Today I want to discuss an issue I am asked about on a regular basis. It has to do with the most important component of trading or investing. This key component is identifying turning points in markets. This is far and away the most important piece of the puzzle because if you can’t identify specific low risk, high reward, and high probability turning points in the market on a consistent basis, you will never be able to manage risk properly. Often, I receive emails from traders who talk of problems with placing their protective stops, trade management, risk management, and more. Some say they enter trades in the right place but they have other issues such as the ones I just listed. What they don’t realize is that the REAL issue is that they are not entering the market in the right area even though they think they are. In fact, almost every trading problem someone has that is sent my way is directly a function of poor entry points in the markets they trade.
When I begin the process of showing someone how to identify low risk, high reward, and high probability entry points on a chart, I go over the supply (resistance) and demand (support) information you may have read about in my prior articles. Today, I will make that process much easier for you with a slight shift in your focus.
Here is a Crude Oil trading opportunity I pointed out in the XLT which a few students took according to our rules and profited nicely. Notice area "A." Area "A" is a series of three or four candles basing sideways. "B" is the circled area on the chart which represents the STRONG move higher in price from area "A". That strong move higher during "B" happens because there is much more demand at "A" than supply, more buyers than sellers. Therefore, we want to buy when price revisits area "A" which is at "C." When we buy at "C," we are buying from a seller who is making the two crucial mistakes that every consistent losing trader makes. 1) The seller is selling after a decline in price. 2) Selling at a price level where demand exceeds supply. We want to buy from that novice seller at "C" as the risk is lowest, reward is highest, and the probability of the trade working is very high. For our regular readers, you have heard all this before, I know. Here is the KEY piece of information I want you to focus on that you have not heard before. From what I just wrote about this chart, most traders will begin the process of identifying a strong demand level by FIRST, looking for area "A," the basing before the rally in price. Don’t do that! If your first focus is searching through charts and looking for areas of basing like "A," you will see those all over the place. Instead, make the FIRST thing you look for area "B," the STRONG move in price. Then, follow price down (or up) to the origin of that move and that is likely where you will find your key demand or supply level. Understand that the strong move in price, "B," can only happen because of a supply and demand imbalance at the origin of that move and that’s where opportunity is.
Steps to Finding Market turning points:
Step 1: Identify strong momentum moves on a chart.
Step 2: Find the origin of that strong move and THAT is likely where your demand or supply level will be found.
Let’s take a look at another chart showing the steps that lead us to identifying a quality supply level. This time, however, let’s do it the right way, focusing FIRST on identifying the strong move in price that will lead us to our quality supply level.
First, our eyes should easily recognize area "B" as that is a strong drop in price. When we then go to the origin of that drop, we find a nice supply level, area "A." We then follow our XLT rules, wrap some lines around this level, and look to sell short when price revisits this supply level, at area "C." "D" is the demand level below "C" which makes "D" our target.
Focusing on strong, momentum moves in price in a market makes it easy to identify the price levels where demand and supply are MOST out of balance. Never forget, the movement in price in any and all markets is a function of an ongoing demand and supply relationship/equation. Low risk, high reward, and high probability trading opportunity exists at price levels where this simple and straight forward equation is out of balance.
Have a great day.
- Sam Seiden email@example.com