Is This The Most Overlooked Supply & Demand Rule in Day Trading?

As with most things in the business world, a lot of trading success comes down to supply and demand!

As a day trader (assuming you want to turn this into a profitable and sustainable career move) you NEED to understand how supply and demand in the markets work.

If you don’t, you’ll always struggle to keep up.

Let alone learn how to adapt as the markets change.

(which we’ve seen happen a lot over the last year or so )

As you go deeper down trading’s rabbit hole, you’ll absorb more and more information, learn new techniques, and find new tools. It can sometimes distract you from what’s really going on, and the fact that stock prices change purely due to change in supply or demand.

That is the basic thing we always need to keep in focus at the forefront.

Ultimately, price is the only thing that matters. It determines everything.

Therefore supply and demand are important concepts you NEED to know about.

When you’re looking at a stock, you need to observe it in terms of its supply and demand.

In today’s article, we’ll look at a very interesting concept when it comes to supply and demand.

In order to understand supply and demand, there are some important things we must look at that are critical for a trader to find their way in the different market conditions.

If you watch my Youtube channel, you know that I often talk about float and volume…

The relationship between float, volume, supply, and demand is something I discuss in this video.

Every day we trade, float and volume are involved.

It just isn’t possible to be successful without an understanding of these.

Float is the number of shares a company has made available to the public, effectively making this the supply of shares that traders can actually trade.

Let’s say a company decides to authorize 200,000 shares to trade in the market, out of which 50,000 are held by employees and internal stakeholders.

The remaining 150,000 shares are referred to as the float. This determines the supply.

When the float is high, it means there is a higher number of shares available in the market.

Whereas volume is the total number of stocks traded in a day.

(this is what shows us the demand)

Stocks high in volume shows there’s more demand for that stock, making volume one of the key factors in your decision-making process.

So now we see that supply is the float and the demand is the potential volume that will trade through the day.

Once you remember this, you’ll always be able to recognize whether a crowded stock will occur on any given day.

In order to figure out whether a stock will be crowded or not, we pay attention to a number called the “rotation” of the float.

The following formula is how we arrive at rotation:

Rotation = (Estimated Volume)/Float

This number helps us identify if the stock will be crowded or not.

Essentially, a low float and high volume together equal a massive spike.

Now that we know these terms, let us understand what supply and demand are in trading.

Supply is how many shares are available to be traded, and demand is how many will actually be traded throughout the day.

As we just saw, supply is determined by the float and demand by volume.

Stock prices change every day and this is why we trade. To take advantage of price changes.

While there is no guarantee how prices will behave, they change because of supply and demand. If more people want to buy a stock (i.e. the demand) than to sell it (i.e. the supply), then the price goes up.

On the other hand, if more people wanted to sell a stock than buy it, there is a larger supply than demand — meaning the price will go down.

The price and supply of stocks together determine the value of a company.

The value of a company is its market capitalization.

i.e. the stock price multiplied by the number of shares outstanding.

For instance, a company with $100 per share and a float (supply) of 1,000,000 shares has a lower value than a company that has stocks at $50 but has 5,000,000 shares float ($100 x 1,000,000 = $100,000,000 while $50 x 5,000,000 = $250,000,000).

In conclusion, stock prices (and its value) are driven by a lot of factors, but ultimately the price at any given time is due to the supply and demand at that point in time.

Let us take a look at this in action, using the stock of HTZ (Hertz Global Holdings Inc).

As you can see, the float of HTZ stock is around 100 million (premarket volume is 100 million).

To calculate the volume for the entire day, we multiply the premarket volume by 10, making the estimated volume for the entire day 1 billion.

Going by the formula from earlier — Rotation = (Estimated Volume)/Float — we can calculate that the float will rotate 10 times.

Since this rotation exceeds 5, the stock is going to get crowded.

Knowing all this, how do we identify what will be the potential actions and how the stock is going to perform throughout the entire day?

For that, we must look at the recent history of the stock by going back 1-2 years and analyzing its charts. As we can see below, the stock had tons of resistance packed in around $3-$5.

The stock gapped up close to $3. Lots of people started selling the stock as soon as the stock opened. This is one of the reasons the stock dropped from $3 to almost $1.5.

Stocks under $3 are difficult to trade and therefore many people lost money on this.

I only shorted a small amount and so took a small loss.

The more expensive a stock is — and the more volume it gets — there are higher chances that it will drop on that specific day. This is because, after a certain point, there’s no money left in the market to trade.

As an example, if a total of $100 million exists in the trading industry, and that amount is already used on that day, there’s no money left that can be used to buy stocks.

For a $1 stock, it’s going to take a while to meet this maximum amount. And because it is not expensive, numerous retailers can (and will) buy a lot of its shares.

As opposed to $10 stock that not a lot of people will buy in huge amounts.

This is one of the reasons that a stock under $3 can produce massive squeeze after the initial drop. If you are shorting a stock under $3, then I’d recommend covering early and not holding the stock for too long.

Taking care of these things and keeping in mind how stocks become crowded is a significant step in your trading knowledge. Make sure to practice these new tips and tricks with paper trading before you actually put your money in the market.

Once you have had enough practice, these techniques help you gain an edge.

For more techniques like these (and in-depth knowledge on them), you may like to check out my flagship educational program: The Freedom Challenge.

This is where I work directly with my students to give them the leverage they need to level up!

It also gives you access to a thriving community of dedicated traders you can learn from and see what tricks and techniques they follow. It will help you choose the best possible strategies and thrive together.

Learn more about this program here, and see if it’s the right fit for you.

Otherwise, you may find my Free Day Trading 101 Newsletter valuable, as well as my YouTube Channel. Be sure to subscribe because I’m always releasing new videos and content.

Next steps.

It’s time you stop wasting time, missing opportunities, and losing money due to platforms that only give you access to part of the process. The mechanism is simple, effective and fast.

Speed and efficiency are two of the main things we focused on while building StockCraft. To make the most of watchlists and choose the best stocks possible, join the StockCraft family and get access to our powerful watchlists (and many other amazing features). Get access to our sophisticated screening software so you can track and follow the right stocks. Also, create your own Watchlists and get access to some of the ones we personally use. The time to make a mark in trading is NOW so the sooner you get started, the better. All you have to do is follow this link and choose the plan best for you and your trades.

And if you’re keen to learn more day trading tips, check out this Investing for Beginners series. I’m devoted to mentoring beginners in order to make day trading your primary source of income. I also invite you to take a few further steps with me:

Join The Freedom Challenge. This is my flagship program for traders who want to level-up and turn Day Trading into their primary income stream.

Subscribe To My Youtube Channel. This is where I share practical day trading tips and training on how to trade, as well as behind-the-scenes insights into the trades I make.

Join My Newsletter. I write these emails for people who want to learn the basic Day Trading Tips and the practical steps they should take to get started.

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