, 2014: Daily Chart
When price declined to that demand level, we would be buying, but again, who would we be buying from, who is the seller? The seller in this case would be making three key mistakes that only a novice retail trader/investor would make. First, they would be selling after a decline in price which is never a good thing. Second, they would be selling into a price level where our strategy determined banks are buying (demand exceeds supply). Last but not least, they would be doing all this in the context of a very healthy uptrend. The laws of supply and demand ensure that this seller will lose most of the time taking that action, which means the odds are stacked in the buyers favor.
Trading with the trend is great but you have to know exactly where to buy into an uptrend and sell into a downtrend. Fresh supply and demand levels offer you the lowest risk, highest reward and highest probability entry into a trending or non-trending market, which is why we focus on them so much. To identify market trends with quality and acceptable levels, know your odds enhancers.
Hope this was helpful, have a great day.
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