This supply and demand trading guide doesn't work. Read the pinned comment. — Transcript

Full transcript

1. 0:00hello everybody it's been a while since i  uploaded and i just wanted to make a little
2. 0:04presentation about the most important  information that i've learned so far
3. 0:08i'm going to talk about the strategy i'll be using  in depth and i would also like to briefly talk
4. 0:13about the power of this strategy in regards to the  trading anxiety that almost everybody experiences
5. 0:19i am doing this as a teaching presentation because  teaching something in your own words is the best
6. 0:23way to commit information to your brain long term  if you need to pass a test and you only have one
7. 0:28day just memorize it using flashcards if you want  to remember something for the rest of your life
8. 0:34pretend that you are presenting it to a class it's  a neat psychological trick i learned in college
9. 0:39for information i don't care about i can memorize  pages and pages of difficult concepts and ace a
10. 0:44test while having hardly any idea what it actually  means but when i want to actually understand
11. 0:50something the process is much more demanding but  rewarding remember knowledge is not understanding
12. 0:58i can tell you that e equals m c squared  but what the heck does that even mean
13. 1:03even if i say what those letters stand  for i still don't really understand it
14. 1:07so i'm doing this presentation because it  will benefit my own learning experience
15. 1:12and hopefully i can help you as well this  presentation is the accumulation of well over
16. 1:1750 hours of watching videos since 99 of trading  information is garbage it took over 50 hours to
17. 1:24find just a few hours worth of really helpful  videos sorry for the rambling let's do this
18. 1:32so very briefly let's go over the only part of  supply and demand that helps us understand trading
19. 1:37for both buyers and sellers there are prices  that are desirable and there are prices that
20. 1:42are undesirable there is no need to make it  more complicated than that i stop buying ice
21. 1:48cream when it becomes five dollars a quart and i  start buying it again when it goes down to three
22. 1:53dollars a quart when price gets too high the big  institutional traders who actually move the market
23. 1:59start selling and when it gets low they buy back  in the people who have enough money to actually
24. 2:06move the market are not looking at thirty second  or one minute charts they are looking at the
25. 2:10bigger time frames waiting to get a good deal  remember the law of supply the higher the price
26. 2:17of something the more sellers will sell it smart  money is not buying huge positions at an all-time
27. 2:23high why would they do that when they could just  wait a week and buy it for a much better price
28. 2:29remember when demand exceeds supply it goes  up when supply exceeds demand it goes down
29. 2:36all that means is that when it gets to a good  buying price big money steps in and chews through
30. 2:41all of the sell orders to drive it up when it gets  to a good price to sell there are more sellers
31. 2:46than there are buyers which causes the price to go  down the cool part about this is that we can use
32. 2:51volume profiles to actually see how the quantity  of trades is changing at different levels of the
33. 2:57market remember do not let the stock market  terminology confuse you almost everything is
34. 3:03simple and the only thing that can make the market  seem overwhelming is because it's a new language
35. 3:09there are all of these fancy words that economists  and big money traders like to use but remember
36. 3:15no matter how complicated the formulas are for  creating indicators for technical analysis and no
37. 3:21matter how many lines of code are being used for  a computer that does trading automatically almost
38. 3:26everything boils down to buy low sell high and  sell high buy low of course you can make things
39. 3:33more complicated by shorting implied volatility or  going long on implied volatility with options but
40. 3:40that's irrelevant and the point i'm trying to make  is that no matter how many new words there are to
41. 3:44learn and how overwhelming it can seem all of the  concepts in the style of trading are very easy
42. 3:51it's so confusing to me when i hear all of these  internet experts talking about how we need some
43. 3:56edge or new system to be profitable how about i  just follow what's happening instead of trying to
44. 4:02write some v wap moving average stochastic rsi  overbought oversold formula which incorporates
45. 4:07data from the chicken market since i found it  to have a positive correlation with the s p 500
46. 4:12on the first tuesday of every month except for  february come on now we don't need to do that
47. 4:18the only thing we need to know is how to follow  in the shadow of the people and the computers
48. 4:23that move the markets isn't it much easier to  point at a chart and say hey look at that the
49. 4:29price is stalling out where it went up really  fast yesterday let's go along here and see if it
50. 4:34happens again and just set a stop loss directly  below the low for a tiny risk and big reward
51. 4:40let's very briefly mention our risk reward ratios  a one to three risk reward ratio means that you
52. 4:46are either going to take a loss of one point or  win three points for es the futures for the s p
53. 4:52500 this means that you are risking fifty  dollars to make a hundred fifty dollars
