When looking for quality supply and demand levels (market timing) on a chart, it tends to be easier to spot key levels on the larger time frames. It's not that larger time frame trading opportunities work better on one time frame or another, it's simply that identifying key levels on a larger time frame chart is easier for most people. However, with a supply or demand level on a larger time frame chart often comes a wide protective stop which means big risk or small position size. While you can and should use larger time frame levels to find and take advantage of trading opportunities, you certainly don't need to add risk or decrease position size. The purpose of this piece is to address this issue and opportunity with a tactic we use in the Extended Learning Track (XLT) class.

 

Above is a picture of a little trade I took the other day. The chart on the left is a 2 minute chart of the S&P Futures and the chart on the right is a much larger time frame, 180 minute chart of the S&P Futures. During a prior XLT session, I identified a key supply level on the 180 minute chart. This was a supply level to me because it met the definition of supply based on our "odds enhancers." There was a strong drop away from the level, price spent little time at the level and the distance price declined away from the level was more than twice the size of the level itself. These and other odds enhancers told me there was likely a big supply and demand imbalance at the level. This was a wide supply level which meant a big stop if I took the trade as planned off of the larger time frame supply level from 8.7.11. A couple of days later, when price rallied back to the level, opportunity was at hand. What I did was this... Instead of taking the trade, shorting the S&P based solely on the 180 minute supply level, I went down to a 2 minute chart to find a supply level within the price range of the 180 minute supply level. The chart on the left is that 2 minute chart and shows the supply level I found and shorted against. Again, this little 2 minute supply level may not seem like much of a level to you, but think again. This little level is inside a very quality larger time frame level which meant it was VERY likely that price would fall from this range. Secondly, if you apply the odds enhancers we teach in XLT, you would see that this 2 minute level is "structurally" solid, meaning big supply and demand imbalance. When price rallied back up to that level, I sold short and profited from a downside move. Instead of having a 20+ point protective stop on the trade, I was able to use a 3 point stop for the exact same shorting opportunity.

What is needed to do this is the ability to know the difference between key levels where supply and demand ARE out-of-balance and other levels where supply and demand are NOT out-of-balance. The important message and lesson here is that you don't need to have big, wide stops on larger time frame trading opportunities. By going down to smaller time frames and looking inside larger time frame levels, we can drastically reduce our risk and increase our reward.