Today I am going to show you an example of a day trading strategy that is super simple, and it’s based on ideas from the previous episodes in this series, so it’s 100% based on price action and volume.

We are going to present more day trading strategies in this series, so make sure you subscribe to our Youtube channel.

The first thing to do is to decide what you are going to trade. At daytradetowin.com we recommend our students to trade the Emini S&P500 – it’s very easy to get started trading the Emini S&P500, and we can provide you with a free day trading platform and free, live real-time data – go to daytradetowin.com to get it.

Anyways, the first thing to do is to open up a live chart of the Emini S&P 500, or whatever you want to trade: currencies, stocks, commodities, etc. I personally would apply this to a five-minute chart, because that is what I am most comfortable with – but if you’re a shorter-term scalper or longer-term trader feel free to use this strategy on whatever time frame you want to use.

Then when you have your chart open you will start looking for candles with huge volume. The volume needs to be really high, extremely high, which tells us that there is huge interest in that particular price level where the market is trading. There is huge supply and demand – people want to buy or sell at that specific price level.

The next thing you do is to check for any news. If the huge volume is based on some news event then you will need to determine what implications that could have. I wouldn’t trade if there was an announcement made, or some economic news that was scheduled to be released. Those sort of things can cause the market to react in erratic ways.

And also one more thing – and this is important. We don’t want to trade this in the morning when the session opens. For that we have the ATO2 instead. The session open usually has extremely high volume and great volatility – but if you want to trade the session open I definitely recommend the At The Open 2 that is available at daytradetowin.com

The next thing to do is to wait for that high-volume-candle to close. It does not matter if the candle is red, green or a doji, and it does not matter if the candle is big or small. If the following candle also has the same amount of volume then wait for that candle to close.

So now you have one or two candles on huge volume. What you would then do is to find the highest high and the lowest low of those candle, and draw a horizontal line from those points.

You will now have a range – in this range there was a lot of interest. A lot of traders bought and a lot of traders sold – so it is significant – it is an important price level. We don’t really care why it was important, why there was this huge volume – because we are technical traders.

Now you just wait until you get a candle that closes outside this range. If the following candles trade inside this range you will wait for a candle to break out of the range. You want that candle to close outside the range. That will be the direction that you want to trade in.

But you do not want to enter a position yet. Because now everybody is jumping on the bandwagon and it could be a false breakout. Instead what you would do is to wait for a pullback…

So you enter a limit order at this level – if the candle closed above then you would enter a limit order to buy at the highest high of the high-volume-candles – if it closed below then you enter a limit order to sell short at the lowest low of the high-volume-candle.

Then you just wait for the market to retrace back to these price levels. The market always wants to test where it has previously been, so it is very likely that you will get a retracement back to this level. Sometimes the market does not retrace all the way back to these levels, in those cases you would read the price actions and you could enter your position based on that analysis. But if there is a pullback to the optimal price level then you will get filled.

You’ll need to be as quick as possible with your limit order – because they are filled on a first come first served basis – so don’t wait until the last minute with entering the limit order.

Sometimes there will not be a pullback at all. You can also enter this trade once you have two consecutive candles closing above or below the range. Then you would just enter in the same direction as those candles. But, this is not something I would recommend for beginners, but if you’re and experienced trader you can try this.

Then – When you’re filled you will need to manage your trade. I suggest you take profit at 1 times the ATR. The ATR is a good tool that you can use in order to base your profit target on what you can realistically expect from the market at any given time.

You can also use the high or low of the previous swing depending on if your long or short.

You’ll also need to protect yourself with a stop loss order – so that you are stopped out if the market goes against you. The easiest stop loss would be based on the ATR, but you can also use other stop loss strategies. We’ll teach you great stop loss strategies further on in this series. We’ll continue this price action trading series, so please make sure you subscribe – and if you like day trading – please give us the thumbs up and like our videos.

Hope you like this super simple day trading strategy. In our mentorship program we will teach you more than 10 different day trading strategies that are even more powerful than this one. Our next 8-week day trading mentorship program begins soon, so make sure you sign up while there are still seats available.

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Today we’re going to continue where we left off last time. We’re going to continue with the Volume analysis and combine it with trends and trendlines. Supply and demand.

Volume speaks volumes about the market – sorry for the silly play with words – but that’s the way it is. It speaks volumes about the relationship between supply and demand, and about the quality and strength of trends and movement in the market.

