Welcome to the fourth episode in the How to Day Trade using Price Action – series

In Today’s episode we will take a look at supply and demand. This might sound like a boring topic, but I don’t think it is that boring. It is in fact a very important topic, and you need to understand the laws of supply and demand in order to be trading successfully with price action – because supply and demand and the relationship between them is the foundation of all price action.

But We’ll try to make the topic a bit more fun to learn, with some silly examples and funny pictures. I might even throw in a funny cat somewhere…

So Let’s jump right in and begin with the most boring part of this video… The official definition according to the economists…

Wikipedia define supply and demand like this:

In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted. Blah blah blah

OK so what does that wall of text mean for us traders…? Why is the law of supply and demand so important?

Well, it is because those forces determine the prices of stocks, currencies, futures or any other security or financial asset. In fact these forces determine the price of any goods or service that is sold anywhere on earth as well (with some exceptions; like if there is a monopoly, oli-ga-paly (oligopoly) or cartels, price fixing or some illegal or government-run operation.

But when there is a free market and free pricing then the forces of supply and demand will dictate the prices.

Supply — means sellers. In our case it means securities or financial assets, like shares or currencies that are offered for sale. It can also be real-estate, commodities or futures contract.

Demand — that means buyers. It refers to the number of stocks or futures contracts that traders want to buy. So the people who want to own the stock or currency creates the demand.

–

The more buyers you have the stronger demand you will have. The more sellers you have the more supply you will get. That is a simplified model of course. In reality there could for example be only a few sellers, and thousands of buyers. But those few sellers could be offering more shares than those thousands of buyers can afford.

So it is not about number of sellers or buyers, but the number of shares or contracts that traders are looking to buy or sell. Often these two go hand in hand, but it is still important to understand the difference.

Think about the stock market and a stock like, let’s say, Tesla or Netflix — There are perhaps a few hundred institutions; like mutual funds and hedge funds in addition to the major owners who could be individuals, that own the most part of the company, and then there are tens of thousands of small time investors like mom and pop who own a few shares.

So when we talk about buyers and sellers, we don’t refer to the exact number of people or institutions of course — It is more like the combined dollar amount, the combined force that buyer and sellers are bringing to the table. So that’s important to keep in mind.

If you’re one of the people who read discussion boards or facebook groups you might have seen stocks that are hyped up and it seems everybody wants to buy a certain stock. In reality, even if there are thousands of people starting to sell a stock XYZ because of some news, their combined dollar amount, their combined demand, might be peanuts compared to the capital that a mutual fund wants to buy the stock for. So don’t listen to rumors online. This is very important.

Here’s an example that will explain the whole thing with supply and demand and how everything works:

It is a hot day. Mr Cat sits at his lemonade stand cashing in on the exceptionally hot weather, and most people who pass by stop to buy a glass of that cold refreshing lemonade. There is big demand for Mr. Cats lemonade. Business even goes so well, that Mr Cat can raise the price for a glass of lemonade from 50 cents to a dollar when he only has a few glasses of lemonade left. And as people see that Mr. Cat is about to run out of lemonade, they happily pay one dollar for that sweet cold lemonade, and Mr Cat earns even more money.

At lunch time Mr Cat goes inside to get more lemonade to sell. After lunch Mr Cat again sits down at his lemonade stand. Now he has even more lemonade to sell for a dollar a glass, and already sees himself making a killing. But, now all of a sudden the sun is shaded by black clouds, and it starts raining. All the people that are out, they just run past the lemonade stand. Nobody is buying. There is no more demand.

Now mr Cat has all this supply of lemonade, but nobody is buying. There is no demand for lemonade at one dollar per glass. It is good lemonade, but the market is not in need of the lemonade as it rains and it is colder.

In order to get rid of his supply and be able to call it a day and go back inside, mr Cat lowers the price for the lemonade. Instead of charging 1 dollar or 50 cents, he decides to set the price at 25 cents, and every buyer of lemonade gets an entire bottle of lemonade to bring home. That’s a good deal. Now, people start buying again, the price appears to be cheap and it seems like a good deal.

