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 clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.
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