54. 4:57since one point has four ticks and each  tick is twelve dollars and fifty cents
55. 5:02this also means that it would take three losses  to wipe out the profits of one good trade
56. 5:07for supply and demand trading the strength is  that it has really well-defined risk and really
57. 5:13well-defined profit taking levels so you don't  need to have a super high win rate for it to work
58. 5:19for the chart on the right you can see that  even if we change our risk reward to be very
59. 5:23conservative down to one to two to break even  we only have to be right one third of the time
60. 5:30now let's do a little lesson on the relationship  between anxiety and trading anxiety in everyday
61. 5:36life usually stems from feelings of uncertainty  what's going to happen tomorrow did i forget to
62. 5:41turn the stove off what if these people don't like  me are they huggers or do they prefer handshakes
63. 5:47all of these questions are relatable for people  with generalized anxiety and social anxiety
64. 5:52this anxiety whether it manifests as shaking  sweating faster heart rate or sickness is stemming
65. 5:58from cognitive processes about the unknown we  fear the unknown and we also worry about it
66. 6:05we don't know if the elevator is going to work we  don't know how fun the party will be and we have
67. 6:10detrimental thought processes which have physical  manifestations so how does this relate to trading
68. 6:17i had anxiety about trading when i was scalping  tesla options it manifested as shaking stomach
69. 6:23pain an increase in heart rate and more this  happened because my plan was never really that
70. 6:28clear i had a plan and i traded the plan but  there was so much mysteriousness and guesswork
71. 6:34going on that i never really felt that confident  now that i'm looking at trading the s p 500 supply
72. 6:41and demand imbalances don't make me feel like  that these setups have a clear risk and reward
73. 6:46a set stop loss and a set profit taking level  anxiety about trading implies a lack of confidence
74. 6:53if we can remove as many variables as possible  when we take a setup we can reduce that anxiety
75. 6:59the solution to reducing trading anxiety is to  find a strategy that you can be confident about
76. 7:04and then use the computer to execute  as much of the entire order as possible
77. 7:10remove human error and human emotions and  your thesis about a trade will be optimized
78. 7:16let's take a look at this chart i borrowed from  the internet we short at supply zones and we go
79. 7:21long at demand zones the green rectangle is the  zone that we want to short at so let's see how
80. 7:27we created it for supply zones the bottom of  the rectangle starts at the open of the last
81. 7:33bullish candle before the drop the top of the zone  starts at the most recent high before the drop
82. 7:41if your intuition has told you but that's  just waiting for a bounce off resistance
83. 7:46yeah you're kinda right but it's more than  that you never would have gotten in on this
84. 7:51trade if you were waiting for a bounce off  of resistance however we knew that this was
85. 7:56a trade signal to take it short after it left  the supply zone for demand the bottom is the
86. 8:02most recent low before the big move up the  top is the open of the last bearish candle
87. 8:10here is another example
88. 8:14and here's one more
89. 8:19the candle you're drawing the  demand zone off of must be bearish
90. 8:22if it happens to be bullish you need to go  back and locate the nearest bearish candle
91. 8:26before the move up and draw your rectangle from  there this is for the top of the demand zone
92. 8:32now i don't know how valid this statement is but  it is important because we don't want to take a
93. 8:37trade that has already moved a lot there is a good  chance that it's going to turn around which is why
94. 8:42this strategy is good for finding out when those  turnarounds aka reversals are going to happen
95. 8:49also part of the idea that this strategy is  based on is order flow the price comes back
96. 8:55to a zone that it once left very quickly and when  it returns hypothetically there are still leftover
97. 9:01orders sitting in that zone that will drive the  price out of there just like it did the first time
98. 9:06so you can't just keep coming back to a zone  and reversing eventually those orders will be
99. 9:12chewed through also let's keep in mind that  support and resistance lines are still valid
100. 9:17so just because a zone may have lost its  power it doesn't mean that there won't be more
101. 9:22battles going on at important price levels it may  reverse again but not because of leftover orders
102. 9:29this picture on the right is just so you can see  that if we wait for confirmation that the price
103. 9:33is going to leave the zone we can take profit  right below or above the next zone for example
104. 9:39i see that price is leaving the demand zone  at the bottom i set an order with a profit
105. 9:44take one tick below the entrance to the supply  zone and maybe i set my stop loss just below the
106. 9:50entrance to the demand zone this would be super  safe but maybe i want to get out if this isn't
107. 9:56a move that immediately goes back up now ignore  the picture and listen to these important notes
108. 10:03lots of small consolidation with a small  breakout is not a strong setup huge moves
109. 10:09are from institutional influence and those are  the levels that matter to us because they are the