Mr. Cat is able to sell his lemonade and he gets to go back inside to dry up.

So, what do we learn from this, and how does it relate to day trading? Well, when there is a lot of demand for a stock and there is limited supply, the prices will rise. Because traders will pay more and more in order to own the stock. That is often because they are afraid to miss out on the big move that the stock is making. They all want a piece of the action. So when the demand is bigger than the supply – prices will rise. If there are 1000 shares available, and there are 5000 traders who want to buy one share each, the market maker can increase the price as long as there is somebody who buys.

When traders find the prices to be too expensive, the prices will stop rising and start to consolidate or fall, until more traders find the prices to be reasonable.

At some point when the price of the stock has increased so much that a lot of the traders who bought earlier now want to sell, in order to secure their profit. So 10000 shares are offered to the market but there are only 4000 buyers left who want to buy one share each. Now there is too much supply, and too few buyers – too little demand — and this means that the price will start to fall. The supply is bigger than the demand. So the prices will fall until more and more traders again find the stock to be cheap and worth buying.

So this relationship between supply and demand is present in the markets all the time, in all time frames – it doesn’t matter if you’re a scalper, a day trader, a swing trader or an investor you can use this information. The relationship between supply and demand will be shown in the chats. And once you can read the charts, you will be able to take advantage of this knowledge.

In the next video we will discuss how you can identify supply and demand in the markets by reading the charts like a pro.

So please make sure you subscribe to our channel, please view the videos and feel free to comment, feel free to request topics – and last but not least visit our website daytradetowin.com and learn about our strategies.

We don’t ask how our clients are doing with their trading. We feel that it’s their finances and their business. However, we do get emails from time to time that describe experiences with our trading courses and software. Here are a couple of those emails along with a recent chart.

With purchase, you will be getting the same products. We do our best to provide quality support. Here’s a chart from today…

In the last episode I introduced the topic of trends, and today we will look further into this topic, and learn some useful techniques that you can implement in your price action day trading.

So we know that the markets move in waves – up for a while and down for a while, up and down, up and down. I call that movement “up waves” and “down waves”.

This fact, this behavior gives us a few different ways to gauge the market’s strength and determine if the market is likely to continue trending in the same direction. Meaning, continue an uptrend or continue a downtrend, or if the market is losing strength and perhaps going to stall or reverse.

In order to be a successful trader, you will need to know when to buy and sell. That is obvious. And pretty ridiculous for me to point out. But if you think about how you are going to produce a profit: when you buy at a certain price and sell at a higher price. Or, when you sell short and then buy to cover at a lower price. In order to do that you are going to have to identify a trend one way or another.

Because a trend is a series of price points that get successively higher or lower, you will need to find out when that behavior occurs. When you have found an established trend, then you can either determine that the trend is going to continue or that it is going to stall, move sideways, or reverse. And then you can profit by following that trend or countertrade it.

In hindsight, it is easy to see when the market has trended in one direction or the other, or if the market trended sideways. But with some experience, you will also be able to determine whether the market is trending in real time when analyzing live charts. For this, you need to develop your own judgment, but there are also ways to identify trends systematically and quantitatively.

There are some techniques that you can use to determine if the market is trending. One way, that is suitable for beginners starting out, is to add a number of horizontal lines to each major price point in the chart. You can simply use every fourth the price levels that Ninjatrader gives you. Then if the price moves through a number of lines upwards or downward you can easily tell if the market is trending or not. I think 3 lines is suitable for identifying intraday trends on a 5-minute chart.

If the market reverses and starts moving in the other direction, then you should still consider the original trend to be intact. The first trend is intact until the price has crossed 2 lines. Then we cannot be sure if the market will continue upwards or downwards, but if it crosses the third line, then you have a new trend.

If the market stays between two lines for a longer period of time, just chopping around between two or even three lines, then you have a sideways trend. Until you have 3 consecutive line breaks, without a pullback of more than 2 line breaks, then the sideways trend is intact

Another way to determine the trend is to use trend lines. We have two different methods to draw trend lines and I will go through the first one today. This method of drawing trend lines was introduced by Richard D. Wyckoff in the 1930s (“The Richard D. Wyckoff Method of Trading and Investing in Stocks”)

If we are in an up trend, find two consecutive lows, two down waves, and draw a straight line through those lows. This straight line can be extended into the future, into the unknown. This will form a support line. You can also add a resistance line to the chart, so that you can form a channel.

