Trading Edge: Where is Your Focus?

Posted On 11 Oct 2016

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Supply and demand is not a new concept… Adam Smith wrote of it extensively in many of his publications including his prized work entitled, The Wealth of Nations. There are, in fact, many theories regarding how and what affects supply and demand. With the entire goal of this quest being to gain a trading edge by figuring out where price is going.

Just watch 15 minutes of CNBC or Fox Business News and you will likely hear just enough theories and view points to become very confused. Most of us would agree that in any market, the movement of price is simply a function of an ongoing supply and demand equation. Where everybody differs in opinion is the question of what is affecting supply and demand, and this also happens to be what everyone focuses on. Answering this question correctly will give you that trading edge.

Make sure your focus is on the information that will gain you a trading edge.

This is the talk that dominates financial news channels 24/7 around the world. Talk of Iran, Syria, what will happen with interest rates and so on. Smart phones run out of battery life trying to keep up with all the economic data coming through. Again, the focus on all these influences on supply and demand is to attempt to determine where price is going to turn and where it is going to go.

What I do very different than most is simply ignore all those influences and my focus goes right to the main question, “Where is price going to turn and where is it going to go.” I mean, I literally ignore any and all of the news, data and information that has an influence on supply and demand. 100% of my focus is on one thing, the actual supply and demand itself. Why do I care about reasons people and institutions are buying and selling if I know where they are buying and selling? Price changes direction at price levels where supply and demand are out of balance so my focus is identifying the supply and demand imbalance itself, not trying to figure out what is going on in North Korea. And even if I did spend some time on Microsoft’s balance sheet or dissecting the Greece issue, I would end up with the same information millions of other people already have so there would be no trading edge for me. I have enough trouble trying to figure out how they light the cheese on fire in the restaurant. I’m kidding but you get the point…

Specifically, I am focused on where big institutions are buying and selling in markets. Many people will say that’s not even remotely possible. If you’re in that camp, I respectfully disagree. You can identify where big institutions are buying and selling in markets with a high degree of accuracy if you know how to quantify institutional demand and supply on a price chart.

I started my career on the floor of the Chicago Mercantile Exchange facilitating institutional order flow so I know what that picture looks like on a price chart. The more you understand how to quantify institutional demand and supply in any and all markets, the less you need to focus on anything else. The point of this piece is to make sure you are focused on the right information when building your trading strategy. If not, you may find one day that you have figured out everything there is to know about the issue in Greece (including how they start the cheese on fire) only to realize that this in no way, shape or form is going to help you make money speculating in the financial markets, in other words, you have no trading edge.