Supply and Demand Trading is used by many well known institutions, commercial and individual traders to assess high probability trading opportunities. In order to do so we use methods to locate a definitive area where there are many orders waiting to be filled, otherwise known as “unfilled orders”. Before moving on let’s define the difference between “filled” and “unfilled” orders.
Filled Orders
These are orders that have been placed and executed by a broker to an exchange and the transaction has already taken place. An example of a filled order would be if you hit the buy button for 1 futures contract and there is an available contract at your specified price for sale you would take ownership of that contract. When you take ownership of this contract that order has now been filled and therefore your order is no longer waiting.
Unfilled Orders
These are most often caused by limit orders being placed to specify an exact price point (or better) to purchase or sell an instrument. The order(s) are placed & reside on the exchange until an opposing buyer/seller becomes available at that price point or better, therefore you take no ownership and your order waits.
Adding Probability
By understanding where the unfilled orders reside on any given exchange we are able to increase the percentage of knowing where price will turn. How? New orders are constantly placed and cause price movement or volatility. If we only know of the new orders there will typically not be enough at one time to make a large reaction, however when we combine unfilled orders (at a specified price) with new orders being placed it simply becomes a math and money game (“He who holds the most WINS!”).
Now we will define a pivot point to see why they are lagging Supply and Demand Trading information. A Pivot Point is a significant price level of a financial market which is used by many to predict the future movement of price. As seen below a pivot point is similar to a V shape or an upside down V shape. It indicates that price has turned at this exact price point in the past. Due to the nature of the shape we know that price returned to a certain location and turned in the opposite direction. The question to ask here is WHY did price turn here? Price action is only capable of calculating “filled” orders, thus if a pivot point is calculated it would mean the orders were in fact already filled. The only remaining question is how many of the orders were actually filled and how many were left unfilled.
The Bottom Line
To simplify the answer; a Pivot Point is a retracement back to a level of unfilled orders followed by a large reaction caused by an abundance of those orders being filled in the opposite direction. It is important for us to look further than just historical turning points. A pivot is certainly information that we want to be aware of and will help to make more informed decisions, but if we are trading true supply and demand for the future movement of price adding both types of orders can benefit you substantially.
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