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Trading Supply & Demand (ob & os)

  • Post #1
  • Quote
  • First Post: Oct 22, 2010 1:59pm Oct 22, 2010 1:59pm
So, I've been getting my fair dose of education from this forum on price action and naked chart trading. I gotta say, didn't know much about it before coming to FF but it's interesting and hey, if it works why not.

For the last 6 months, I've been transitioning from day trading stocks to creating a new strategy and account management system for Forex. I like the 24/5 market time, the liquidity so you never have to find a buyer, no worries of bid whacking or ask slapping, fake L2 walls, the trading on %'s rather than capped fiscal gains. In the stock world though, trading naked is almost unheard. The first advice anyone gave back and the advice I've been passing on is know your charts.

SO, I see there's very active threads like:
"Price is Everything"
"Intraday Point and Figure Trading"
"Swimming With the Current"
"The pitfalls of money management"
"Candlestick Trading"

But there's NOTHING about trading the economics! I'm talking about the supply and demand! Volume of buyers and sellers! Overbought and oversold. Admittedly, I'm only about 6 months fresh in the Forex world but profitable, but 2 years deep in general equities/options/futures trading. I'm surprised the FX world doesn't follow it as much as the other venues do, and I see those laws working on all time frames for the major pairs.

The reason for trading laws of economics is because then you have an understanding of why the price is what it is, and an educated idea of where it's going to go. It allows you to crack out that crystal ball and get a fairly accurate statistical prediction of where the market should head. Many of the "false signals" and "random price movements" that people attribute to ob/os oscillators and indicator failures, are simply because the laws of economics must apply through the higher time frames as well. I've often seen in stock forums that a person may be attempting to play a 5 minute bullish breakout pattern but surprised to see it whacked down by sellers. A look to the hour or daily chart may show that the price is currently in a bearish phase and therefore bullish patterns do not apply. A 5 minute CCI could tell you oversold oversold, lift me up lift me up but the hour and daily say it's overbought and the price must come down. Therefore though the price may rise to consolidate the 5 minute os, ultimately the price and trend is weighted in the direction of the sellers.

Measuring overbought and oversold is relative to the time frame and period. Popular indicators include RSI (Relative Strength Index) and CCI (Commodity Channel Index). In my experience CCI is often mis-used as a "quicker signal" ob/os oscillator to an RSI, when it was really designed for cyclic swing trading where the period is equal to the number of bars between bottoms or tops. Other indicators such as Stochastic RSI can inform you of the strength of a signal cross. When a MACD is combined with an ob/os oscillator, it's typically seen that a high positive value MACD indicates overbought and a high negative value MACD indicates oversold. There are many indicators of ob/os they just have to be properly applied (like CCI) and ignored on lower time frames when the economics of larger time frames are at work (Ex. A daily EUR/USD chart remaining overbought for a period of time, while a weekly chart would show it continued until the weekly was also overbought).

So, here's the rules I listed in another thread:

1. Price oversold: Too many sellers, price is deflated so buyers step in. Shorts covered.
Price overbought: Too many buyers, price is inflated so sellers step in to take profit. Shorts taken.
2. Addition of buying/selling power reverses the trend until the same occurs.
3. The length and weighted-direction of the trend is determined by the same economics of the higher time frames. Artificial buy-sell points such as the 20MA hold for all time frames. Ex. EUR/USD play is a weekly chart breakout, this pullback/top comes at the monthly 20MA resistence. This higher time frame explains why the daily chart was able to remain overbought for the last month while the price still increased.



Purpose of this thread I was hoping to be like many of the others, a place to post about trades using the overbought/oversold psychology. I'm not sure there are many people on FF who trade this way tho!

Thanks to all the threads for expanding my trade psychology knowledge. Maybe I can help expand yours.=)
I am stunned... 0 replies. This truly is a naked trader's forum.=o

Not like it's a bad thing, I've enjoyed learning the price action stuff and knowledge gained just means more knowledge to use.
  • Post #3
  • Quote
  • Edited 4:43am Oct 23, 2010 4:43am | Edited 4:43am
Quoting DKallDAY
So, I've been getting my fair dose of education from this forum on price action and naked chart trading....
Hi DKallDAY

In a trend, no matter how OVERSOLD or OVERBROUGHT the market is, it will contiune going the same way, given new money is being pumped into the market. Using indicators (which is based on price) or price alone to determine oversold or overbrought is a fallacy.

The real supply and demand imbalance lies in the amount of open interest. You might want to do some research on futures and options open interest.

(My old job was to do with stocks. While I was there, I saw no such thing as oversold or overbrought. It was just who's holding how much, how much are they willing to loose, how much are the public holding "out of control stocks", when and how to distrubute etc...)

In my country, there is a published list of holdings for each listed company, released 2 days after the trading day. Order imbalance is shown there, I am not sure if you have such service from your exchange. Regarding FX, everything is available online...


Hope it helps
Life is a school for the soul
Quoting esuffw
In a trend, no matter how OVERSOLD or OVERBROUGHT the market is, it will contiune going the same way, given new money is being pumped into the market. Using indicators (which is based on price) or price alone to determine oversold or overbrought is a fallacy.
Example and point being, the period between March 2002 and March 2008; penny stock p&d's; WAMUQ's increasing price earlier this year despite it's intrinsic value being 0.

Quoting esuffw
The real supply and demand imbalance lies in the amount of open interest. You might want to do some research on futures and options open interest.
I'm well aware. (my primary income still comes from the stock market and my long term positions are hedged. Never took the series 7 but I did buy the books and pass all the practice exams.)

Imma leave out bid and asks and just assume all buys are at the ask and all sells are at the bid.

Overbought refers to too many buyers.
Oversold refers to too many sellers.
Price increases when there are more buyers than sellers.
Price decreases when there are more sellers than buyers.
(Assume that terms "buyers" and "sellers" also refer to relative quantities)

A period of price increase refers to a greater supply of buyers than sellers in the market.
A period of price decrease refers to a greater supply of sellers than buyers in the market.

When many people are buying demand for sellers is high.
When many people are selling demand for buyers is high.
Price reflects this.

Because price is determined by the supply and demand for buyers and sellers and fluctuations result from the imbalance of the two, the price used to calculate the ob/os oscillators is an accurate depiction of the supply and demand. When calculated relatively using periods, indicators give a fair assessment of the buyer to seller ratio which determines overbought or oversold.

Back to:
Quote
In a trend, no matter how OVERSOLD or OVERBROUGHT the market is, it will contiune going the same way, given new money is being pumped into the market.

As long as one side (buyers or sellers) has the majority, the price will continue in it's direction. Calling ob/os a fallacy based on an idea that one side will always hold the majority is the same logic the housing market crisis CDO's were based on. A properly assessed ob/os must be relative to the period of time, or it does not hold true. Ascending up from smaller to larger time frames, ob/os still holds but is often weighted in the direction of the higher time frame's ob/os and direction.

I think I talked about this in the "Indicators or None" thread as well. The reason or psychology behind a decision to buy or sell is based on what the person sees. Fibonacci retracements, supports & resistances, trend lines, etc are artificially created buy and sell points. I noted that the s/r's of a fib do not tend to hold up on a stock play because the stock world doesn't use fib's as much. In Forex fib's are often used by traders and therefore used to make the decision to buy and sell which is what makes those lines hold true. The 20-50-200MA's are often seen as points of solid support-resistance because they are known technical trading points. If they were not used by people making decisions to buy or sell, the psychology wouldn't be changed and the balance between buyers and sellers would be different resulting in the support or resistance not holding true.

The psychology points of where to buy and sell with naked trading price action do not hold any more true than indicator based trading. If a person never see's the supply of buyers over a period of time has been too high, a take profit point because of resistance, a period where trade psychology brought in the bears, or a reason to sell, they won't.



As I make my transition to Forex though, the dominant naked price action trading psychology means more people make buy and sell decisions off of these points, so it has definitely been noted! I do however completely stand by the trade psychology of supply and demand as well.
Quoting DKallDAY

A period of price increase refers to a greater supply of buyers than sellers in the market.
A period of price decrease refers to a greater supply of sellers than buyers in the market.
Price can increase when there are more willing sellers then buyers, especially in stocks. It is called market making.

Don't get fooled by price along. It tells a lot, but it can also trick one into thinking there is an inbalance in the market.

e.g.(Notice, before any big market crashes is due to happen, penny stocks will make fast pace runs. The intention of the run is to SELL, but just becasue the bid and ask range is shifted to the upside, it DOES NOT SHOW GREATER AMOUNT OF BUYING. It is there to trick people into thinking there is great demand.)

The same is in everymarket. Supply can be hidden, covered up by price drives, which is just mere shift of the BID/ASK range.

The market doesn't operation in a prefect condition for such Buyer's/Seller's talk. Don't think in terms of BUYERS or SELLERS, it leads you nowhere...

Think in terms of : Market makers, big traders, users, hedgers, specualtor, gamblers, small traders etc... Each plays a different role in the market. Their operation all have different effects on the market. To explore the imbalances they cause would give you an edge to do the business.
Life is a school for the soul
Quoting DKallDAY
A period of price increase refers to a greater supply of buyers than sellers in the market.
A period of price decrease refers to a greater supply of sellers than buyers in the market.
In a perfect world.

I'm with esuffw here, it's not that simple because there is market making involved to fool people, otherwise trading would be easier.
This is a good topic.

The previous posters make good points in that the dealer/market-makers during times of low liquidity ( or for very short periods of time) can create stop-runs, price drives, weird spikes.

There is another thread similar to this topic which contains some of Sam Seiden's free stuff on the web. [Bottom of first post]
http://www.forexfactory.com/showthre...71#post4016271
I think Seiden's stuff is very good, I definitely wish I had found it earlier.

Also, one of Capitalist88's research articles on his website made the statement:

Identifying overbought/oversold conditions rather than trends are the key to profitability in shorter time frames.

This mindset along with basic support and resistance has made a very big impact on my trading lately.
Quoting Marv
In a perfect world.

I'm with esuffw here, it's not that simple because there is market making involved to fool people, otherwise trading would be easier.
lol yes, it's called simplicity for the point of theory.

The only venue I've witnessed the true of effects of market making is with naked shorting and the intervention of p&d's for penny stockers.

Quoting Intu
There is another thread similar to this topic which contains some of Sam Seiden's free stuff on the web. [Bottom of first post]
http://www.forexfactory.com/showthre...71#post4016271
I think Seiden's stuff is very good, I definitely wish I had found it earlier.
There we go! How did I miss that threads existence! I thought there was NOTHING on the topic.

Quoting esuffw
The market doesn't operation in a prefect condition for such Buyer's/Seller's talk. Don't think in terms of BUYERS or SELLERS, it leads you nowhere...
It's lead me to a full time career and financial independence for about a year and a half now...

Quoting esuffw
Think in terms of : Market makers, big traders, users, hedgers, specualtor, gamblers, small traders etc... Each plays a different role in the market. Their operation all have different effects on the market. To explore the imbalances they cause would give you an edge to do the business.
This is what I meant by: "(Assume that terms "buyers" and "sellers" also refer to relative quantities)" I should have made that a little more clear.

I also would like to reiterate that trading points are artificial from trade psychology. A naked traders lines on a chart have no more validity to an ob/os status if nobody else uses it as a trade psychology.

Also I use a very healthy mix of many trading strategies. Promoting the solid use and understanding of only one will only paint one picture that's being played out. It's much better to get all the pictures.
Quoting Intu
Identifying overbought/oversold conditions rather than trends are the key to profitability in shorter time frames.

This mindset along with basic support and resistance has made a very big impact on my trading lately.


I don't get why everyone on FF thinks it's all or none! I feel like I'm in a religious debate and am hearing that ignorance and blind shoulder turning makes you more intelligent hahaha.


ps.

I am in no way implying that indicators give definitive trading signals to follow. When used properly, they can give you an idea of where the price is relatively and where it should be heading.
Trading supply & demand zones works but there are also areas that are not visible on common basic charts.

Naked charts don't give enough information about market conditions.

IMO Sam Seiden's teaching is incompetent and only for beginners.
Quoting UnnamedPlayr
Naked charts don't give enough information about market conditions.

IMO Sam Seiden's teaching is incompetent and only for beginners.
I concur.

Let me add that many chart traders seem to forget the element of randomness involved. Some levels and geometric formations that chartists give so much meaning to are simply due to chance, nothing else (i.e. some of the level where the cross-over/reversal between buying vs selling power happens is random).

Don't believe me? Run a random simulation (using a random number generator), plot the results, and see for yourself.

Here is one:

http://fun.trading.free.fr/IMAGES/Random_walk_1.png
http://fun.trading.free.fr/IMAGES/Random_walk_TA.png
That is some damning evidence! Thanks for sharing that.

However, even if the formations forming were to be random, the sheer fact that people see those points as support or resistance (the psychology of it) will help shape their decisions to buy or sell. So the fact that it's used and known re-enforces the trending of randomness.

Scrap the talk of supply/demand, the effects of positive or negative news for securities are easy to see in many examples. I'm not even going to get into the psychology of determining if news is good or not, but there are examples where relatively good news does not seem to affect market direction.

The whole s/d, ob/os, news, financials, etc psychology points attempt to explain why the market behaves as it does. Understanding why helps to make informed decisions, something that as UnnamedPlayr hinted too, naked charting alone cannot provide.

Quoting Marv
I concur.

Let me add that many chart traders seem to forget the element of randomness involved. Some levels and geometric formations that chartists give so much meaning to are simply due to chance, nothing else (i.e. some of the level where the cross-over/reversal between buying vs selling power happens is random).

Don't believe me? Run a random simulation (using a random number generator), plot the results, and see for yourself.

Here is one:

http://fun.trading.free.fr/IMAGES/Random_walk_1.png
http://fun.trading.free.fr/IMAGES/Random_walk_TA.png...
As traders we have to have absolute confidence in our analysis and our own trading methods, we have to trade what we believe is best and gives us the highest probability of winning, be it sd, pa, fibs, mas or fundies.

Personally I like trend analysis and fractal analysis, I am confident enough to trade the same chart pattern on any timeframe from one minute to one month, It enables me to predict SR levels (stops and targets) to the pip on many occasions.

It has taken years of chart analysis and hard work. I have studied almost every method out there.

As a result I do not believe in randomness.

Stop hunting and dealers games, yes, but I believe the prevailing trend beats those, "random" price fluctuations.

I know I still have so much to learn about trading, every day excites me in this business still.
  • Post #14
  • Quote
  • Edited 3:19am Oct 24, 2010 12:45am | Edited 3:19am
[quote=DKallDAY;4117768]Scrap the talk of supply/demand, the effects of positive or negative news for securities are easy to see in many examples. I'm not even going to get into the psychology of determining if news is good or not, but there are examples where relatively good news does not seem to affect market direction.quote]

The dealers and market makers are far better informed than we can ever be. What about the fact that news we as retail traders hear is often old news, already priced into the markets. That explains to me why some news has no affect.

Granted, bombs going off or acts or war, natural disasters etc are "new news", I can understand those apparently random movements.

Weekly and monthly trends soak up these "news spikes" as if they never happened most of the time IMHO.

I am not trying to convince anyone either way, these are just my own thoughts and observations.

P.S. I spent the first year to eighteen months of my forex journey in a live trading room with a trader who spent 5 years learning to trade trend analysis and support and resistance. He traded h4 and m15 trends, 10 lots a trade and had little regard for news. I still didn't get it completely back then and spent the following two years learning about fibs, mas, ew, fundis etc. The additional time was well spent cos it proved to me he was right all along.
Quoting jag1966
The dealers and market makers are far better informed than we can ever be. What about the fact that news we as retail traders hear is often old news, already priced into the markets. That explains to me why some news has no affect.
That's why the saying goes buy on rumor sell on news.

Quoting jag1966
P.S. I spent the first year to eighteen months of my forex journey in a live trading room with a trader who spent 5 years learning to trade trend analysis and support and resistance. He traded h4 and m15 trends, 10 lots a trade and had little regard for news. I still didn't get it completely back then and spent the following two years learning about fibs, mas, ew, fundis etc. The additional time was well spent cos it proved to me he was right all along.
To be completely blind of other factors that actively affect the market imo is a terrible idea. I would compare it to going into an MMA fight with only knowledge of a single martial art. Every move and quirk the other opponents do would leave you confused and with no understanding of how to react.

Fact is there are highly successful traders who trade naked price action, highly successful traders who trade ob/os supply-demand, highly successful traders who trade fundis, stocks, options, futures, forex, etf's, even trading country's emissions certificates (the guy that coined the term and philosophy of Global Warming in the UN). To have a full understanding of the market, you have to have a full understanding of why all factors choose to do what they do when they do it. There is no one right answer as you have suggested.
Quoting Intu
This is a good topic.

The previous posters make good points in that the dealer/market-makers during times of low liquidity ( or for very short periods of time) can create stop-runs, price drives, weird spikes.

There is another thread similar to this topic which contains some of Sam Seiden's free stuff on the web. [Bottom of first post]
http://www.forexfactory.com/showthre...71#post4016271
I think Seiden's stuff is very good, I definitely wish I had found it earlier.

Also, one of Capitalist88's research articles...
Seiden's free teachings only show a fraction of how he trades. If people want to follow that then that's their choice. It may help, but just a little. The thread mentioned is a case in point.
Yea I was in the demand and supply thing VSA method barried to the neck. I tought i found holy grail volume is the key and so on and so.Its useless

Watch with open eyes, you will get your perception and experiance. After 2-3 bankrupts you will be a good trader.
  • Post #18
  • Quote
  • Last Post: Nov 3, 2013 9:24pm Nov 3, 2013 9:24pm
Quoting TravoltaImp
Yea I was in the demand and supply thing VSA method barried to the neck. I tought i found holy grail volume is the key and so on and so.Its useless Watch with open eyes, you will get your perception and experiance. After 2-3 bankrupts you will be a good trader.

What do you mean by this statement bellow?
Quoting TravoltaImp
Watch with open eyes, you will get your perception and experiance.

lol.. So you say VSA is crap?


I never understood it myself, couldn't make sense of the concept, totally backwards.
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