November 21st, 2014
by Sam Seiden, Online Trading Academy
As the old saying goes, "risk and reward go hand in hand." I can't tell you how many times I have heard that in the trading and investing world. Most people think the more reward you try to attain, the more risk you need to take on. Many years ago, I heard this so often that I believed it. However, after many years of trading experience I could not disagree more. It is very possible to attain plenty of reward taking on minimal risk if you know what to look for when analyzing price charts.
Whether you are trading for short term income which means creating a daily, weekly, or monthly income from the markets or investing for long term wealth which means creating annual income/growth to your retirement accounts, the key is buying where banks are buying and selling were banks are selling. The more precise we can be with analyzing supply and demand, the lower the risk and higher the reward our trading and investing can be.
11/14/14: Supply / Demand Grid DAX Futures Income Trade Profit: $1,431.58
To help you understand this concept, let's go over a trade I took last week utilizing the Supply / Demand grid which is one of our trading services for our students. The trade was in the DAX Futures. On the supply / demand grid, the first row of supply and demand is for short term income trading opportunities. The DAX supply was offered on the grid and can be seen on the chart (yellow shaded area). The price activity there told us that supply exceeded demand, that financial institutions were selling the DAX at that level and that they hadn't sold all that they wanted to sell. In other words, there were plenty of sell orders left at that price level.
- Price spent very little time at that level: The less time price spends at a level, the more out of balance supply and demand are at the level.
- Price declined from that level in strong fashion: The stronger the move in price away from an area, the more out of balance supply and demand is at the level.
- The first time price revisited the level, it touched the level and fell: This is a clue that there is lots of supply still left at that level.
- Price moved very far away from that supply level before returning to the level where I sold short (circled area): The farther price moves away from a supply or demand level, the further it needs to move to return to the level. This is helps with probability of the trade and profit zone. Meaning, when sold short to the buyer on the other side of my trade, that buyer wasn't buying a normal rally in price, they were buying after a huge rally in price which is a big mistake and almost always will lead to a loss which means a profit for us. Furthermore, they were buying right into a price level where our strategy already determined banks were selling the DAX. This means a very low probability buy for them and a high probability sell for us.
I have just listed a few clues and rules from our supply and demand strategy that helped us determine a very low risk turning point in the market, before it happened. At the same time the trade was low risk, the potential reward was very high as there was plenty of room for price to fall because of the distance price traveled on the initial decline as mentioned in point #4.
Whether we are looking at a short term income trade like the DAX above or a long term wealth trade which can also be found using the Supply / Demand grid, the rules and logic don't change at all. It is easy to get caught up in all the news, fundamental data, economic reports, and so called expert opinions. However, any and all of that influence on price is reflected in price. So, instead of spending so much time analyzing the data to figure out where price will turn, why not skip all that and go right to the main question which is: "Where will price turn?" It is all about supply and demand and what that picture looks like on a price chart.
Hope this was helpful, have a great day.