For the US dollar index its not hard to read there was a massive drop from the big red candle (creating a supply area) and it is now making its way up to the initial price drop area. Based on Elliott wave pull back method we can foresee the 5 waves almost being played out except that we will still have to wait for no higher high and V formation before taking the sell. But have you ever wonder why the sell will work? If you are so confident that your trade is going to work, it WILL work.
When I was a high school student at age of 16 I opened up my first business selling GPS units. I branded my GPS as "Stevu", dreaming one day I might be competing with New Zealand's GPS tycoon Navman. At first there was only myself selling GPS, I could sell it for $300 NZ dollar per unit. However, soon I realised that other people start selling GPS as well. For $300 NZ dollar per unit no one would buy from me anymore. The person next door would sell it for $250, if I still want my business running I would then have to reduce it to $200. Not long after my new price I noticed that 10 more people start selling it and they've set their new price to $60 per unit. Given that it cost me to buy each unit (including shipping) $55, there is no way I could make money anymore. So my first business got shut down and I had to work for KFC to cook chicken for two years.
The same logic and concept apply to Forex, Stock, Commodities. Everything in our life is related with supply and demand, including every single business. Currency is a essentially a product. When a product is in demand, the price rises, if the same product is over supplied, the price will drop.
The big bearish red candle is revealed to us as "the market has over supply of US dollar, there is way more sellers than buyers". In order for the sellers to sell product they will have to reset competitive prices for buyer to buy US dollar. These sellers in real life are considered as "Goldman, JP Morgan, Morgan Stanley, other investment banks and even hedge funds".
These banks would put say for instance one billion worth of sell limit orders at the price of 97.44. But there aren't enough buyers to digest them all at once, only 1/3 of the entire orders would create a massive unbalance of buying and selling forces. the price then drops as indicated on chart.
When the price climb its way back to similar level (around 97.44), we all agree that there are still 2/3 orders being placed at 97.44, which is why every time the price reach 97.44 it bounces back (not a single pipe more). This is a good indication that this supply area is very robust. If you are going to do the sell, do you all agree that it would be much safer to sell with these investment banks (institutions)? Of course the answer is yes.
But before that We must accept that there must be a V formation to take out the buyers, in this chart it is revealed as the pink area. On the contrary there is also buying orders being set at such price. You will HAVE TO wait patiently until these orders gets consumed before taking the sell.
I hope these explains the whole logic. If you have questions or doubt please feel free to leave any comment.
Hey Steven,
Thank you for the informative write up. Now a question would be why would the institutions leave the orders in the same place in such a dynamic market? For instance Trump tweets of customs just pushed the $ down and now here goes the nuclear deal! So the in such a changing environment how would supply or demand remain constant or static?
Thank you,
Tamer
StevenFu
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@TamerGaber, Hi Tamer, this name sounds very familiar because I knew a Tamer few years ago (forex trader) and had lost contact, not sure if you are the same Tamer. Yes you are correct to some extent. but sometime the news are not as critical as it sounds to be. The institutions place short trade or long trades for very good reasons, they do not simply 'just place it there'. Loads of fundamental analysis and probability analysis is to be carried out before they put the orders. Of course there is a big knowledge base on how to identify and differentiate the effective supply and demand area from non-effective ones. Let me pick NFP as an example, last month (July) the NFP was bearish to gold but have a look at the Gold price now. Did the news affect the trend? It might have dipped the market in short term, but will eventually goes toward institutions favour direction. For us Swing traders we do not have that amount of time to research the whole market, but supply and demand 'with confirmations' would be good entry point, if you just enter where your supply and demand area is its just a probability game. This is why most of my analysis I have mentioned 'enter with confirmation'. When there is winner there must be loser in the marker. For you to make money somebody must loss money. I hope the above clears most of your doubts, if you still confused please feel free to message me.
TamerzFund
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@StevenFu, Thank you so much for the elaborated explanation. I am relatively new in trading so it must have been another Tamer. But would be a pleasure to start this now :)
Samanbir
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Perfect anticipation and drawing before it happened.
Thank you for the informative write up. Now a question would be why would the institutions leave the orders in the same place in such a dynamic market? For instance Trump tweets of customs just pushed the $ down and now here goes the nuclear deal! So the in such a changing environment how would supply or demand remain constant or static?
Thank you,
Tamer