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How to Determine Where All The Unfilled Orders Are
Think about it… If you had the worlds unfilled buy and sell orders in front of you at each price level in the markets you were trading, how simple would trading be? You would know where price was going to turn as that would always happen at price levels where supply and demand are very much out of balance. You would also know where price was going to move as price always moves quickly through price levels where you have a lack of buy and sell orders. If it sounds like I am writing this article during a trading dream in fantasy land, think again. The truth is, we all have this information in front of us all the time, if you know what you’re looking for and what to be focused on when looking at a price chart.
When I talk about supply and demand levels, I am specifically talking about the size of buy and sell orders from willing buyers and sellers. I say “willing” because they have not bought all they wanted to buy yet. Let’s say I’m looking at the actual buy and sell orders, specifically the sell orders as I will reference that later in this piece. I am looking to short the market as I see a price level a little higher where there is a significant amount of unfilled supply and I see no significant buy orders (demand) until much further down in price. So, I am expecting price to turn lower from supply and fall down to demand. In that scenario, things are very set and there is almost a profit guaranteed barring any earth moving event where a huge set of new orders come into the market which hardly ever happens. This is a big reason people paid so much money for seats on the exchange years ago, it’s all about visibility to the significant orders. Now, let’s focus on the supply where we are expecting price to turn lower at. What if just above that supply area, there was an even larger amount of supply? Would you now feel even better about shorting at that level? Of course you would. This is like asking you how thick you want your floor, ceiling, and insulation in your house. We all pay the premium for “stronger.”
Let’s look at a trade I took last week in the NASDAQ Futures to help explain this exact same concept by looking at a price chart. The yellow shaded boxes (A and B) are two supply levels on top of each other and represent one thing and one thing only, price levels where there were significant unfilled sell orders (supply). With these two key supply levels present and the big profit zone below (circled area) below, the opportunity for a very high probability shorting opportunity was at hand. Why?
1) Two stacks of sell orders on top of each other (A and B). One was DBD and the other was RBD which is very strong as it is a little farther out on the curve. The benefit of two stacks of orders is that many buy orders will be filled at the first supply (A) meaning that if and when price gets through that level, moves higher, and maybe even reaches the next supply level (B), there will not be many buy orders left at the same time there are many sell orders. Hence, a major supply and demand imbalance which is where price always turns.
2) A key profit zone below. Notice the circled area on the chart. This is the price action below supply and prior to price reaching our supply levels. If you follow our rule based strategy at Online Trading Academy, there is no significant demand in that circle meaning no significant unfilled buy orders below (the floor is very weak and really not even there). This allows price to easily decline through that level which it did a bit later.
NASDAQ Income Trade 6/26/14 Profit: $760.00
When price rallied back to our supply level (C), notice is struggled once it got close to the first supply (A). This is because the buy orders were met with plenty of sell orders. So many that for a while, price didn’t need to move higher to fill the buy orders. Then, once the sell orders were all filled at (A), price quickly moved higher toward (B) but remember, there were very few buy orders left as many were filled at the first supply level. Price could not even reach supply (B) because the supply and demand imbalance was so big and price proceeded to fall. My plan was to sell short at both (A) and (B) with a stop for the whole position above (B) but only the entry at (C) filled. Smaller position size than I would like but the trade produced a short term income profit of $760.00.
In many parts of our life, everyday things that all of us understand have moved from the physical world to the virtual world like trading and investing. The key is to understand that the governing dynamics never really change. With electronic trading all of a sudden you have so many new trading strategies over the past decade of technology advancement. The funny thing is, how people made and lost money in the markets 100 years ago is no different than today. The strategy that produced profits in any decade of any markets existence is the same strategy that produces profits today. Exactly how and why prices turn and move in markets never changes. It’s the same supply and demand equation no matter how advanced computers get.
Hope this was helpful. Have a great day.
Sam Seiden – sseiden@tradingacademy.com
