The goal for most traders is consistent profits, life – long income from speculating in markets. The key word in that sentence is consistent. Anyone can have profitable trades here and there, but do they produce consistent income and profits from trading as most are looking for? Many people have a strong winning percentage but don’t make consistent income from trading. Sounds crazy, I know, but one loss tends to wipe out all the profits.
Now, we can’t argue with the importance of supply and demand, it tops the list. However, don’t focus so much on Supply and Demand for turning points that you fail to consider the second most important focus, Profit Zone. Without a clear and ideal risk/reward (profit zone) opportunity on the chart, there is no trading opportunity. What we are looking for are supply and demand levels that are far apart from each other with clear room in between for price to move. You see, often there are very quality supply and demand level on a chart but the problem is, they are too close to each other which means no trade due to a lack of profit zone.
S&P Futures – Income Trade
What is Profit Zone?
Profit Zone is the area on the chart there is a high potential for profit. Let me explain through a recent income trade I took in the S&P Futures (ES).
Take note of the supply level and profit level (lower circled area) on the chart. The supply level is the origin of a strong decline in price and the profit target was just above a demand level not seen on the charts. The trade was to bet on a downside move, selling short at the supply level for a move in price down to the demand level.
Now, we need to measure risk to reward for this trade. To measure risk to reward, we need to do two things. First, we need to compare the distance from entry to protective stop against the distance from entry to profit target (the demand level). This opportunity offered around 3:1 according to the chart. Second, we have to adjust position size to make sure we are never risking more than we are willing to lose.
If you’re thinking you’d sell short at the supply level and take profits at the demand level, not quite. To ensure consistently profitable trades I suggest using the two strategies below.
When looking for trading opportunities that offer you 3:1, make sure the chart is offering you at least 4:1. If you want a 4:1 setup with a much easier time of attaining consistently profitable trades, make sure the chart is offering you at least 5:1, and so on… I think you get the point. When the chart offers you 3:1, actually getting 2:1 is much easier than if that opportunity offered 3:1 on the chart.
When taking profits at demand from a short position, don’t wait for price to come all the way down to demand to take profit, make sure you take your profit with your buy order just before demand. The reason is that there is competition to buy at demand, that’s why it’s demand. When we are taking profits on a short position, we are buying; so why would we want to buy at a price level where there is competition to buy? Why not buy when there is competition to sell which is right before the demand level, as price is falling. The same but opposite holds true for exiting longs just before supply levels.
By focusing a little more on profit zone, and all that goes along with it, you may just find and achieve the consistency you’re looking for. Never forget, in trading or many other things in life, those who know what they are doing typically get paid from those who don’t. I didn’t write this rule so don’t get mad at me… It’s how the world works.
Read the original article here - The Second Most Important Trading Topic Few Think About