Monday, October 14, 2013

Understand your own

I've read plenty of books on trading in search of the holy grail.  I've joined plenty of newsletters to rid myself of accountability when a trade went bad but accepted all the accolades when the trade went well.  Unfortunately, I cannot say that I've ever truly understood the trading methodologies that came with paying $99/month for 5-10 recommendation.  Nor can I say I've ever made money following them.  Then it hit me that following the opinions of others is not learning.  Understanding is learning.  What I've learnt is that without the understanding of the principles of any trading system you will never have the confidence in that system to successfully execute on it.

The principles of the trading system I use today are not my own (obviously).  However, they made enough sense to me to investigate them further and to come up with my own understanding and interpretation to gain the confidence to execute on them.   The funny thing is that I disagree with the majority of people's understanding of these principles which intrigued me more to continue with my own studies of these principles.  That is what this blog is all about.  The evolution of my understanding of the principles of supply and demand, support and resistance.   Lucky for you, you all have a front row seat to watch me blossom into the successful trader you all want to be one day.

Moving right along with the markets.  I've copied below the PnF chart from my last post highlighting once again the importance of the 1692.5 and 1685 area.  Why?  If you keep these numbers drawn on a chart you will see how price tends to gravitate to these area before a larger move ensues.

To hammer home the point, below is a SPX 15 min chart of the last three trading days.  You will see how price reacted to the levels mentioned above highlighting the principles of supply and demand and support and resistance.

So now what? Below we have the SPX 30min PnF chart with a volume by price overlay. You can see that although price did stop at the previous high back on August 2nd the amount of overhead supply is pretty slim until we get to 1719.9 where can see more potential overhead supply.   I am not saying that price is going to trade up to 1719.9 and reverse.  What I am saying is that moving higher is the path of least resistance for now.

Looking at the daily chart below you may notice that price has been closing on the highs for the day on decreasing volume.  I interpret this as a lack of supply allowing prices to move higher on minimal demand.  This may be explained by the recent shakeout I believe we saw (and posted about) where those holding positions in the 1684-1692 area of supply sold (out of frustration) essentially removing themselves out of the supply equation paving the way for uncontested higher prices.  If this is simply a lack of supply then when will supply enter the market?  I believe it will emerge when the large institutions decide to unload their shares to the less informed market participants. Maybe they may use news as a way to stir up enough excitement to coerce people into buying their shares.  Isn't there a debt ceiling problem to be solved?

Thanks for reading

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