110. 10:14ones who make the big stuff happen additionally we  can use volume profile to show us the price levels
111. 10:20where the most volume is happening so we can  volume profile the supply and demand zones to see
112. 10:26where all of the action is happening i'm waiting  for td ameritrade to finish the paperwork for my
113. 10:31account so i can use thinkorswim for charting  since it has all of the good tools for analysis
114. 10:37also trader workstation with interactive  brokers is absolute garbage for charting
115. 10:41but i'll still be executing my trades there  this is quantifying order flow imbalances
116. 10:48you can see where the sellers are if this top  supply zone can be broken then you know that the
117. 10:53next zone is going to be tough to break through  and it will only get harder because the further up
118. 10:59the price goes the more attractive the price will  become to sellers when you have an established
119. 11:04plan before the price gets to this zone you  are trading proactively instead of reactively
120. 11:10i'd also like to note something that i think  is important here what we are looking at is
121. 11:15an opportunity to buy where that circle is on the  far right expecting it to get close to that first
122. 11:20supply zone do you see what i see though if i  took this trade i would have looked to take my
123. 11:27profit if the price didn't almost immediately  break through that resistance line i just drew
124. 11:32if it does get through we would look to  see if it could get through that zone
125. 11:36and then we would just keep on holding until  it failed to break a zone let's take a look
126. 11:41at one of my new favorite phrases don't diddle  in the middle catchy easy to remember and smart
127. 11:48what kind of magic indicator is going to tell  me what i'm supposed to do with a statistically
128. 11:53significant level of accuracy during this choppy  stuff between these two zones v web no 9 ema no
129. 12:02the only way you trade chop that looks like  this is with a good risk to reward ratio
130. 12:06and just start guessing however after we drew  this green zone on the bottom if we wait for
131. 12:13price to leave and go long taking our profit  right before the supply zone that's a big win
132. 12:19we don't need to win that often for this to be a  good strategy remember don't diddle in the middle
133. 12:25because when the market gets choppy trading  gets sloppy there's another one for you now
134. 12:32a brief intermission let me just remind you that  this presentation is happening because teaching
135. 12:37something in your own words is the best way for  the human brain to store information long term
136. 12:43and i might even teach you something or spark an  idea that leads to you improving your trading life
137. 12:48i haven't even done a single trade with this  yet and let me also make something clear
138. 12:53we're not going to see an a plus setup every  day in fact maybe just three times a week we
139. 12:59will see a great setup but the methodology  is so good that this is all that we need
140. 13:04to become consistently profitable  more trades don't equal more money
141. 13:10perhaps one week from now i will have  different opinions on supply and demand
142. 13:14zones and the other technicalities  involved here okay let's get back to it
143. 13:21what are these zones created from peaks and  valleys which are just another name for market
144. 13:27turning points peaks refer to the top of the area  where price turns to the downside after a move up
145. 13:34they become areas of supply and are created by a  rally base drop formation we've got some new vocab
146. 13:40here but take it easy they're self-explanatory a  rally goes up a base is the consolidation where
147. 13:47it just hangs out for a bit and the drop is well  the drop it would be easier just to call them up
148. 13:54sideways downs but we all know that if it has  something to do with the stock market we have
149. 13:59to give it a special name to make ourselves sound  smarter than we really are valleys refer to the
150. 14:05bottom of the area where price turns to the upside  after a move down they become areas of demand and
151. 14:11are created by a drop base rally formation yep  you've got it that just means down sideways up
152. 14:20the strongest setup is going to start from a  huge and fast move and you should ask yourself
153. 14:26don't you think we left some buyers there if  it moves super fast there wasn't enough time
154. 14:31for these big orders to get filled so when it  returns to these zones why should we believe
155. 14:37that it won't get bought back up and rally  again i'd also like to note that these two
156. 14:42demand zones are based off a zone that isn't in  this picture it's from the previous slide so if
157. 14:47you notice that the second zone actually goes  below the low of where the arrow is pointing and
158. 14:52thought to yourself wait a minute that just broke  through the demand zone great job paying attention
159. 15:00rally base rally refers to a continuation  pattern controlled by the bulls
160. 15:05this can act as an area of  demand for upcoming trade setups
161. 15:09if the price comes back to this base it  would be a good idea to get long here
162. 15:16drop base drop refers to a continuation  pattern controlled by the bears
163. 15:21this can act as an area of  supply for upcoming trade setups
