Sam Seiden
Independent Analyst
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.
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Editors’ Picks
EUR/USD holds around 1.1750 after weak German and EU PMI data
EUR/USD maintains its range trade at around 1.1750 in European trading on Tuesday. Weaker-than-expected December PMI data from Germany and the Eurozone make it difficult for the Euro to find demand, while investors refrain from taking large USD positions ahead of key employment data.
GBP/USD climbs above 1.3400 after upbeat UK PMI data
GBP/USD gains traction and trades in positive territory above 1.3400 on Tuesday as the British Pound benefits from upbeat PMI data. Later in the day, crucial data releases from the US, including Nonfarm Payrolls, Retail Sales and PMI, could trigger the next big action in the pair.
Japanese Yen seems poised to appreciate further; awaits BoJ decision on Friday
The Japanese Yen maintains its bid tone through the first half of the European session on Tuesday which, along with a bearish US Dollar, keeps the USD/JPY pair depressed below the 155.00 psychological mark. The growing acceptance that the Bank of Japan will raise interest rates this week turns out to be a key factor behind the safe-haven JPY's outperformance.
Editors’ Picks
How will US Dollar react to October and November NFP? – LIVE
The US Bureau of Labor Statistics (BLS) will publish the official employment report for the first time since the government reopened. Nonfarm Payrolls figures for October and November could provide key insights into the labor market conditions and influence the market pricing of the Fed's rate outlook.
EUR/USD holds around 1.1750 after weak German and EU PMI data
EUR/USD maintains its range trade at around 1.1750 in European trading on Tuesday. Weaker-than-expected December PMI data from Germany and the Eurozone make it difficult for the Euro to find demand, while investors refrain from taking large USD positions ahead of key employment data.
GBP/USD climbs above 1.3400 after upbeat UK PMI data
GBP/USD gains traction and trades in positive territory above 1.3400 on Tuesday as the British Pound benefits from upbeat PMI data. Later in the day, crucial data releases from the US, including Nonfarm Payrolls, Retail Sales and PMI, could trigger the next big action in the pair.
Gold retreats from seven week highs on profit-taking; all eyes on US NFP release
Gold price loses momentum below $4,300 during the early European trading hours on Tuesday, pressured by some profit-taking and weak long liquidation from the shorter-term futures traders. Furthermore, optimism around Ukraine peace talks could weigh on the safe-haven asset like Gold.
NFP preview: Complex data release will determine if Fed was right to cut rates
The long wait is over, and the Bureau of Labor Statistics in the US will release nonfarm payrolls reports for both November and October at 1330 GMT on Tuesday. The overall NFP figure for October is expected to be -10k, however, it is expected to be influenced by a massive 130k drop in federal department workers.
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