S/D - Smoke and Mirrors

Created: Thursday, 20 April 2017

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SUPPLY & DEMAND TRADING – SMOKE & MIRRORS

In recent years, there has been an influx of vendors promoting ‘Supply and Demand’ trading as the pathway to financial freedom. Unlike traditional retail trading strategies, the hook with this form of trading is its supposedly a method used to trade with the ‘smart money’ and ‘institutions’. This is a marketing ploy to make the student trader feel like they are part of an exclusive club which makes all other trading styles appear inferior. Sounds great, right?

Unfortunately, it’s nothing more than smoke and mirrors. At this point you may be thinking “isn’t RTM itself a community built upon supply and demand trading?”. It is true that components of Supply and Demand are discussed however, its presented in a way that identifies decisions and manipulation on the chart. This differs greatly to the conventional teachings of Supply and Demand Trading.

A FLAWED LOGIC

The average ‘Supply and Demand’ trader will swear by the levels they identify in the charts. They will claim such levels are the foot prints of the smart money. The truth of the matter is these levels are nothing more than a mirage and trap in many cases.

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The blue areas above are zones which may appeal to a Supply and Demand trader. Typically, they categorize their levels into two different types of zones. The first type are reversal patterns (peaks/valleys) and the second are continuation patterns (impulse/base/impulse). The rationale is that when price reverses, a large amount of opposing order flow has come into the market, therefore when price returns there must be unfilled orders and price should react again. With continuation patterns they claim price has an impulse leg, consolidates and continues in the same direction. It’s believed the consolidation is an area where institutional traders are reloading or unloading before moving in the same direction. Ergo, there should be a reaction upon return. This seems logical and would be the case if the markets operated in an environment of true supply and demand. However, any supply and demand in the market is artificial.

What sits beyond each of these areas is a cluster of stop loss orders placed by the Supply and Demand traders. Its not in the best interest of the institutions to allow retail traders to know where their actual order blocks reside. The more visible or enticing an area looks the more stop orders exist beyond the zone which allows the institutional traders to get a better average price on their long or short position. Without these stops or the liquidity from breakout traders (a subject for a future article) they may suffer excessive slippage.

This means that if the institutions know where there are large pools of orders, they will temporarily move price, create highs and lows or other patterns to have the retail crowd place their orders in a predictable way. In turn they will often drive price beyond the so-called supply and demand zones so the retail stops are triggered.  It’s important to remember this provides liquidity for their own orders.

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Unlike conventional Supply and Demand Trading, RTM traders can establish the true Decision Point (DP) and locate where the institutional orders reside. This is truly a unique way of reading price which allows for a high win rate and risk to reward ratio.

 

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