Recently, I have received many questions about an article from a couple weeks ago entitled, "The Two Most Important Parts of a Trade Setup." The article seemed to have peaked interest in a very simple approach to trading which I employ for my own trading. Below are some of those questions and the answers to help you use the strategy rules.
I was in your class before; I would like to say thank you for writing the excellent articles.
I have been reading a lot of your articles. However, this is the one I like best and will apply this method for my trading next week... "The Two Most Important Parts of a Trade Setup." But I am still confused about which time frame to use for this method? I trade part time intraday. I am looking to swing trade.
Thanks – Jacqueline
Seiden Answer - Thanks for the kind words on the articles; I hope the articles are helpful. As that article pointed out, the two important components of the trade are a quality supply or demand zone and a significant profit margin. When day trading, it's a good idea to use a combination of a larger time frame chart, like an hourly or daily, and a smaller time frame chart such as a five minute chart. You want to use the larger time frame to identify where price is on the larger time frame supply/demand curve as this will tell you whether you should be looking for buy setups or sell setups on the smaller time frame. For example, if price is at or near larger time frame supply, you want to go down to the 5 minute chart and find quality supply levels with significant profit margins to short against. You would only know this if you first looked at that larger time frame like I am suggesting. For swing trading, looking at daily and weekly charts should be fine.
I have seen a lot of your webinars on fxstreet.com and I would like to ask you a question because I couldn't find an answer yet. When looking at supply and demand zones, we know that price is potentially revisiting the previous supply or demand area. What you say is that one should take the trade when price revisits the area for the first time. What I was wondering is... What happens with those levels after price has revisited it for the first time? Should we keep an eye on those levels for a potential new trade or do we have to deny the levels once price visited it for the first time?
Thanks in advance - Eliza
Seiden Answer - Very good question. When I was on the floor of the Chicago Mercantile Exchange facilitating institutional order flow, the answer to your question was very clear. Let's say I was on the trade desk and had a large stack of buy orders (demand) in the S&P at a price of 1245 and the market was opening at 1260. Sure enough at some point, the market would come down to 1245 and some of my orders would get filled, depending on how much supply (sellers) there was when price reached 1245. The first time price would reach that large stack of buy orders at 1245, it would bounce higher. With each succesive decline in price to 1245, what is happening to that stack of buy orders? Is it increasing or decreasing? Is the demand getting stronger or weaker? If you answered decreasing and weaker, you are correct. Each time 1245 traded, more of those buy orders were being filled meaning demand was weakening. Layers of the "floor" (demand) were being removed so to speak. Once all the buy orders at 1245 were filled, price would then quickly fall to the next level of demand.
I have been enjoying your webinars very much and just have a question for you. When you enter trades based on daily/monthly charts at demand/supply levels, what percentage of these are winning trades? I am guessing they would be much higher than smaller time frames as there is less 'chop.'
Thanks and regards – Michael
Seiden Answer - Typically, most people have a higher winning percentage in the larger time frames, you are correct. This is because you are only looking at daily/weekly/monthly charts and the levels are very clear. Also, larger time frame levels trump smaller time frame levels so when you find a nice demand level on the larger time frame with a significant profit margin, what is happening on the smaller time frames is not a big deal. The other way around is a different story, however. If a day trader finds a quality demand level on a five minute chart, for example, and supply looks to be much higher, that is not enough information. You still need to check the larger time frame to see where this smaller time frame setup is on the larger time frame supply and demand curve. For example, if that five minute buy setup is near larger time frame demand, that trade will typically work out very well. If, however, that smaller time frame buy setup is at or near larger time frame supply, that trade has very low odds of working. Day trading is fine and can be very profitable, you just have that extra step of looking at larger time frames so you're not blindsided.
I am a student of Online Trading Academy and took the Forex Trader course 2 years back. I have been reading your articles about Supply and Demand and how floor traders see the market. However, I have a few questions which I hope you can clarify.
1. Strong/Weak Support/Resistance
How do you know when to take a reverse trend trade using the supply and demand concept? I mean how do you determine whether a particular support or demand is strong enough so that price does not simply punch through the level? This is the most difficult part for me if I want to trade using naked price action.
Seiden Answer – This is based on the larger time frame "fresh" demand or supply level. Trends always end and begin at "fresh" larger time frame demand and supply levels so this is when and where we stop trading with the trend and trade against it as we are expecting it to reverse and change direction. Our anticipatory analysis allows us to then enter the new trend well before it gets under way which gives us a big edge. The key is identifying a "fresh" supply and demand level in the larger time frame. Before you attempt to do this, make sure your definition of a quality supply/demand level is proper.
2. How many touches on a daily chart and a 4 hour chart of support or resistance will you consider before not taking a trade when the market comes back to test the support and resistance lines again. I have heard some traders using a 3 taps concept and anything more than 3 tests, they will not take a retracement trade no matter how good the trend is? What is your take on this?
Seiden Answer - What we do in the Extended Learning Track (XLT) program is a bit more objective and logical than the textbook way of doing it which is "touch count." Try to focus on how deep price is moving into a supply/demand level each time it returns to that level. If price just touches the level the first time it returns and moves away in strong fashion, that suggests there is a big supply/demand imbalance at that level. Therefore, we would be comfortable taking a trade again at that level. If this happens the second and third time and so on, we would still take trades at that level. However, as soon as price trades 25% or more into that level, I would not suggest taking another trade at that level as this suggests the supply/demand imbalance at that level is not strong enough anymore to offer us a high probability trading opportunity.
3. Do you do counter trend trades?
Seiden Answer - Only when that trend is reaching a larger time frame supply or demand level which means that trend is about to end and a new one is about to begin, as mentioned above.
4. Do you use Fibonacci retracement levels and pivot points in your analysis of supply and demand?
Seiden Answer - No, I don't. Fib levels and pivot points don't often line up with a real supply and demand level. Fib lines, for example, are created with a mathematical calculation that does not take into account willing supply or demand so there is a huge flaw with this line of thinking. Also, if you use Fibs, you have a choice of a number of retracement lines to choose from. The one that will work with consistency is the one that lines up with real demand or supply. So, after taking the Fib line that lines up with real demand or supply for a while, you will eventually ask yourself, "Why do I need the Fib line when I am always taking the one that lines up with real demand or supply?"
5. Do you use Candlestick patterns in your trade analysis?
Seiden Answer - Not conventional patterns. If we agree that price always stops falling and turns higher at price levels where willing demand exceeds willing supply and vise versa, don't we only want to focus on the picture that represents that fact? Also, conventional chart patterns almost always have you buying high and selling low; that's how they are setup. Think about the most popular ones like the Head and Shoulders and Double Top patterns. Neither of these patterns have you selling high, near supply. Both have you waiting for a significant decline in price before selling which makes absolutely no sense and these are some of the most popular patterns in all the books; crazy if you ask me.
I tried to be as detailed as I could in the answers to ensure a solid understanding of these concepts. The key answer to almost all the trading questions I ever receive is always answered by considering the reality of how you profit buying and selling anything in any marketplace. So the next time you are puzzled and looking for an answer, dig into your bag of "logic" and you will likely find the simple answer. If that doesn't work, send me an email and I will be happy to help.
Hope that was helpful, have a great day.