164. 15:25so if the price comes back up to the base  it would be a good idea to get short here
165. 15:30let's also remind ourselves that this formation  just looks good to go short after it breaks the
166. 15:35consolidation slash base flag patterns and pennant  patterns are very high probability we have to
167. 15:41remember not to over complicate how easy it can be  to make money when it's in a clear down or uptrend
168. 15:48larger time frames are more important because  that's what big money is paying attention to
169. 15:53they are more aware of this stuff they don't care  about some weird technical analysis baloney like
170. 15:58an inverse triple waterfall butterfly swordfish  guitar pick or whatever you want to call it
171. 16:03forming on the 200 tick charts if we want to make  big money let's follow what big money is doing
172. 16:10and we have an amazing advantage over them  since individually our orders don't influence
173. 16:15the market we get all of the benefits of riding  those huge waves they create without actually
174. 16:20causing any ourselves now on the charts we do  a top-down approach this begins with the larger
175. 16:27time frame first and then we work our way down to  the time frame we will be placing our trades on
176. 16:33some helpful information is choose a  maximum of three time frames to view
177. 16:38and do not over analyze the market do not look at  10 different time zones or you'll psych yourself
178. 16:43out all we need is the daily chart hourly  chart and then the 5 or 15 for our entries
179. 16:50less than that is all noise and stuff we should  not care about we want to know what kind of trend
180. 16:55the market is in overall and then we want to know  what it's doing this week and today it does not
181. 17:01need to be more complicated than that the 5 and 15  are best for supply and demand remember the more
182. 17:08the price drops down the less desirable that price  becomes to the sellers so why would we not believe
183. 17:14that it's going to come back up simultaneously  that price becomes desirable to the buyers you
184. 17:20don't want to become a buyer after a large rally  and you never want to become a seller after a
185. 17:25huge sell-off okay let's do an analogy to surfing  i've never surfed but the concept is not difficult
186. 17:33however if you get on the board at the very end  of the wave i'd probably tell you that you suck at
187. 17:39surfing we use supply and demand zones to identify  where these big waves are building up and then we
188. 17:45ride them to their destination on shore and when  we get back into the water we have a general idea
189. 17:51of where another wave is probably going to start  again so we wait there patiently and ride it again
190. 17:58let's briefly return to my favorite phrase  don't diddle in the middle when it's choppy
191. 18:05you'll have a hard time convincing me you're not  just gambling with good risk management if you're
192. 18:09diddling in the middle yes by definition all  trading is gambling but hopefully you get my point
193. 18:17we have no idea which direction has higher  probability in the middle but when it's in
194. 18:22a supplier demand zone there's a good probability  as to which direction it will move now i like this
195. 18:28picture for a few reasons this is es on the five  minute chart which is the futures for the mini s p
196. 18:34500 you can see that we will have big trading  opportunities and smaller ones it dipped into that
197. 18:41demand zone that i drew so we could go long there  then we would have sold it about 25 minutes later
198. 18:47after it got up to the high of day and failed to  break through it now that was only a few points
199. 18:53but it was still a clean setup these are the only  patterns we need in order to trade reversals have
200. 18:59a rally based drop and a drop base rally where  base becomes the zones to trade and the other ones
201. 19:05just have a small base where it stalls out before  continuing to move in the original direction
202. 19:10the continuation patterns create supply  and demand zones at their base as well
203. 19:16the speed at which price left the area determines  the strength of the imbalance and price
204. 19:21we don't want to see a bunch of little candles  we want to see a few big candles which you can
205. 19:26see on the left the faster it leaves an area the  higher probability the price will turn there again
206. 19:33this is a very good demand zone  because of how fast it left
207. 19:36you'll notice it didn't stay there for very long  either now the supply zone isn't that good because
208. 19:42it moved very slowly so it wouldn't be a good  idea to short when it got back into that area
209. 19:48if price arrives into a level with few candles  which just means fast price is offering a larger
210. 19:54profit potential for upcoming trades this is due  to no opposing order flow being close to the entry
211. 20:00which is just saying that not a lot  of people want to sell right there
212. 20:04but they do want to buy so let's just follow  them and make some money if price enters the
213. 20:11level very slowly there's a higher probability  that price will continue in the current direction
214. 20:18this is very important and in this case it  is referring to the speed at which the price
215. 20:23enters a supply zone it is saying that  the faster the price jumps in there
216. 20:28even if it was consolidating in the middle  for a while the stronger the chance is