A good reason to use channels is that you have an upper boundary, that will help you determine when the up wave is likely to end and a down wave will form.

To draw the resistance line you will find the highest high between the lows you used to draw the support line. Then draw a similar line through this high point. It is important that you draw the trend line in the same angle as the support line you drew through the lows.

The easiest way to draw this is to use Ninjatrader, select the support line, copy and paste it into the chart, right click the line, select-copy, then right click the chart and select paste. You can also use the short command CTRL+C and CTRL+V. Then you will get the new resistance line and you can click and drag this trend line to make it run through the highest high between the lows in the trend. Now you will see a trading channel.

Trends are more likely to continue than to end. Strength or weakness in a stock or another type of security is more likely to continue than to reverse. The reason for this is that prices are a direct result of the forces of supply and demand. The demand for a stock, demand for some futures contract is not temporary, it is not a one-off occurrence. It is usually more long term. It is not like a thousand traders wake up one morning and all decide to buy Apple, or buy the Euro. The demand for any contract is more long term.

So when you have drawn your trendlines, your trend channel, then you should trade with that trend until it ends. The trend ends when it breaks the lower trend line, the support line.

Trendlines are never going to be perfect, so don’t take anything for granted. Sometimes you will have situations when the price breaks the line, but then immediately moves back inside the channel. Sometimes, you wall have the market respecting the trend line for a long period of time, and sometimes that market will not care about your trend line at all. So you should consider trend lines to be one of the tools in your tool box – you will need more tools in order to be successful in your day trading.

The general idea behind trend lines is the same fact that markets move in waves – fluctuations up and down. When a trend is formed you will have price action that looks like stair steps, stronger up moves, a little bit weaker and shorter down moves. When this happens in a longer sequence, you will get the stair steps of higher lows, or lower highs.

How do you know if the trend is strong or not? For this purpose I use something I call the 50% line. When the market has made an upwave, from a low point to a high point where it starts to pull back. I measure the distance it has traveled and draw a 50% line at that price level. I use a tool in Ninjatrader like this. As the market moves from a low to a high and starts pulling back, I want the pullback to end before reaching the 50% line. If the pullback ends before the 50% line, then the market is strong, the trend is strong.

If the pullback goes past the 50% line, then there is some weakness in the market, the trend is not so strong at the moment and it could well start moving sideways or even reverse.

That’s it for today’s episode. Please make sure to subscribe to our Youtube channel https://www.youtube.com/daytradetowin, and then browse our website to see our day trading strategies that are all based on price action.

Dr. Martin Luther King, Jr. Day is Monday, January 21, 2019. The CME Group Globex holiday calendar indicates that equity produces (such as the E-mini S&P 500) will halt at 1:00 p.m. EST (UTC-5). Equity markets will resume trading at 6:00 p.m. EST (UTC-5). These changes also apply to the CME’s Bitcoin, Interest Rate, FX, Energy, Metals & DME products. You can view the official calendar via this link.

The next holiday in the CME calendar is President’s Day, which occurs Monday, February 18, 2019. A similar halt and resumption will occur then.

As always, be careful trading on and around holidays. Markets can be unexpectedly slow or fast. Also, you don’t want to be in a position, have the market close, and have to place an emergency call with your broker to see if you’re in any danger.

How has your trading been so far in 2019? December 2018 was a month of steady bearish activity, taking price low to unexpected levels. So far in 2019, things are looking up. In this 2019 Atlas Line video, you can see how the Atlas Line produced two successful signals.

The Atlas Line software consists of the blue line and signals seen in the video. When price moves through the line and two candles close, a long or short signal is generated. You’ll know exactly when a signal will occur, so you can prepare in advance. From that point, it’s a matter of following the rules. The included training video explains it all.

Often, the Atlas Line can be used as an indication of support or resistance. Price tends to “bounce” off the Atlas Line. We tend to think this activity further validates anticipated market direction.

