Sam Seiden
Independent Analyst
For any market speculator, the most important function of your routine is proper analysis of supply and demand. This leads to the two important pieces of a trade/investment:
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Market Turning Points – For low risk/high reward entries and exits
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Large Profit Zones – Profit potential
As I have written about before, one of the most important pieces of that analysis is knowing the objective profit zone on a given trade. The other day on our Supply and Demand grid, we used our rule based supply and demand analysis to attain a very low risk, high reward, and high probability trading opportunity. I will explain for your review in hopes that you can understand how important the Profit Zone really is.
This opportunity was found in the NASDAQ futures using a very small time frame. Notice the supply level on the grid and chart #1. We know this is a supply level because price could not remain at the level and declined from the yellow shaded area. Price only declines from supply because there is more supply than demand at that level. Notice the first time price revisits supply on chart #2. Our rules tell us that novice traders are buying here. We know this because these buyers are buying AFTER a period of buying, mistake number 1, and they are buying at a price level where supply exceeds demand, mistake number 2. The objective laws of supply and demand ensure that the trader who commits these two mistakes will consistently lose. We simply sell short at the level with our protective buy stop just above the level. The lines/level represent the “supply zone”. As active traders, we determine these zones each day. As longer term investors, we do the same thing in the larger time frames.
Supply Demand Grid July 26th – NASDAQ (NQ)
Let’s now discuss the key point that made this trading opportunity such high probability. Notice the rally in price on chart #2 up to the grid supply zone. It is a strong rally built with NO DEMAND levels during the rally, just nice big green candles. This means that as soon as price reached supply, it was likely to fall very quickly back through that area. We require strong rallies in price such as this one to our pre-determined supply levels as that increases the odds of our short position working. In other words, price reached our supply level and we shorted at supply for a move down through the very clear “profit zone”.
Trading Tip: Consider identifying a Profit Zone before Supply and Demand levels to arrive at strong trading/investing opportunities.
Hope this was helpful, have a great day.
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Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
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Gold: Volatility persists in commodity space Premium
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Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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