We can use this information to our advantage and gain an edge over other traders who don’t know how to read volume.

In the last episode we had a look at how we want the volume to increase and be high in the up moves of an uptrend, and diminish and be lower in the pullbacks. The up-legs are strong, the pullbacks are weaker. That tells us that the uptrend is strong and healthy.

Trends that do not have enough volume will not last for long, because that means there is not enough supply or demand to keep trending. Instead it is likely that we get a period of consolidation and sideways movement, or a new trend in the opposite direction.

When we draw trendlines and trend channels we can use the volume to get a better understanding about how strong that trend line is. If the market reverses at the trendline and the volume picks up on the move away from the trend line, then we can have confidence in that trend line. And once the trend line breaks, we want that to happen on a big candle with big volume – the market should show determination. And after the break of the trendline we want the volume to diminish on the test of the trend line. The market is going to test that previous support or resistance. The market is going to test if it is able to move back inside the trend channel, or back above or below the trend line. So this pullback or rally back towards the trend line after the break out should happen on lower volume. Again, this tells us that there is no willingness to move back where it came from, there is not enough supply or demand required to do so.

So let’s now have a look at another way to analyze volume.

How can we tell if a trend is going to end? We’re never going to reach 100% certainty that a trend will end at some specific price – if we would have that ability we would all sit on our own private islands in the caribbean right now — but we do have a method to analyze the charts that will give us reasonably high – i would even say high – confidence in knowing that a trend is at its end, at least for the time being.

So let’s consider an up trend. The same will be true with downtrends, but let’s start with the uptrend as it is easier to grasp what I am about to explain.

So we know we want the up-legs to be stronger and the down-legs to be weaker in an uptrend, right? But how do we know that the upleg is going to end, or if the uptrend is going to end?

Let me give you an analogy – I just love analogies, the sillier the better. Silly is simple, simple is easy.

So we have Mr. Market here running up the side of a mountain.

The hill sometime becomes steeper and steeper, and sometimes there’s an area that is flat or part that is easier, even going downhill before going up again. So the side of the mountain is just like an uptrend, right? In the market you’ll have up-legs, down-legs and periods of consolidation.

Now if you have ever walked up the side of a big mountain you’ll know just how exhausting it is. You need the be in pretty good shape to do it. I was visiting the Swiss Alps some years ago. At that time I was is pretty good shape – I was jogging regularly and going to the gym, but I was still getting pretty darn exhausted as we went hiking in the mountains, the Alps.

So as mr market starts walking up the mountain side the path gets steeper and steeper and steeper until finally he reaches the mountain ridge. The volume bars shows the effort he is making. The volume bars get bigger and bigger. Mr. Market is getting more and more exhausted. Right at the top he makes the final push, one last big effort to get up to that ridge.  

That’s exactly what happens in your chart as well. The bars move higher and higher and the volume stays high, or picks up and increases. At some point there will be one last push, one big candle on very, very high volume. This is sometimes referred to as a Buying climax. This buying climax exhausts the market completely, because it happens on a big candle, or a few big candles, and very high volume.

What happens during the buying climax is that all traders notice that the market is moving up. Everybody who watches the chart will notice the big move that the market is making. It’s moving up fast, and they all want a piece of the action. They don’t want to miss out on the big move that the market is making, so everyone’s rushing in and buying. The market makers are able to raise the price, there is a lot of demand, so the candle is getting bigger and bigger, and this causes even more traders to join in on the buying. So it’s a kind of a self-fulfilling prophecy.

This means the volume is getting bigger and bigger as well, because more and more traders are buying. The more buyers and sellers that participate at any given time, the more contracts or shares that change hands, the bigger the volume will get.

Then when all traders who wanted in, when they have bought everything they wanted to buy — then there is no more demand left. Nobody wants to buy anymore.

And what happens when there is no more demand? Well, the prices will stall and consolidate. Or if there is supply coming in – sellers entering the market – the prices will fall. There will be a pullback or a sideways consolidation.

The buyers who bought close to the top, they will sell because they aren’t seeing any profits on their positions. It doesn’t make sense holding on to a trade that does not produce profits. And the traders who bought at lower prices will sell to secure their profits. And of course the traders who bought right at the top will start to have losing positions and their stops are starting to get hit.

So all of this is building upon what we have learned in a previous episode — when the demand overcomes supply – the prices will rise. And when supply overcomes demand, the prices will fall.

