Where price will turn next is everybody’s question and focus and that’s not a bad thing. The challenge and opportunity I am raising in this article is about the question I hardly ever hear, Where will price go? This is one of, if not the most important things to consider when putting your hard-earned money at risk in markets. Let’s look at a recent trade I setup in our live trading room for our members to illustrate the importance of the second question.
Where will price go we will call the Profit Zone. The profit zone is the distance in price between the entry point and the profit target price. Another way to say that is the distance between demand and supply. When looking for trading opportunities, people tend to focus on where the next big turn in price will happen.
As I often write about, these turns happen at price levels where supply and demand are out of balance. When looking at charts, you will find that there are many supply and demand levels. By no means are we interested in taking trading opportunities at all the levels we find. We only want to focus on big supply and demand imbalances, where banks and financial institutions are buying and selling. Our odds enhancers help us find these quality levels. When considering profit zone, we would ignore most of the supply and demand levels we find and narrow our focus down to the supply and demand levels that have large profit zones associated with them.
Sam Seiden – Live Trading Room: Gold Trade: 6/18/18
To explain the concept of profit zone and its importance in trading, let’s take a look at the trade above from the other day, a shorting opportunity in Gold. Notice the supply level above. This is where we expected there to be more supply than demand, where banks were heavy sellers of Gold. The distance between the supply zone and the demand zone below is the profit zone. The blue line was the profit target.
Notice the price action between the supply zone and the blue line. That price action represents filled orders, meaning that price will have a very easy time moving through that level once we enter our position. In other words, there are no fresh demand zones to stop price from moving through that area. The trading opportunity was to sell short at the supply level above (circle at supply) and profit from a move down through that area below the supply zone to the blue line.
The key element here is to identify where the demand and supply is, and where it isn’t. Then look at current price and determine the path of least resistance as that is where the next move in price is likely to go. Keep in mind a VERY important point here: I am coming to all these conclusions BEFORE I enter the trade. You must perform your analysis in advance and make your decisions before it’s time to push the button or this will never work. Remember, when you are able to identify where supply and demand is, you are also able to identify where it is not and that is the key to the profit zone, which is the key to properly assessing the complete opportunity.
As I mentioned earlier, there are many supply and demand levels on a chart and many large and small profit zones. The key for the astute trader is to be able to identify objective supply and demand levels. Then and only then will you be able to find supply and demand levels that have huge profit zones associated with them.
What I do is ignore most supply and demand levels on a chart and only focus on the ones that have a great distance between them. This does two things. First, it obviously offers an attractive risk /reward opportunity. Second and just as important, the larger the profit zone, the greater the probability of the trade working out. This is because when you have a big profit zone, by definition your supply and demand levels are far out on the supply and demand curve. Entering your trades at market price extremes increases the probability of success.