Howdy Folks!

It was another fantastic day on the lake, sunny and 70 degrees! I hope your all doing well in your corner of world today! Trading is rather quite for me this evening. There are no trade setups I like and I’m already in a USD/CAD long so I guess we wait for the fundamentals to play out Thursday and Friday and see where we end up. Yesterday’s thoughts on USD/JPY turned out to be too conservative and my entry orders were never picked up. Instead of trade setups today I thought I’d respond to a comment I saw on another post I wrote.

My entire trading methodology centers around three things; price action, supply and demand and fundamentals. The currency market is a floating point exchange which means it’s price is determined by the underlying forces of supply and demand. The market will move only when supply and demand are so unbalanced market makers must move the price in order to fill their orders, it has nothing to do with indicators. Reading price action is subjective and a skill that takes time to develop but I believe anybody with a little guidance and a lot of commitment can learn to trade on price alone. Today’s question comes from “Another Brian” who wrote the following comment:

“I have a question. This post has a chart with a “50 pips support zone” I’m wondering why 50 and not 10, or the height of the lowest low candle. Are you looking for the congested area?”

He is talking about this chart:

The short answer is yes, I’m looking for the congestion area ahead of the breakout. The reason I selected a 50 pip demand level in this case is due to the choppy candles around the pivot of $98.25 / .45. As the currency pair was rejected from $98.13 it was choppy up to $98.62 before breaking free of selling pressure and moving higher. When I look for supply and demand level trades I’m looking for the area immediately before a large breakout occurred, that becomes my supply or demand level. That is the “zone” which the battle between supply and demand ultimately became imbalanced enough to drive the price away from that area.  Using the old axiom of demand (support) becoming supply (resistance) I assume that as price enters that zone again the imbalance will emerge again offering a low risk entry point. This methodology can be used on any currency with any time frame. You’ll see me use two indicators to visually depict trend but all of my entries are planned on price action alone, it is all that matters.

Why didn’t I market it up with a smaller supply zone and smaller stop required? You want to give yourself the best chance of entering the market with the lowest risk but if you go too low you’ll miss alot of trades. Supply and demand levels are rarely clean so you need to give the market room to manuver. If you want a smaller stop, by all means drop the order at $98.25 on this chart with a stop below $98.13, there is nothing wrong with that. I just prefer a little more room.

It is not a perfect science, it’s somewhat messy but it is the only reason price moves. With a little practice you’ll get the hang of it.  While your learning I recommend trading only one currency pair, learn it’s habits and observe how it performs around supply and demand levels until you can trade it in your sleep. Only then should yo consider adding more pairs to your watch list. Besides, if you can’t make a profit trading one pair what makes you think you ready to trade ten? Trading is a profession, learn what makes the market work and be patient during your apprenticeship, I promise you will enjoy the journey.

I hope that answered your question “Another Brian”, best of luck through the end of the trading week!

Ryan