We’ll continue on this topic in the next episode, so make sure you subscribe, and if you have any questions feel free to use the comments here below. Until next time, bye bye.

Today, let’s talk about volume. I have mentioned volume and the importance of analyzing volume a few times so far in this series, so today I want to focus on volume.

So first of all, what is Volume ? Well, volume is the number of shares or number of contracts that are traded during a time period like a candle. In forex you don’t have volume, you don’t have the information about how much was traded at any given time, but most other tradable instrument will have the volume, like stocks, futures or commodities. In forex you have tick volume, showing you how many ticks took place during that time – it is different.

Anyway, if you think about stocks for example. Every time somebody buys and somebody sells any number of shares, the number of shares are added up. So in stock trading you have deals taking place all the time, somebody buys 1 share of apple, another one buys 1000 shares of Tesla, Warren Buffet buys Coca-Cola for a billion dollars! All those shares are added together and what you get at the end of the day – that’s the volume for that day. The number of shares that changed hands.

Of course you can, and as a day trader you should, also split the daily volume into hourly volume – or volume for 1 minute, or 5 minutes or 15 minutes, so volume is very useful for day traders as well.

When you look at a chart that displays volume, you will usually see the volume at the bottom of the chart, like bars sticking up. It is either called bar graph or a histogram. I have no idea which, but it’s one or the other. During my time at the university, some of the classes were more boring than others. Statistics in particular was something that I slept through most of the time, so I got bar graphs and histograms mixed up and the professor probably thought I was pretty stupid. So guys do yourselves a favor and pay attention to what your statistician tells you.

OK enough of the side track — the volume is displayed as a bar graph. In layman’s terms that means these bars sticking up from the bottom of the chart.

Together with the candles the volume will give you a lot of information. By analyzing trends and changes in the character of the volume, together with analyzing the movements in price you can get a better understanding about the relationship between supply and demand.

As you learned in a previous episode – the one with the silly cat – it is the relationship between supply and demand that determine if the prices are going up or if the prices are going down.

All good economists will tell you that:

If demand overcomes supply, then prices will increase.

and

If supply overcomes demand, then prices will decrease.

If there is huge demand for something, then the seller can increase the price and people will still want to buy. Or there can be limited demand, but if there is not a lot of supply the prices will still be high. So for example scarcity can lead to high prices – when I was looking to buy a vintage german sports car. There are not a lot of those lying around, so you cannot just go to any used car salesman and ask for a classic Porsche. Even if you found one, it might not be in that good condition. So at any given time there are not that many vintage Porsches in top condition. So there is limited supply – there is also limited demand – but prices are still high. There are not that many buyers either, so the prices are not extreme, but they’re still elevated.

So each volume bar at the bottom corresponds to a candle in the candlestick chart. When you have many candles in a chart, you also have many volume bars.

To explain the simplest way to analyse the volume, I sometimes use the car fuel analogy. You see you can consider the volume bars to show you how much fuel that the car consumes, and the price itself is the vehicle that is moving. You would expect the fuel consumption to increase when the car goes fast, and when the car slows down you would expect the fuel consumption to decrease. When you have big candles, up or down, you would expect big volume. When you have small narrow candles, the volume should be less.

There are two main ways you can gauge the volume on up waves. Either the volume increases on the upwaves, or it decreases. If the volume increases on the up move, then you can be fairly sure that there is good demand. When you have a series of up moves or up waves, if the volume increases on the upmoves, compared to the pullbacks, then you can be fairly sure that the series of upmoves will continue. The pullback will have lower volume in a healthy up trend, there is not as much selling as there is buying, so when buyers enter the market on the up moves – the volume should increase if you have a healthy up trend..

But if the volume diminishes on the upmove, there is no more demand. The market is running out of steam, and could well turn into a down trend soon.

Sometimes there is a period of Equilibrium before the market moves from a up trend to a down trend. During that period of equilibrium the market is in a horizontal channel. If the volume is picking up on the downmoves and decreases on the upmmoves, then chances are the market will start a new downtrend soon.

Same thing in a downtrend when you have price waves moving lower and lower. If the volume picks up on the down moves, and decreases on the rallies, then it is likely that the down trend will continue. If the volume starts to dry up on the down moves, then after a period of equilibrium, the market will form an up trend

That was the very basics of volume analysis – a bite size. In the next few videos in this series we’ll delve further into volume analysis, and then also start combining the volume with the analysis of the candles and get a good understanding about how you can use this information in your price action trading.

