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Back To Basics by Sam Seiden

Rally base drop, drop base drop, resistance, Fibonacci, Elliot Wave, and on and on... all attempts to figure out where price will turn in a market. What makes Online Trading Academy different is that we don't subscribe to anything related to conventional technical analysis. We don't do this just to be different, we ignore conventional technical analysis theory simply because it's very flawed at its core (more on this in another article). For today's piece, I thought I would literally take a page right out of our Pro Trader course to help share the picture that represents real supply or demand in a market. We will also look at a recent trade example from one of our live trading rooms, the Extended Learning Track (XLT).

For today's lesson, let's focus on the supply side as that is what we focused on in a recent XLT session. First, let's go into the current Pro Trader Course and look at a course page (page 42) that introduces "Supply" to our students so you can start to learn this as well.

Notice the pattern, Rally - Base - Drop. This is the picture of supply that helps you be a willing seller high up on the supply and demand curve. While some may look at the Drop - Base - Drop as a supply level, keep in mind it is found in the middle of moves, unlike the Rally - Base - Drop that is found farther out at the extremes. With any picture of supply, you need to make sure it is very "fresh" meaning there are still significant unfilled sell orders in that area (price level). The entry once the picture above is produced is to short a rally back up to that supply level. The "drop" from the level tells us supply exceeds demand in that area. We sell short at the proximal line with a protective buy stop just above the distal line and that's the sell setup. Again, keep in mind that a section that comes later in the course deals with the ever important "Odds Enhancers" which are the filter that helps us identify the best levels with the strongest supply and demand imbalances so make sure you understand those before trying this at home. I have also written about them in prior articles.

Every live trading room session begins with the screen that you see here. Prior to the market open, we go over the key supply and demand levels with our students. It is key that you have a good idea where institutions are buying and selling in the markets you’re trading. During this session, as you can see on the screen shot of the live session, the focus was on shorting the QQQ (NASDAQ) into a small time frame supply level for a short term income trade.

The yellow shaded box represents supply in the QQQ, that was the level posted on the XLT prep screen for our students/traders. Notice the pattern prior to the yellow box, the yellow box itself, and after: Rally - Base - Drop. This is the pattern right out of page 42 in the course book that we see live every day in the markets. Once price rallied back up to that level, the shorting opportunity is at hand if you wish to take the trade. These are typical of our early morning income trades.

This is not about taking many trades in a session, it’s about taking the high probability ones that meet our criteria. There is nothing fancy about this, no indicators or oscillators or conventional chart patterns, there are not many different strategies, there is simply one. Buy where institutions are buying and sell where they are selling. Another way to say that is, buy where the smart money is buying and sell where the smart money is selling. The purpose of this article was to help you identify what the picture of that looks like on a chart. Of course, the Odds Enhancers help this process immensely and are key to identifying the key levels.

Hope that was helpful, have a great day.

Sam Seiden - sseiden@tradingacademy.com

Sam Seiden
Sam Seiden
VP Education

Sam brings over 15 years experience of equities, forex, options and futures trading which began when he was on the floor of the Chicago Mercantile Exchange where he facilitated institutional orderflow. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.

Points of interest:

  • Chicago Mercantile Exchange Floor
  • Author of Market Advisory Letters
  • Fund Manager/CTA
  • Speaker to Investment Groups, Universities, and Private Seminars
  • Contributing Author for Stocks, Futures, and Options Magazine, Active Trader Magazine, and Futures Magazine
  • Trading and Investment Conference Speaker