Find Solid Entry and Exit Points for Your Trades

03/02/2011 1:00 am EST

Focus: STRATEGIES

Brandon Wendell

Senior Instructor, Online Trading Academy

Master basic chart-reading skills and you’ll be able to more consistently identify the best prices for entering and exiting your trades. Your bottom line can improve dramatically as a result.

When we teach our courses at Online Trading Academy, we teach our students where the proper areas to buy and sell lie on the charts. Those areas, as you may know, are supply and demand levels. However, there seems to be some confusion among traders as to how to identify the best levels for entering or exiting trades.

Remember, we want to buy at strong demand levels where the supply is very thin and prices are likely to rise. We want to sell at supply levels where the supply of stock overwhelms the feeble demand that may be there. Prices will halt and reverse when the current trend no longer has the pressure to sustain itself and the opposite pressure begins to exert.

We must focus on how strong the opposing pressure is at those levels. For example, we buy at demand levels because they were turning points in the past. They are levels where prices could not continue to drop and started to rise. This occurs when the supply is becoming exhausted as sellers dump shares onto the market. Eventually, prices become so cheap that willing buyers jump in and support the price. When the demand from these buyers exceeds the existing supply from sellers, prices will rise. We focus on that area as an area of demand where we will buy again in the future.

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When we enter into a long trade, we want to buy at the strongest level of demand in order to have a high probability for success. Most traders incorrectly think that all turning points where prices rose will act as demand. We need to be selective in our trading. We want to find the strongest levels of demand for the best trading opportunities. Those strong levels identify themselves in the way that price leaves the level.

Think of a glass filled with water. If you grab hold of the glass and it is filled with lukewarm water, you will be able to hold the glass for as long as you'd like. However, if you grab a glass filled with scalding hot water, you are likely to let go of it very quickly. Demand levels work the same way. If prices enter that area and then move sideways or slowly leave the area, there is no strong buying pressure there and it is a weaker demand level. However, if prices barely enter demand and move quickly away, there is strong buying pressure there and you want to use those areas as buying points in the future.

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Supply levels work the same way, with selling pressure dominating buyers. Until next time, trade safe and trade well!

Related: “Finally, A Real Answer to ‘Where Do I Place My Stops?’

By Brandon Wendell, instructor, Online Trading Academy

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