Make sure you subscribe to get the next videos in this series, we also do live trading and other great videos – so subscribe now.

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In today’s episode we will continue with the topic of support and resistance, supply and demand, and combine that with trends, and repeat some of what we learned so far in this series.

We already spoke about trends and trend lines a few weeks ago, so You already know that a trend is the kind of price action that is going to make you money. You will buy at some price, say $10, the price will trend upwards, 11, 12, 13, 14 and you will sell for a profit at $15, as an example. Or you sell short at 100, the price will trend downwards 99, 98, 97, 96  and you will buy to cover at 95 and make money. That’s simple, right?

Earlier we also concluded that the markets move in waves. In an uptrend you will have price moves, or pushes, upwards, and then price moves, retracements, downwards. This is true on every time frame, and in both upwards and downwards trends.

The market never goes straight from one point to another. Even if it sometimes looks like the market moved down in a straight line when you look at a historical 5 minute chart for example, there would have been a lot of fluctuations up and down during that move, especially if you watched the same market in a lower time frame, e.g. 1 minute chart.

So when you have these waves moving higher and higher, this price action will form a trend. And you can use lines to draw simple trend lines, which is the idea behind diagonal support and resistance.

So the idea behind trend lines is straight forward. We just connect the dots. When there is underlying demand for the stock, currency, futures contract or commodity – or whatever you are trading because this is true for any traded security – the prices will increase. The demand forces the prices upwards with certain momentum, until the demand diminishes or a force of supply that is strong enough changes the direction of the price movement. We can see that the demand is diminishing as the price bars or candles arch over of flatten out, consolidate. When this happens over and over again, we will get low points and high points. We will use these to draw the trend lines; the support line in an uptrend together with an Overbought line parallel to the support line.

Then when a growing force of supply becomes significant, it will drive prices downwards, until the force of supply is exhausted, OR if there is new demand coming in. Then prices tend to round up or level out. When this happens a few times in a row, we get two high points that we use for drawing the resistance line and an oversold line, parallel to the resistance line.

Now that we have those parallel line, we see that they form a channel. An uptrend channel or a down trend channel.

The way we can use trend line channels in day trading price action is both as a trading signal, and as a filter – a way to avoid entering trades when the circumstances are not right.

So, like we did in episode 3, we draw a trend line – in this case a support line, or a demand line — there are always many different terms, different market terminology, that is used. I like to use the term support line when drawing a trend line to indicate an up trend. We draw the support line through two lows. Then we draw the overbought line, parallel to the support line, through the high between the two lows that we used for the support line.

In a down trend you use the same principles; you find two highs, draw the resistance line through those. Then find the low between those two highs, and dram a line through it, parallel to the resistance line.

These two lines form a channel, a range, with An upper boundary and a lower boundary, and we expect the market to continue moving inside this channel — until it break out of it. That can happen soon, or the market can stay in the channel for a long time. The significance of trend lines and channels that “fail” is not just that a trend line is broken – but HOW and under what circumstances. A move down through a support line, can just be a test, or it can be a “shake-out”. The Shake-out is a form of market manipulation, where large market operators artificially push the prices down to “shake out” traders out of their positions. In other words, scaring the traders into selling. These price moves are often called springs when they occur in uptrends, and upthrusts when they occur in downtrends. They are usually very good trading signals, but it is difficult to trade them as it will feel counterintuitive to go long when the market seems to go down.

Another way you would use an up trend channel for trading, is either to BUY as the prices bounce of off the support line, and to sell short as the prices bounce off of the overbought line. At the overbought line you want to see prices arch over or flatten out. You want to see shorter, smaller candles and diminishing volume. This signals that the demand is drying up for the time being.

And at the support line you want to see the prices round up or level out. As the price starts to move up, you want to see an increase in volume and bigger candles which tells you that the demand is again becoming stronger.

Another way to use the channel for trading is to sell short as the market breaks the support line. But you don’t want to sell short immediately. That will lead to a lot of losing trades, because there will be false breakouts happening all the time.

You should instead either wait for two consecutive closes below the support line, or better yet, wait for a retracement up to the support line — as the market is likely to try testing these levels again to see if there is still demand to go higher. You want to see a big red candle and high volume on the break out. That tells us that there is a lot of supply entering the market. Then when the retracement occurs, this should be on diminishing volume and candles that get smaller and smaller.

