Traders need to remember the profitable market investor simply finds
markets where price is at levels where supply and demand are out of
balance and trades the stock back to price levels where supply and
demand is in relative balance.
Watching that order flow can help to
see where prices were going to turn. Traders need to learn to read
their level II and where market makers are sitting. When you have
twelve buyers and six sellers at a certain price, all equal size, as
soon as the sixth seller sold, price had to rise. Watching the orders
in your level II makes this easy to see. Knowing exactly what this
picture looks like on a price chart makes it even easier. The key is
to not look at candles on your screen as red and green pictures and
patterns. You must understand what is happening behind the scenes.
Whether you're trading Stocks, Futures, Options, or Forex, the logic and
rules never change. Traders can combine volume with the candles
themselves. Volume charts are created in the same way as normal
candles. A new candle is created only when a certain number of shares
are traded. Time is not an issue. Until enough shares are created to
complete the current candle, it will not close and a new one will not
The market imbalances are greatest at or near the open of
trading in all markets. By the end of the first hour of trading each
day, a large amount of novice trading capital is simply transferred
into the accounts of the experienced trader.
There is another way to incorporate volume into your charts. Traders
need to learn to trade the gaps but it is also important not to trade
them in changing markets. This can be extremely useful in determining
strength of trend.
When there is an increase in volume to sustain the trend, there will be
more candles created and they will appear larger to cover more price.
When the volume and buying uptrend or selling downtrend pressure
subsides, you will see less candles created. Also a bunch of candles
can identify an area where many traders have an interest in the stock
and a possible strong supply or demand level.
A trader will use a smaller time frames to trend trade between
larger time frames supply and demand zones. Another factor that will
go into your choice of time frames is your discipline. This is one of
the most important factors in becoming a profitable trader! The
training and education last for a while, but without commitment, the
novice trader soon stops using the new tools and concepts. They
gradually forget them, often beginning with the principles and
concepts which made the training seem so worthwhile in the first
place. Traders should want to let your winners run and cut losers
short. By observing true price action in an easy format such as volume
Below we have a chart of the S&P as seen through the SPY, the
ETF for the S&P. "A" represents a resistance (supply) level. We know
this because price could not stay at that level; it had to fall
because there are more willing sellers than demand at that level. "B"
is a day where price gapped right into that resistance supply level
at the open. The novice trader buys and the smart trader sells to
The very next day at the open "C," price gapped up right into an objective
supply level, "A" and "B." That short entry at "C" was very low risk
and high reward, but you had to be trading at or near the open to get
that low risk short entry which was true for all the gap entries for
the week. The last thing you want to do is buy at that price level and
that is exactly what the new trader did that morning on the open.
Only a new trader would sell a gap down, after a decline in price, and
into an objective demand support level, "D." We simply bought from
that new seller and profited nicely on the trades.