In our graduate online education program, the Extended Learning Track (XLT), one of the very first lessons we teach is on “Odds Enhancers.” This is because it is a critical part of identifying the proper trading opportunity. After all, what trading and investing ultimately comes down to are two things: Where do I get in and where do I get out… The optimal opportunity gives us a low risk, high reward, and high probability entry and exit point. This means getting into the market right before the move in price happens and exiting right before the move ends – market timing. The Odds Enhancers help us identify these key turning points in markets with a very high degree of accuracy and that is the focus of this piece. Why do prices ever turn in any market? Simple, because of a supply and demand imbalance at a price level. So, to identify market turning points in advance, we need to be able to identify price levels where supply and demand are out-of-balance. Another way to say this is… We need to be able to identify the picture that represents a supply and demand imbalance.
While it would not be fair to XLT members to go over all the Odds Enhancers in a free article, I will share two key Odds Enhancers with you that should help you, whatever type of trader or investor you are. Whether you trade stocks, futures, Forex, or options, all that really matters again is: Where do you get in and where do you get out? To go over these two Odds Enhancers, let’s review a trading opportunity we had in a live XLT session with our students.
Live Trading Session (XLT) – January 11th, 2012
During this live trading session, I was setting up the trading opportunities with our students before the market opened so that we could focus on simply executing our plan once the market got going. The plan was to sell short at the supply level shown above if and when the market rallied to that level. As you can see on our pre-market prep screen, that was the key supply level we went over before the market opened in the S&P (SPY). The level itself has a few Odds Enhancers that made it a very quality level. This is a two minute chart so the opportunity was for a short-term day trade. As we now dive into these two Odds Enhancers, remember that the focus is to identify the picture that represents a supply and demand imbalance.
Odds Enhancer #1: How Did Price Leave the Level?
Notice there was a gap down in price from the level. This is key… Price can leave a level in one of three ways. First, it can be a gradual move away from a level. Second, it can move in stronger fashion, maybe with big red or green candles. Third, it can gap away from a level. Out of those three choices, the gap is the picture that represents the strongest supply and demand imbalance.
Lesson: The stronger the move in price away from an area, the more out-of-balance supply and demand is at the area.
Odds Enhancer #2: How Much Time Did Price Spend at the Level?
Notice how much time price spent at the level. In this supply level on the chart, price spent very little time. Most trading books teach you to look for lots of trading activity at the level with many candles on the chart when identifying key market turning points. If you think the simple logic through, however, you will find that the opposite is true. At price levels where supply and demand are most out-of-balance, there are very few transactions (trades). This is because of the big imbalance. So, the picture on the chart is not going to be many candles and lots of trading activity like all the books say; its going to be very little trading activity like the opportunity we had in the XLT with the S&P shorting opportunity.
Lesson: The less time price spends at a level, the more out-of-balance supply and demand is at the level.
When price finally rallied to the supply level, the plan was to sell short at the level. Who would buy at that level? Someone who is not focused on the reality of how and why prices move and turn in markets. Trading is simply a transfer of accounts from those who don’t know what they are doing into the accounts of those who do.
Hope this was helpful, have a great day.
- Sam Seiden firstname.lastname@example.org