217. 20:32that it will reverse out of the  zone let's look at an example
218. 20:39see how fast it returned to the supply zone at  those two candles that's what's important we don't
219. 20:44care about all the choppiness after left supply  and before it got to the two candles that went
220. 20:49flying into the zone it can move around like this  what's important is how it eventually moved in
221. 20:56here it did it really fast in just two candles  so it's good we can call this a clean arrival
222. 21:05the less time it spends at the base slash  consolidation the stronger the level is it
223. 21:11shows a clear decision and no battle if it leaves  very fast then the chance of orders being left in
224. 21:17that zone are higher if it's at the base for a  long time there's a good chance that order flow
225. 21:22is already consumed so when we return to the  level the probability of it holding is lower
226. 21:28remember to ask the question don't  you think we left some buyers there
227. 21:34this is a good base it went in  and then immediately rallied out
228. 21:39even though you'd like to see it leave this zone  faster after it came back the buyers are still
229. 21:44in control this is a good setup but sometimes we  have to be patient which is something i personally
230. 21:50have to work on that's why we set the stop  loss one tick under the demand zone now i
231. 21:57want you to look at this chart and see if you  see another clean setup i'll wait five seconds
232. 22:08do you see the supply zone up there that's a great  looking setup remember that we need to be aware
233. 22:13of the overall trend of the market something you  may have also noticed is that not everyone makes
234. 22:18these zones the same i made this one by extending  the rectangle from the opening price of the last
235. 22:24bullish candle and the most recent high some  people use percentages of the first candle out
236. 22:31let's also remember that we need market context to  make judgments about whether our zones are going
237. 22:36to result in the movements we are hoping for not  every zone is going to work of course this isn't a
238. 22:42magical indicator and i'm not selling you anything  i don't even know how to actually do it yet
239. 22:48i'm just making this to quantify my own  research and to make use of my notes
240. 22:54notes aren't useful unless you use some  sort of method to commit them to memory
241. 23:00let's talk about actually doing  the order from start to finish
242. 23:03let's say the price has dipped into the demand  zone at the bottom and it has now just barely left
243. 23:09i will buy one es futures contract and by the way  the strategy seems to do well with all forms of
244. 23:16trading since supply and demand is a fundamental  part of all markets my profit target is going to
245. 23:21be right below that supply zone and my stop  loss will be one tick below the demand zone
246. 23:28that's very small risk for a great reward  additionally if i'm right i'll probably drag
247. 23:34that stop loss up as time goes on so i can  at least lock in some profits or break even
248. 23:40of course this would be the opposite  process for selling a supply zone
249. 23:44or shorting the market one thing that we need  to watch out for when going long our resistance
250. 23:50levels between demand and supply these levels are  still significant and when we short the market
251. 23:57we need to watch out for support  levels between the zones as well
252. 24:03remember we're going to be wrong sometimes we need  market context to have better informed decisions
253. 24:10it's really easy to get a  picture where the strategy works
254. 24:13and something i have to remind myself is that  this isn't the be-all end-all of trading i'm
255. 24:19sure i'll find something else on my own or  from someone else that makes a lot of sense
256. 24:23which i can add to my arsenal of trading  strategies in the markets we need to be adaptive
257. 24:30survival of the fittest extends to every aspect of  life including economics and the market it's easy
258. 24:36to see darwinism at work in the markets and the  statistics about how many day traders fail exist
259. 24:41because of the failure to adapt adapting is what  i will do until i can do this successfully i'm
260. 24:47never gonna give up because even if there was  only one person who could do this successfully
261. 24:51then that's good enough for me to  persevere until i become the second one
262. 24:56there are so many ways to make money and as the  only animals on earth with a sense of self and an
263. 25:02often destructive ego we love to overcomplicate  things we do not need 50 magical indicators or
264. 25:08a million petabytes of data run by a building full  of supercomputers running statistical analysis and
265. 25:14correlation tests in order to become consistently  profitable this is something i have to remind
266. 25:19myself when i experience information overload  and you should keep this in mind as well we over
267. 25:24complicate things it's what we're best at at its  core supply and demand just means we like things
268. 25:31when they are cheaper and we like to sell things  when it makes us money the market fluctuates
269. 25:36between these two areas while simultaneously  following an uptrend usually the market moves
270. 25:42sideways between important areas and in an uptrend  we just need to hold the position and ignore the
271. 25:48noise to make money we don't need a cutting  edge strategy we just need to be good followers