D espite the dominance ofcomputer back-testing andsoftware programs thatoffer traders multitudes of

market indicators, Sam Seiden eschewstraditional technical analysis in favor ofthe simple laws of supply and demand.

First exposed to futures trading about10 years ago while working on the floor ofthe Chicago Mercantile Exchange (CME),Seiden developed his theories of supplyand demand from watching the marketaction in the currency pits. He traded forhis own account while working as aphone clerk, and through spending sever-al years on the floor, Seiden developed themethodology he still uses today.

Unlike many other off-floor traders,Seiden’s approach has an almost sim-plistic focus on price.

“My trading has nothing to do withindicators, oscillators, news, earningsannouncements, Federal Reservespeeches, or anything else that mostpeople think affects price,” Seiden says.“After all, any influences on price arereflected in price. Price alone reflects themarket’s true ongoing supply and

demand relationship.”“Indicators are nothing more than

derivatives of price and can only moveafter price does,” he continues. “Anybuy or sell invitation that lags pricemeans your risk is increasing and yourreward is decreasing.”

Seiden left the floor in the late 90s totrade his own account. He also started amarket advisory newsletter called TheSimple Swing Trader. In early 2000, hebecame the director of technical researchat Pristine Capital Holdings. He directedthe firm’s trading advisory services, devel-oping trading methodologies and invest-ment research for the firm's customers.

Currently, Seiden trades for himself,provides technical research to clients,and offers educational workshops viahis firm, The Scientific Investor. He is theauthor of Trade What Is Real, Not WhatYou Feel, which will be released byTrader’s Press later this year.

AT: What were some of the things youlearned from the floor? SS: It allowed me to observe the actionsof the buyers and sellers, and I figured

out pretty quickly who was consistentlyprofitable and who was not. When Ifocused on the actions of those groups, itbecame easy to notice behavioral pat-terns.

Traders who consistently lose makethe same two mistakes. First, they buyafter a period of buying or sell after aperiod of selling. Second, they buy atprice levels where supply exceedsdemand, or they sell where demandexceeds supply.

I began to figure out what those mis-takes looked like on a chart. That’s howI developed my current strategy.

There is such a big advantage to trad-ing off the floor. Instead of being face toface with the people you’re trading with,you’re seeing a chart with price levelsmeasuring supply and demand. Nineout of 10 floor traders run on emotion.They fall for the trap, which is why it’simportant to have a set of rules based onthe laws of supply and demand.

AT: Can you explain your concept ofsupply and demand?SS: It all comes down to simple math. If

56 www.activetradermag.com • September 2006 • ACTIVE TRADER

SAM SEIDEN: Back to the laws of supply and demand

There is a big advantage to trading off the floor. Instead of being face to face with the people you’re trading with,

you’re seeing a chart with price levels measuring supply and demand.

Lessons from the trading floor translated

into a simple supply-and-demand

framework for this trader.

Q&A

BY ACTIVE TRADER STAFF

there are 100 buyers and 50 sellers at aspecific price, you have an objective sup-ply and demand imbalance. As soon asthe 50 sellers sell, what has to happen toprice? It must rise — there can be noother outcome. When you have buyers ata price and no sellers, there is competi-tion to buy. Competition to buy leads tohigher prices. It will continue to rise untilit is met with a price level where supplyand demand are in balance again.

I identify price levels in these marketswhere supply and demand are out ofbalance.

AT: Explain how you determine where“true” support-demand and resistance-supply exist?SS: Most people think it looks like a clus-ter of trading activity above and belowcurrent price (i.e., trading-range typeactivity), but that’s not enough. The con-ventional definition of support is a clus-ter of trading activity below the currentprice. But what nobody focuses on iswhat happens before and after the clusterof price activity, and that is where all theinformation is. The price action prior tothe cluster is what determines if it is peakdemand or nothing at all. So for supportor demand, I look for a rally-base-rallypattern — that is, a rally in price wouldprecede the cluster, or consolidation.

In the big picture, a rally preceded by adecline is just a decline to a support level.However, when a rally precedes that clus-ter of trading activity and price ralliesfrom that cluster, you now have a peakdemand area. I would only buy on thefirst price decline to that demand levelbecause that’s when the supply-demandimbalance is the greatest. With each suc-cessive decline to that price level, what’shappening to demand? It’s going down. Ionly want to buy that first pullback to thesupport-demand level.

AT: Where is your target to get out?SS: The target to get out is the peak sup-ply level above the market.

AT: How do find you that on the chart?SS: It’s just the opposite of support-demand. A cluster of trading activityabove what you may think is resistancehas to be preceded by a decline in price,not a rally in price. That is, a decline-

base-decline formation.

AT: Where do you place your stops?SS: Once I enter at a demand level, mystop is placed on the other side of thelevel. If I’m selling short at a supply level,the stop is just above the supply level.

AT: Regarding your overall method,would it be accurate to say it reflects,first, watching for a breakout and, sec-ond, trading when price pulls back to

the breakout level? It seems that thispattern occurs frequently. SS: It does happen all the time. I chooseto take the opportunities that offer thegreatest reward relative to risk. The dis-tance from the entry to the first targetneeds to offer a minimum three-to-onereward-to-risk ratio — in other words, itmust be at least three times the size ofmy stop.

Basically, I find where peak supply ordemand are — the rally-base-rally andthe decline-base-decline patterns. Thedistance between those two has to offer arisk reward of three-to-one. If pricerevisits that objective demand level forthe first time and the distance to theopposing supply level is at least threetimes the stop, I take the trade.

AT: What is the typical time frame foryour trades?SS: From one or two days, to two orthree weeks.

AT: What kind of charts do you use?SS: I use multiple time frames — 30-minute, 60-minute, daily, and weeklycandlestick charts — to quantify the sup-ply-demand relationship in a specificmarket.

AT: What markets do you actively tradenow? SS: The 30-year T-bond, 10-year note, E-Mini S&P 500, E-Mini Nasdaq, Japaneseyen, euro, British pound and Swiss francfutures.

AT: Do you tend to trade with or againstthe trend?SS: Conventional trend analysis invitesyou into a market well after price hasmoved away from the lowest-risk, high-est-reward entry. When price declines toan objective demand level, the nextmove in price will be an uptrend. That’swhen I buy.

Typically, days later, after price hasincreased, is when the majority of trendtraders will buy into the same market.

They will typically pay those of us whobought when risk was low and rewardwas high. The only way you get paid intrading is when someone buys at a high-er price after you buy or sells at a lowerprice after you sell.

AT: It sounds like you try to get in atturning points, or when a trend is justbeginning.SS: Yes, when you properly anticipatethe “next” trend with objective supplyand demand analysis, you end up beingin the market before everyone else real-izes there is a trend. Think about it — alarge increase and higher highs andhigher lows is what most people recog-nize as an uptrend. This uptrend invitesthem to buy, which actually pays thebuyers who already bought becausethey properly anticipated the next trend.Conventional trend analysis ensures youwill buy only after a period of buyingand sell after a period of selling.

Every major technical pattern has youbuying after a period of buying. Forexample, the cup-and-handle pattern hasyou buying after a period of buying,much like a head-and-shoulders top hasyou selling after a period of selling.Anyone that adheres to the laws of sup-ply and demand will look at the cup-and-handle and say it is ridiculous to buy on abreakout after that pattern is formed.

The demand is at the bottom of the cup,which is why it formed. If you enter onthe breakout of the handle, you are riskingthe distance from your entry to where truedemand is, which is enormous. �

ACTIVE TRADER • September 2006 • www.activetradermag.com 57

The target to get out is the peak supply level above the market.