Predicting Price Movement

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

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.

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