When looking at the markets, many traders look at lagging indicators for a signal that the market is changing in direction or to confirm that the main thrust of the market will persist. These conventional indicators quickly lose their edge as the institutions (mainly through algorithms) identify these common patterns and take action to move the market to nullify, or take the other side, of these trades causing those traders to lose.

In order for a trader to maintain profitability, she must have an edge. In the futures market, this becomes even more critical as leverage and the fact that trading futures is a net zero sum game makes it very challenging to maintain an edge if a trader is using the same strategies as everyone else.

 

Dynamics of the Market

To make this concept simple, let’s think about two immutable laws of market dynamics.

 

Buy and Sell Transactions

First, in any buying and selling transaction, there have to be two parties in order for it to materialize. A buyer will buy based on a perception of value, but will need to find a seller that has the opposite view of the exact same item or financial instrument. This could be for a futures contract, a stock or even a house for that matter.

 

Supply and Demand

The next factor is the concept of supply (large amounts of unfilled sell orders) and demand (large amounts of unfilled buy orders). When sellers are largely depleted, demand will take over and change the trajectory of the market. This works exactly the same on the buy side of this  equation.

Another way to look at this concept is through the law of inertia. Inertia is the tendency of an object to stay in motion, which in the markets is referred to as a trend or momentum. Yes, trends tend to persist, just like objects in motion. However, the momentum will slow and reverse when it is met with an unbalanced force, or as Galileo discovered, it was friction that caused objects to change direction. In the markets, the reason markets turn is because of the shift in the Supply and demand equation.

Put another way, an uptrend will persist until all the buy orders are filled and an overwhelming amount of unfilled sell orders are found. It is impossible for the market to move higher unless all the sell orders can be matched.

Understanding this concept helps traders understand where to buy or sell, but also, and more importantly, helps traders identify how far the market can travel in the opposite direction so they can realize gains.

In one of my recent spotlight sessions we identified a daily demand zone (unfilled buy orders) in the Platinum futures market.

In the picture below, we see that price fell sharply into that demand zone creating a big distance between the entry and the new supply. Inertia is now in play here. If the unfilled buy orders (demand zone) will turn prices higher, how high will they go? They will continue higher until they meet a large amount of  fresh sell orders, would be the correct answer.

Lessons from the Pros - Futures

As we can see, this particular trade worked because the Platinum rallied off the demand and traveled back up to the supply before turning down. In fact, it turned down at a lower supply area, created new demand and kept moving higher before meeting more sellers.

Not all trades will work, as we all know. That’s because, unlike physics, the markets aren’t an exact science. The point here is that if we apply science versus emotion we can increase the probabilities of success. And yes, we can start anticipating market turns before they happen with a high degree of accuracy using simple laws of physics.

Please don’t misinterpret this as an indication that trading is easy. It’s actually quite challenging if you don’t have the right rules and the self-control to follow them, but it does help to keep it as simple as following the basic laws of inertia using supply and demand.

Until next time, I hope everyone has a great Holiday Season.

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

Education feed

Editors’ Picks

EUR/USD battles 1.2150 after disappointing NFP

EUR/USD is trading off the 32-month highs amid bumps in US stimulus and vaccine distribution. Markets await the all-important US Nonfarm Payrolls missed expectations with 245K jobs gained in November. 

EUR/USD News

GBP/USD tumbles from the highest since 2018 on the Brexit impasse

The GBP/USD roller coaster continues with a downfall below 1.35 after the pair hit a 31-month high of 1.3539 earlier. Brexit talks have yet to yield an agreement. Negotiations are set to continue through the weekend.

GBP/USD News

USD/JPY: Modest bounce, still vulnerable

USD/JPY has bounced from weekly lows, but it’s at risk of falling further. US Treasury yields and equities post modest intraday gains ahead of the NFP report. 

 

 

USD/JPY News

Editors’ Picks

EUR/USD battles 1.2150 after disappointing NFP

EUR/USD is trading off the 32-month highs amid bumps in US stimulus and vaccine distribution. Markets await the all-important US Nonfarm Payrolls missed expectations with 245K jobs gained in November. 

EUR/USD News

GBP/USD tumbles from the highest since 2018 on the Brexit impasse

The GBP/USD roller coaster continues with a downfall below 1.35 after the pair hit a 31-month high of 1.3539 earlier. Brexit talks have yet to yield an agreement. Negotiations are set to continue through the weekend.

GBP/USD News

USD/JPY: Modest bounce, still vulnerable

USD/JPY has bounced from weekly lows, but it’s at risk of falling further. US Treasury yields and equities post modest intraday gains ahead of the NFP report. 

 

 

USD/JPY News

Bitcoin price majestically rockets past $18,000 as $20,000 beckons

Bitcoin rally is in full swing as investors anticipate a final leg up to $20,000. The flagship cryptocurrency has in the last couple of weeks broken key barriers to top $18,000 on Wednesday towards the end of the Asian session.

Read more

XAU/USD fails to break $1850 and turns to the downside

Gold peaked after the beginning of the American session at $1848/oz reaching the highest level since November 23 and then turned to the downside. It bottomed at $1829 and is it about to end the week hovering around $1830.

Gold news

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology