Supply, Demand and Trading Tools

Most people will say there are many ways to look at the market. Many ways to determine where market prices will turn and where they will move to. The number of trading tools to supposedly help plan trades is nearly endless if you search the internet and most trading and investing platforms. The key to making these trading tools work is to put objective rules around them based on the market’s supply and demand. To explain, let’s look at a recent short-term income trade where I combined supply and demand and an indicator, Stochastics.

NASDAQ Income Trade – 10/4/17 Profit: $700.00

Above is a 1- minute chart of the Nasdaq Futures. On the chart we have the stochastics indicator (an overbought/oversold tool) and the market’s supply and demand levels at that moment.

The Setup:

When price reaches the supply zone (circled area on chart) and stochastics moves into overbought territory (circled), the odds of price turning lower are extremely high. As long as there is a clear profit zone below, which there was in this case, you have a quality trading opportunity on your hands.

Another rule to add, if you like, is to wait for the stochastics lines to cross for an entry. I always chose to simply enter when price reaches the zone, but you can add the stochastics cross if you like. Your protective buy stop can be just above the supply zone. Make sure you adjust your position size with each trade to ensure you are never risking more than your maximum dollar loss, as the distance from entry to stop will always be a bit different.

The Logic

When taking the short setups shown on this chart, we are selling short to someone who is buying AFTER a move higher in price and at a price level where the indicator and supply suggests price is overbought. This is not the action of a consistently profitable trader, it’s more the behavior of a novice trader who trades based on emotion. This is the pedigree of the trader we want on the other side of our trades. I know this isn’t a polite way of talking about making money, but unfortunately, this is how the game works.

When buying, who are we buying from? We want to buy from a seller who is selling AFTER a decline in price and at a price level where demand exceeds supply and the oscillator suggests price is oversold. We want to buy from this type of seller, it gives us strong odds of success.

Exits

There are a number of exits available; too many to list in this piece but here is what I do. Don’t use the indicator at all. Instead, focus on a profit target that has you exiting the position before the opposing zone. In the case of the trade above that I took, I exited the position (bought back the short position) before that demand zone below, not at it. Doing this increases the odds of success, you don’t need another trading tool.

A Trading Truth

Every trade will not work, you will have losers but that’s ok. Never forget, one of the least important set of numbers in your performance is your number of wins to losses (batting average). The most important statistic to watch is your average gain to average loss. This is very difficult for most people as people in general desire to be right all the time. Some of the greatest traders of all time lost money on more than 50% of their trades, and they wouldn’t change a thing if they had the chance. This is because they got out of the losers quickly and held on to their winners for large profits. Most of them, however, did not have the benefit of charting the way we do today, so a higher than 50% batting average can easily be the goal today.

While there is a ton of education on trading tools such as Stochastics, Bollinger Bands ®, CCI, moving Averages and many others, it is very important to understand how to use them, not just what they are. The question you must always ask yourself is this: Who is on the other side of my trade? Is it someone making a logical decision or an emotional one? Over time, emotion always provides steady income for logic, never forget that. The key is to make sure supply and demand is at the core of your strategy and any tool you use. Make sure you add rules that help stack the odds in your favor.

Hope this was helpful, have a great day.

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