When you’re in a profitable position, it’s tempting to hold on for too long. The market can suddenly go against you and leave you with a smaller profit or worse. It’s important that you stick to the rules and have the discipline to know when to lock in profits and get out.

Practice is super important. Once you are a customer, we can assist you further with setting up a real-time practice environment. That way, you can feel comfortable before risking real money in the markets.

Make sure you watch the full video for a coupon code! Then click here to visit the Atlas Line page.

This will be a series of videos and articles about price action and how to trade using price action, instead of using indicators.

When you browse through the web looking for information on day trading, you will very often come across pages or videos with charts that look something like THIS or THIS…

But, when you see charts like this you can be sure that almost always the trader who uses those types of charts are just trying to overcompensate for his lack of confidence in his analysis, OR simply put… that he does not know what he is doing. He is probably not very successful. I don’t like to badmouth other people, but that is my strong belief.

Because, I speak from personal experience.

I started with trading and chart analysis back in 1995. I still remember how I learned about day trading, and I still remember my very first trade! When I started out, I also thought that I needed to use charts like that with many different indicators that would tell me if there was a trend and if the trend was strong, when that trend was going to end, when it would lose steam. I would also be worried about one indicator not giving me the correct outlook so I would use another indicator that would confirm or reject the first one…and so on…

Pretty stupid. But hey, that’s easy to say in hindsight!

In a discussion I had some years later with an experienced trader who would later be my trading mentor, I asked him how I could become as successful as he was. The answer I got was kind of strange to me at the time, and to be honest I really didn’t understand the implications it would have on my trading back then, but what he said was, “The first thing you need to do is to remove every indicator that you have in your chart.”

I was like, “What?” How would I be able to find any trades without indicators, without the MACDs, RSIs and moving averages?

In wanting to become a day trader, I took his advice because I REALLY wanted to become a successful day trader. I got rid of everything except Open High Low Close bar charts and Volume. Most traders today use candlestick charts, but I use the OHLC bars. They tell you the same thing, but candlestick charts can actually provide a bit more information that you usually don’t have with the bar charts, and that’s the hollow candlestick vs. the solid candlestick. But it doesn’t matter – you can be successful with OHLC bars and you can be successful with candlesticks. If I would begin day trading today, I would probably pick candlesticks, but I’m just used to the
OHLC bars after looking at them for close to 25 years.

Anyway, looking at those “naked” charts without any indicator, at first it was a bit intimidating. I did not really understand what I was looking at. But as time went on, I started to see details I did not get a chance to see when I was just looking at indicators. Instead of looking at a short term Moving Average (that I was using to smoothen out the way the price behaved), I started looking at the bars themselves. I started looking at price itself. I started looking at Volume and realized something that I had not noticed before. How the trading volume would increase, spike, or diminish depending on what happened with the price. There was definitely a relationship between price and volume.

I also noticed that there was something going on with the price bars themselves. Sometimes they would be very long and sometimes they would be very narrow. Sometimes the price bars would be huge and the volume would be huge at the same time. Sometimes the price bars would be very narrow but the volume would be huge. What was going on? The price bars could form a short trend and the volume would increase for each bar until the volume spiked and there was a certain type of bar that formed the top of that trend, of that wave. Then, after the price had consolidated for a while, the price bars started forming a similar short term trend but it didn’t get far this time. Looking at the volume I could see that it did not increase the way it had done the previous time. Something was definitely up with the relationship between price and volume. I became totally intrigued with this idea of only using price bars and volume, instead of looking at indicators and lines. The more I studied charts the more details I noticed. I could see different types of bars, different behaviour of the volume, I could notice different stages of the market, uptrends, downtrends and sideways moves, all with distinct price action that would repeat every time. I knew I had struck gold!

There will be more on this topic next time, I will continue this series of price action analysis videos, so please subscribe to our Youtube channel now and stay updated when the videos are released.

Also remember to browse https://www.daytradetowin.com to see our day trading strategies based on price action. A new eight-week day trading Mentorship class begins soon – so please make sure you sign up if you are serious about becoming a successful day trader.