As I write about so often, the key to low risk, high reward and high probability trading and investing is knowing where the market is going to turn, before it turns. This means identifying price levels where supply and demand are out-of-balance because that’s where price always changes direction. In other words, when price is declining and reaches a level where demand exceeds supply, price will stop falling and turn higher. Buying at or near that price level allows us the benefit of minimum risk and maximum reward for a position. So clearly, the goal is to train your eye to identify these levels where supply and demand are most out-of-balance. Today’s piece deals with this quest as we dive deep into something we call “Odds Enhancers” at Online Trading Academy. Odds Enhancers are a list of factors we use to assess the supply / demand equation at a given price level. In other words, they allow us to see and assess real order flow behind the candles you see on your screen. While there are a number of Odds Enhancers we use at Online Trading Academy to help stack the odds in our favor, I will share an important one with you today.
Gold Futures (GC) Trade
Above is a recent day trade I took in the Gold Futures market. The trading opportunity was to sell short into a supply level and buy back for profit at demand. The trade is shown on the chart above. Well before the trade was taken, there was an Odds Enhancer that told me this opportunity was very high probability we call “Levels on Levels.” First, look at the supply levels above. The fact that price could not remain at those price levels and how fast price initially declined away from that area told me there was a supply and demand imbalance at that level; supply greatly exceeded demand. Just prior to price revisiting this area or supply, I also saw that the nearest area of demand was quite a bit lower creating a nice healthy profit margin. What made this an above average high probability shorting opportunity was the fact that there were TWO supply levels on top of each other (levels on levels). This means that there were two big stacks of sell orders sitting on top of each other. This dramatically increased the odds that price would stop rising at supply and fall to demand. Once price rallied back to the two supply levels, I sold short. Another important component to this trade to think about is who the buyer was on the other side of my trade and what they were thinking, I always consider this in my decisions. The buyer was making two key mistakes. They were buying AFTER a rally in price which is not a smart thing to do and a clear sign of novice buying, and they were buying at a price level where the chart already told me supply exceeds demand, an even greater sign of novice buying. Again, not only did supply exceed demand but our “Levels on Levels” odds enhancer told me the supply was roughly twice as strong as normal. After selling to this buyer, price fell to demand where I took profits of just over $1,000.
To really understand this concept, you must understand the simple logic. Let’s say you are on a big trade desk at a major exchange or institution and you have the markets huge buy and sell orders in front of you. Today is your lucky day, you can also trade your own account with this information which of course is illegal in real life because you can’t lose when you have access to the markets real buy and sell orders. Let’s say the biggest stack of sell orders is at a price of 1250 in the S&P and the nearest significant area of demand (buy orders) is not until 1230. Where are you going to put your money at risk and sell short? 1250 of course… But, is there anything else that would make you more comfortable about selling short at 1250? How about if there was another huge stack of sell orders at 1251. Would you now feel even better about selling short at 1250? If you answered yes and really want to do this, then ask yourself, what does this picture look like on a price chart? It’s “Levels on Levels,” one of our key odds enhancers we teach at Online Trading Academy.
Why don’t you find this information in trading books at the store or on the internet? As with learning anything else in life, there is the book version of how to do something and the real world way of doing something. If trading were as easy as applying all the information in trading books, everyone would be making tons of money. That’s not how trading really works, unfortunately. When you are thinking of putting your hard-earned money at risk in the markets, make sure you have a simple, strong, rule-based edge over your competition. If you don’t have an edge, don’t compete. This is your hard-earned money we are talking about after all.
Hope this was helpful, have a great day.
- Sam Seiden firstname.lastname@example.org