Same thing in a down trend channel. You will want to sell short as the price bounces off of the resistance line, and buy when the price reaches the oversold line. Here you also want to pay attention to the price action and analyze the candles. When the price approaches the oversold line you should see smaller and smaller candles and lower volume, the candles will flatten out and round up. At the resistance line you also want to see prices arch over, and volume picking up as the down move begins.

When the market breaks through the resistance line, you want to see this happening decisively, on a big candle and with big volume. It is safest to wait for a retracement after this breakout, as there is a risk that it is a false breakout or an upthrust that tries to shake-out traders, or fool traders into buying right before the market starts moving down. The retracement should be on lower volume, there should not be any demand, not a lot of buying at this point. The volume should be on the down moves. That tells us sellers are in control, and we want to join those sellers and profit from the down move.

Another way to use the price channels is to know when to be more conservative in your trade management. Say you the market is in an up trend channel, and some day trading strategy like the DayTradeToWin Atlas Line, Trade Scalper or At The Open2 signals a long trade close to the upper boundary of the channel, close to the overbought line. Now you can take advantage of the information that the trend channel gives you and take profits earlier as the market approaches the overbought line, or enter a smaller position in the first place.

Or if you use some less accurate trading strategy, other than the DayTradeToWin strategies, you may even want to filter out trades that signal at the boundaries. Filter out long signals that occur at the overbought line, and filter out short signals that occur close to the support line.

Today we have again talked about volume. The analysis of Volume is one of the foundations and corner stones in price action trading. In the next episode we will go through the basics of volume analysis. It is going to be important for you to know and understand, so please make sure you subscribe so you get access to the next Episode.

March 7, 2019 is rollover day for CME equity products such as the E-mini S&P 500. If you are a NinjaTrader user, that means on or after March 7, you will need to roll over your contracts. For the E-mini, switch from ES 03-19 to ES 06-19. The March 2019 contract is expiring. The June 2019 contract will be the new and correct one to trade.

Some traders prefer to roll over after the official rollover date. The idea is to trade whatever contract has the most volume. Click here to view current E-mini volume levels. A day or more after the rollover, the majority of the volume should transfer into June 2019. Revisit the CME page to monitor current volume levels.

Rolling over contracts in NinjaTrader 8 is quite easy. We’ve covered this topic before, but it’s good to mention every three months or so because even veteran traders can forget. What happens if you forget to roll over your contract? Well, to start with, your charts will eventually “run dry” and you’ll see bunch of odd-looking candles (many dojis). You may also get a call from your broker asking why you’re attempting to trade an old contract.

The next related roll date is June 13, 2019.

Follow these rollover steps on or after March 7, 2019:

1. In NinjaTrader’s Control Center, go to Tools > Database Management. Providing you are following these steps on or after March 8, you should see the E-mini (ES) and possibly other markets (instruments). Click the gray Rollover button. That’s it – you’re all set!

2. Close the Database Management window and go back to your charts. Your charts should automatically reflect the new contract period. In other words, your ES 03-19 chart should now magically be ES 06-19.

These pictures demonstrate the steps above:

By the way, what a great Atlas Line trade late in the day! You can purchase the Atlas Line from this page.

In today’s episode we’ll take a look at something very, very basic when it comes to day trading and price action.

We are going to have a look at Support and Resistance. Today we are going to look at horizontal support and resistance. There is also diagonal support and resistance, and when I say diagonal I mean the nature of the market when it is trending. We will have support and resistance in trends as well. In the candlestick chart an uptrend would be diagonal from the bottom left corner, to the top right corner. But we will take a look at that in the next video.

Today we’ll simply start with the basics, because this is a series in the basics of price action day trading. And horizontal support and resistance is the most basic.

I believe most, perhaps almost all price action traders use support and resistance in some way. There are many ways to use support and resistance in yoru price action analysis and this is a topic that we will revisit further on in this price action day trading series, and take a look at more and more advanced uses of support and resistance.

Let’s start with the basics, and define support and resistance. This is my own definition, if you listen to somebody else they might have different definitions. Perhaps there’s even an official definition for this somewhere, but this is how we define support and resistance, and I’m pretty sure that what we have found to work in the markets is better than what someone has found to work in books of theory.

