Page 12 - Module 5 - Key_Players_in_the_financial_game

Module 5 – Understanding the game between the bulls and bears

Paraphrasing the definitions, they described them as an area where price has historically had trouble
moving through. They said support is where lots of buyers tend to enter the stock and resistance is
where sellers tend to enter. The definition also stated that the more times the level is tested the
stronger it can become.

We then looked at a chart and started to locate those levels based on what the site and popular
trading books would have you mark. The fun part was the student’s reactions when they realized
that they were not in the same places that they would have marked demand and supply.
Furthermore, most of the so-called support or resistance levels would have been no better to trade
than a coin flip.

Knowledgeable traders need to look for true supply and demand to be successful. We want to trade
as the professionals do, not the retail investor. It is true that we buy in areas where buyers are likely
to enter the stock. But not just any buyers: institutional buyers. Ironically, it tends to be the same
place that the retail traders and investors are exhausting their supply. That is what defines demand.
It is an imbalance between buyers and sellers that displays certain characteristics that we can readily
identify on a chart with the proper training.

When we see that demand is weakening and selling pressures overtake it in a price level, it also
makes a distinctive pattern on our price charts. We look to this as supply. By knowing where these
levels have been in the past, we can enter trades with high confidence since we know that there is
likely to be leftover institutional orders that will help us profit in our trade direction.

Novices often do not have patience when trading or investing and chase prices when their emotions
take over. The institutional traders use computers to work large orders and look to enter or exit
based on an average price. These leave “footprints” on a chart that the patient trader can use to
their benefit.

supply and demand
Supply(Resistance) and Demand(Support) is the heart of a market economy [Capitalism]. Since
market economy is based on exchange of goods and services for a value, for it to function there must
be some goods and services on offer [supply] and people who are willing and able buy them
[demand]. Supply and Demand in textbooks look as two separate things for study purposes but, they
are strongly interconnected. One cannot exist without the other.

The key principle of supply and demand trading is when the market makes a sharp move up or down,
the large institutions i.e. banks/hedge funds are not able to get their entire trade placed into the
market, therefore they leave pending orders to buy or sell at the zone with the expectation the
market will return to the zone and the rest of their trading position will be filled. To a new trader
who doesn’t really know much about supply and demand trading, this theory makes sense.

The problem is the theory above is completely wrong with the way the forex market works. 90% of
supply and demand traders all trade supply and demand zones with the idea that large institutions
place pending orders at these zones ready for when the market returns, this is wrong! institutions
never do anything like this and even if they did put orders at supply and demand zones when the
market would hit these orders it wouldn’t move anywhere because pending orders cannot cause the
market price to change, only market orders can. To understand why this is we must talk about
something called liquidity.

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