When it comes to price movements in any market, whether it be stocks, futures or Forex, the driving force is supply and demand. When demand outstrips supply, prices go up. When supply is greater than demand, prices fall. The movement of prices is directly affected by supply and demand, and it’s really the only thing that matters when it comes to day trading. Because of this supply and demand factor, it’s important that you realize and understand how supply and demand affect price action.
We have heard it many times: The fundamentals are calling for a surge or even a drop in prices, yet prices continue to work in the opposite direction. Sure knowing the fundamentals might help you a bit in the long run, but the bottom line is that the supply and demand will dictate the direction in which prices are going to go, and until the price action on your chart dictates a reversal or trend change, it will be fruitless to try calling a reversal.
The sooner you learn to read a price chart and convert over to price action trading, the better your trading results will become. Do you really think that there is an indicator, which will more than likely be basing it’s outcome on past prices, that can tell you when to enter and exit a market? Normally by the time your indicator is pointing you to a reversal, that is about the exact time that the current trend will reassert itself, so you are forced into entering the market in the wrong direction, just as prices begin reversing again.
Here is what Greg Guenthner at www.istockanalyst.com had to say about supply and demand and it’s relationship to understanding price action trading in the markets.
The important thing to remember is this: Supply and demand are the only factors that directly impact a stock’s price. Even though fundamental factors typically cause an increase in demand (and in price), those fundamentals can often become out of sync with market prices.
Think of any recent market correction. Both “good” and “bad” companies saw their share prices drop. And of course, you’ll also find stock in companies with strong fundamentals that are completely ignored by investors when the market is stable or moving higher.
However, when you study how supply and demand interact, you’ll no longer fret over these disconnects. Instead, you’ll know to use all of the available market data on a stock to produce high-probability trading setups.
Here’s how it works:
For most investors, the most-natural thing to do after buying a stock is to watch how it moves in relation to his or her entry price. We’ve all been there. Seeing your position move into gains or slide into losses has a huge impact on whether you choose to continue to hold shares or sell them. Remember, those entry prices are past prices. These past prices are significant. They’re the prices paid by tens of thousands of individual investors. So as a result, the decision making of those investors is based almost entirely on past prices.
One of the main goals of technical analysis is to identify and exploit these psychologically important price levels. That’s why charts are a key component of the practice. Charts offer us a quick, thorough glance at past price action. By analyzing certain formations on stocks charts, we can find the emotional pivot points that investors and traders have deemed the most significant. This is how trading opportunities are born.
The comment we liked best was when Greg says that there is a “difference between being right and making money.” That’s a very important and interesting comment that says it all in our opinion. The bottom line is that it doesn’t matter what the fundamentals are telling us, nor does it matter what some special indicator is telling us. The only important factor is what are prices doing and how are we entered into the market in relation to those price movements. We are either right or wrong, and prices are moving in our direction or moving against us.
You will find that you are better off forgetting everything else except learning to read the price action on a bare chart, and then simply entering on corrections with the overall trend. Picking tops and bottoms is almost impossible for even the best chart readers, so stay with the trend and the price action and forget all the rest and you will immediately improve your trading results. By learning to read a price chart, you will soon understand how supply and demand affect price action, and how price action is the only thing that really matters when it comes to day trading the markets.
Price action trading is king in our opinion, and we have proven it with our consistent winning strategies over long periods of time. If you would like to learn how to trade with price action, you can get more information on how at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.