econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 17 June 2016

Exhaustion As An Odds Enhancer For Market Reversals

by Brandon Wendell, Online Trading Academy

Online Trading Academy Article of the Week

One of the many rewards of being an instructor at Online Trading Academy is the interaction received from students, both in the classroom and via email. The questions and challenges are what keeps you sharp as a trader. By constantly recalling my knowledge and seeing trading concepts through the eyes of new traders, it prevents me from becoming stale and makes me a better trader.

While teaching and trading live in the Extended Learning Track (XLT), this morning, a topic that kept coming up was on candle shape and the importance of price arrival to a supply or demand zone. This reminded me of an old email I received from a student.

"I want you to tell me the importance of how a price comes back to a level? What is the significance of how it arrives, if it comes in like a glider plane or a lead balloon? I think what is important is how it leaves but the arrival is an odd's enhancer. I am a 'why' guy. So why is arrival so important?"

This is a great question and the answer highlights the true market forces behind price movement, fear and greed. I want you to think about a flagpole. If I climbed to the top of that pole it would hold my weight. However, as more and more people climbed up to the top of that same pole, eventually it would bend and break from the added weight. Prices are similar. Stock prices rise because of demand. The demand being greater than the supply causes buyers to outbid each other in an attempt to attract elusive supply and climb the pole. At some point, the buyers have exhausted themselves and everyone who wanted to buy has already done so or is prevented from buying due to the high cost.

Prices start to fall as fear takes hold. Most investors and traders will start to panic when the price starts moving against them (market reversals) or their stops will be triggered. If there was a lot of buying pressure and large green candles going into the supply level, there will be few buyers to stop the collapse and catch the supply being dumped onto the markets from stop orders being triggered.

Compare this with a gradual climb that features smaller green candles and some small pullbacks to shake out weak traders. As prices fall away from a supply level in this scenario, they will be met with less stop orders and more buying pressure as the demand was not exhausted on the way up.

Steep approach to supply

When the approach to the supply level is slower and had smaller candles, price is more likely to break through the level rather than respect it.

Slower approach to supply

Arrival to demand zones are also important. If you arrive to the demand with large red candles signaling panic and fear, you are likely to have a bigger and better bounce. The large red candles signal that everyone who wanted to sell has now exited the stock. When buyers step in they must raise their bids quickly to attract a seller who may still be around.

price gapped down

If the arrival to the demand zone is quiet, there are still many worried holders of the stock who are looking to sell at a smaller loss when the bounce occurs. This added supply will mute the bounce of price from the demand level.

shallower approach to demand zone

So one of the important odds enhancers for analyzing our trades is how price arrives to test the supply or demand level. To learn all of the other odds enhancers, be sure to visit your local Online Trading Academy Center and enroll for one of our trading courses. Until next time, trade safe and trade well!

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Energy and Falling Productivity
Reinhard Selten: Pioneering Analyst of Rationality and Human Behaviour
News Blog
What We Read Today 25 September 2016
Dangerous Ultra Pure Water
Job Employment Tenure Down
Mobile Payments Promise To Improve Financial Accessibility In Mexico
Aging Populations May Mean Lower Economic Growth
Urban Rebound Causes Large Shift In Lower Credit Borrowers To Seek The Outer Suburbs
Infographic Of The Day: How Oil Is Formed
Early Headlines: Japan Needs Fed Hike, Mexico Tanker Ablaze, 1.5C Limit Within 10 Yrs, Africa's Growth Problems, Did US Destroy Syria Truce?, Merkel: No Help For DB And More
Americans Wary Of Drone Delivery
Britain's Wealthiest Households
What Next In The South China Sea
The Dollar - Gold Relationship
Almost Half Of Rape Cases End Without A Conviction
Investing Blog
The Week Ahead: How Will Election News Impact The Market?
How To Protect Your Money Against Negative Interest Rates
Opinion Blog
There's No Wall Between The Fed And Banco De Mexico
The Setting Sun: Japan Faces Monetary Exhaustion
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
23Sep2016 Market Close: US Indexes Close Lower As Crude Prices Slip, Fed Lowers Economic Growth Prospects, Indicators Melting Into Bearish Territory
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved