In my 5 years of Trading, I have been introduced to many ways of stock trading. Some of them were basic, other were very advanced and Technical had different methods of giving buy and sell signals.
Starting with one technical indicator one would need to apply multiple technical indicators. Hence I relied on many technical indicators to get the right buy and sell signal. Now different indicators give different signals at a different time. This practically exerts the emotional you. Our purpose is very simple to get the right opportunity and ensure the least risk. Or in other words, expect a high risk to reward ratio.
As the time passed by what I realized the most important thing is how to seize the right opportunity when it arises and how to take maximum benefit out of it. On a daily basis when you see you are in constant watch over the daily market activities and multiple technical indicators very simple actions are made very complex and difficult. Now the urge to keep things very simple yet not missing any opportunity I was introduced to Demand & Supply based analysis.
My expectation initially was to use the best of the complex technical indicator and the best charting software to make it very simple. In search of a holy grail for stock trading, I wanted to make an advance and complex things to look simple rather than looking at simple things in a different way. Now for demand and supply analysis what I got was just a candlestick chart and nothing else. I wondered initially that would this really work.
What works in the Market?
The market usually can’t be predicted as to what happens next. This is a simple fact which everyone has to accept. How many ever tools we use or indicator we use we are just trying to predict the direction of the market. Now there is no one indicators, tool or pattern that can give us consistent guaranteed returns. This leads to a search what really works and what does not work and then layers over layers are added. These layers are nothing but marketing gimmicks of various financial product marketing genius to differentiate their product so that you are dependent on their tool and they earn a regular revenue stream.
Now financial technical products keep innovating to give you more and more information is given to try and find a trading opportunity. More information is given to ensure that you keep their product and hope for the results with this new tool or information. On the contrary when more and more information is given what we really miss is the price itself. Our entire focus is on the indicators, charts, pattern and what not. It is less likely for you to focus on the price which is the most important indicator in itself. At the end of the day, all the indicators are price based.
Price is the only information which forms the most basics of all the indicators, chart or pattern. Price can not lie. In a market driven environment price alone forms the basics of dynamics which stipulate the further course. Now since we agree that price is all that we need. Let us place details about what causes the price movement.
Here comes the basics of economics e.i. demand & supply for a particular point in price. Here demand refers to the quantity of stock desired by buyers. The quantity demanded is a number of stock people are willing to buy at a certain price. The relationship between the price and the quantity demanded is known as demand relationship. Similarly, supply refers to how much stock the market can offer at when receiving a certain price. The relationship between the price and quantity supplied is known as supply relationship. Reflection of supply and demand is the price. This forms the basis of our analysis.
Charting Demand & Supply?
Lets, look at an example chart of Index NIFTY.
This chart doesn’t show volumes and there is nothing surprising about it. Perhaps in our analysis, we don’t require volume also. Volume does not talk anything about the Demand nor Supply. Why we do not consider volumes is again a very lengthy article will cover the same in another post, for now, will close regarding the demand and supply.
Traditionally one of the most popular technical and the most simple technical indicator is simple moving average. Most traders consider this as a yardstick for identifying a trend. Many newbie trades when a buy or a sell signal is given based on 2 or 3 simple moving average signals. Let take an example of Simple Moving Average for the above-mentioned chart.
The simple moving average functions in a very simple way for those who don’t know when a smaller number moving average crosses from below the higher number of moving average it generates a buy signal.
Now let us place a Demand & Supply based analysis on the same.
Simple Demand & Supply based analysis gives an indication much earlier than conventional technical analysis.
From the above chart, one can find out that when Nifty had more buyers willing to enter the index when compared to the sellers. In the upper region of the chart which we can say higher supply area where the suppliers of the stock were more compared to that of buyers which let the stock price of fall. Understand standing these two basic facts by looking at the price and what the chart is telling us is important. Now basic decision here is when you are into supply area you should be selling or covering up your long. At the same time when you are in demand area, you should enter into fresh long position or exit your short positions.
People will not make money consistently make money if they enter the stock when everyone has finished buying and hence will get trapped with long covering. The same logic can be applied while entering the market and existing the market. Importantly while this maximizes the profitability it also minimizes the losses to the least possible level. Thus when we speculate in the market we are at a huge advantage over the others.
The comparison of technical analysis, multiple technical analysis along with demand and supply analysis can be a never ending process. There are many more factors that can consistently improve our ability to analysis and understand and improve are speculating skills. In the coming posts would be giving more information on demand and supply analysis for better speculation of the market.