Alright so, let’s define Support. We define this as an approximate price level where the market is not able to move lower for the time being. The reason for this is because buyers will step in and start buying when the market nears and reaches this price level, and sellers will stop selling because they don’t believe that the market is going any lower. So it’s the combined force of buyers and sellers – the buyers are active and the primary force, they do most of the job. The sellers basically help by not participating, so they are passive and the secondary force. The sellers do not actively sell, so the market is not able to break down through the support level.

So when we think about support, and think about what we learned previously in this price action day trading series – what we learned about supply and demand. In this case the demand will force the price upwards from the level of support. The lack of supply is secondary. If there had been active selling, short selling, then the price would probably not stop at the support level. Or the buyers would have to be more active to overcome the active selling.

The amount of buying could stay constant as well and support would still hold, if the amount of selling would diminish. So the buyer do not have to be actively trying to push the market up. As long as there is more buying than selling the price will move up. That also means that if there is sell selling than buying the prices will move up.

So there are two different things with the same result. More buyers than sellers, then price moves up. Less sellers then buyer, then the price moves up. We get the same end result, but you will either have the buying with bigger force and selling staying at normal levels. Or you will have buying at normal levels and sellers withdraw. So the buyer and sellers can be active or passive at any time, and it is the rate between buyers and sellers that determine where the price goes.

And we define resistance the same way, but opposite of course. It is an approximate price level where the market is not able to move higher. This is because seller will become very active and start selling when the market approaches a certain price level, and buyers will become less active, and stop buying. They see all this supply coming into the market and don’t expect the market to go higher at this time. So here it is also the combined force of buyers and sellers. In this case the sellers are the are active ones. They are the primary force, they are the work horses.

The buyer do not actively participate in creating the resistance. The buyer are simply not buying, because it does not make sense buying when the sellers are hell-bent on pushing the market down.

So just like you would step off the railroad track when you see a freight train coming your way 60 miles per hour, the buyers will step aside as they see all the selling. So they are passive and a secondary force.

Of course, this is simplified. There will always be some buying and selling going on regardless if we are at support or resistance, but the idea is that the amount of buying will be much less than the supply when we are at resistance levels. And we know from a previous video, that when supply is greater than demand, the prices will fall. Same thing at support, there will of course be selling at support as well. But the buying, the demand will be much larger, the buyers will be stronger. And when demand overcomes supply, prices will rise.

So at resistance there is a lack of demand. So the buyers are passive, the role of demand is secondary. If there had been active buying then the price would more easily be able to move through resistance. In that case the seller would have to be more active to be able to push the market down.

You should realize that the support and resistance will not appear at an exact price. Many traders draw lines in their charts, because it is so easy to do in the charting platforms, and they tend to be very stubborn about their lines and want the price to reverse at the exact price, otherwise they lose confidence in their lines.

We on the other hand consider support and resistance to be approximate price levels. We don’t care if the price moves down through the support line as long as it comes back with determination. You will very often have candlesticks that have their shadows penetrate the support line and close above. Same thing with resistance lines, there will be frequent candles with their wicks penetrating the resistance lines but the candles close below the resistance. That is 100% normal market behaviour at the levels of support and resistance. This means that the market is testing these levels. The market tries to push through, but is not able to close above resistance or below support. You can have several candles pushing through and closing on the opposite side of the line, but usually this happens on very low volume and smaller and smaller candles – meaning there is no real force behind the move. Then when you get the move back below resistance or back above support, that move will usually show its determination with big strong candles and higher volume.

Volume is something very important when trading price action. We will cover volume in future episodes. In the next video in this Youtube series we will take a look at support and resistance in trends. That’s something that we call diagonal support and resistance.

The next 8-week mentorship class begins soon: https://daytradetowin.com/day-trading-mentorship-coach

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’s actually a very important topic, and you need to understand the laws of supply and demand in order to be trading successfully with price action. This is because supply and demand and the relationship between them is the foundation of all price action.

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 defines 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…)

Okay, 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 indicates 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 indicates buyers. This 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.

Therefore, 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 who own a few shares.

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. 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. Most people who pass by stop to buy a glass of that cold refreshing lemonade. There is big demand for Mr. Cat’s 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 lunchtime, 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 per 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 1,000 shares available, and there are 5,000 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 10,000 shares are offered to the market but there are only 4,000 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.

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. Today, we will look further into this topic, and learn some useful techniques that you can implement in your price action day trading.

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.