Q &A

SAM SEIDEN:
Back to the laws
of supply and demand
Lessons from the trading floor translated
into a simple supply-and-demand
framework for this trader.

BY ACTIVE TRADER STAFF

D espite the dominance of

computer back-testing and
software programs that
offer traders multitudes of
market indicators, Sam Seiden eschews
traditional technical analysis in favor of
the simple laws of supply and demand.
demand relationship.”
“Indicators are nothing more than
derivatives of price and can only move
after price does,” he continues. “Any
buy or sell invitation that lags price
means your risk is increasing and your
reward is decreasing.”
out pretty quickly who was consistently
profitable and who was not. When I
focused on the actions of those groups, it
became easy to notice behavioral pat-
terns.
Traders who consistently lose make
the same two mistakes. First, they buy
First exposed to futures trading about Seiden left the floor in the late 90s to after a period of buying or sell after a
10 years ago while working on the floor of trade his own account. He also started a period of selling. Second, they buy at
the Chicago Mercantile Exchange (CME), market advisory newsletter called The price levels where supply exceeds
Seiden developed his theories of supply Simple Swing Trader. In early 2000, he demand, or they sell where demand
and demand from watching the market became the director of technical research exceeds supply.
action in the currency pits. He traded for at Pristine Capital Holdings. He directed I began to figure out what those mis-
his own account while working as a the firm’s trading advisory services, devel- takes looked like on a chart. That’s how
phone clerk, and through spending sever- oping trading methodologies and invest- I developed my current strategy.
al years on the floor, Seiden developed the ment research for the firm's customers. There is such a big advantage to trad-
methodology he still uses today. Currently, Seiden trades for himself, ing off the floor. Instead of being face to
Unlike many other off-floor traders, provides technical research to clients, face with the people you’re trading with,
Seiden’s approach has an almost sim- and offers educational workshops via you’re seeing a chart with price levels
plistic focus on price. his firm, The Scientific Investor. He is the measuring supply and demand. Nine
“My trading has nothing to do with author of Trade What Is Real, Not What out of 10 floor traders run on emotion.
indicators, oscillators, news, earnings You Feel, which will be released by They fall for the trap, which is why it’s
announcements, Federal Reserve Trader’s Press later this year. important to have a set of rules based on
speeches, or anything else that most the laws of supply and demand.
people think affects price,” Seiden says. AT: What were some of the things you
“After all, any influences on price are learned from the floor? AT: Can you explain your concept of
reflected in price. Price alone reflects the SS: It allowed me to observe the actions supply and demand?
market’s true ongoing supply and of the buyers and sellers, and I figured SS: It all comes down to simple math. If

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.
56 www.activetradermag.com • September 2006 • ACTIVE TRADER
there are 100 buyers and 50 sellers at a base-decline formation. AT: Do you tend to trade with or against
specific price, you have an objective sup- the trend?
ply and demand imbalance. As soon as AT: Where do you place your stops? SS: Conventional trend analysis invites
the 50 sellers sell, what has to happen to SS: Once I enter at a demand level, my you into a market well after price has
price? It must rise — there can be no stop is placed on the other side of the moved away from the lowest-risk, high-
other outcome. When you have buyers at level. If I’m selling short at a supply level, est-reward entry. When price declines to
a price and no sellers, there is competi- the stop is just above the supply level. an objective demand level, the next
tion to buy. Competition to buy leads to move in price will be an uptrend. That’s
higher prices. It will continue to rise until AT: Regarding your overall method, when I buy.
it is met with a price level where supply would it be accurate to say it reflects, Typically, days later, after price has
and demand are in balance again. first, watching for a breakout and, sec- increased, is when the majority of trend
I identify price levels in these markets ond, trading when price pulls back to traders will buy into the same market.
where supply and demand are out of
balance.
The target to get out is the peak
AT: Explain how you determine where
“true” support-demand and resistance- supply level above the market.
supply exist?
SS: Most people think it looks like a clus- the breakout level? It seems that this They will typically pay those of us who
ter of trading activity above and below pattern occurs frequently. bought when risk was low and reward
current price (i.e., trading-range type SS: It does happen all the time. I choose was high. The only way you get paid in
activity), but that’s not enough. The con- to take the opportunities that offer the trading is when someone buys at a high-
ventional definition of support is a clus- greatest reward relative to risk. The dis- er price after you buy or sells at a lower
ter of trading activity below the current tance from the entry to the first target price after you sell.
price. But what nobody focuses on is needs to offer a minimum three-to-one
what happens before and after the cluster reward-to-risk ratio — in other words, it AT: It sounds like you try to get in at
of price activity, and that is where all the must be at least three times the size of turning points, or when a trend is just
information is. The price action prior to my stop. beginning.
the cluster is what determines if it is peak Basically, I find where peak supply or SS: Yes, when you properly anticipate
demand or nothing at all. So for support demand are — the rally-base-rally and the “next” trend with objective supply
or demand, I look for a rally-base-rally the decline-base-decline patterns. The and demand analysis, you end up being
pattern — that is, a rally in price would distance between those two has to offer a in the market before everyone else real-
precede the cluster, or consolidation. risk reward of three-to-one. If price izes there is a trend. Think about it — a
In the big picture, a rally preceded by a revisits that objective demand level for large increase and higher highs and
decline is just a decline to a support level. the first time and the distance to the higher lows is what most people recog-
However, when a rally precedes that clus- opposing supply level is at least three nize as an uptrend. This uptrend invites
ter of trading activity and price rallies times the stop, I take the trade. them to buy, which actually pays the
from that cluster, you now have a peak buyers who already bought because
demand area. I would only buy on the AT: What is the typical time frame for they properly anticipated the next trend.
first price decline to that demand level your trades? Conventional trend analysis ensures you
because that’s when the supply-demand SS: From one or two days, to two or will buy only after a period of buying
imbalance is the greatest. With each suc- three weeks. and sell after a period of selling.
cessive decline to that price level, what’s Every major technical pattern has you
happening to demand? It’s going down. I AT: What kind of charts do you use? buying after a period of buying. For
only want to buy that first pullback to the SS: I use multiple time frames — 30- example, the cup-and-handle pattern has
support-demand level. minute, 60-minute, daily, and weekly you buying after a period of buying,
candlestick charts — to quantify the sup- much like a head-and-shoulders top has
AT: Where is your target to get out? ply-demand relationship in a specific you selling after a period of selling.
SS: The target to get out is the peak sup- market. Anyone that adheres to the laws of sup-
ply level above the market. ply and demand will look at the cup-and-
AT: What markets do you actively trade handle and say it is ridiculous to buy on a
AT: How do find you that on the chart? now? breakout after that pattern is formed.
SS: It’s just the opposite of support- SS: The 30-year T-bond, 10-year note, E- The demand is at the bottom of the cup,
demand. A cluster of trading activity Mini S&P 500, E-Mini Nasdaq, Japanese which is why it formed. If you enter on
above what you may think is resistance yen, euro, British pound and Swiss franc the breakout of the handle, you are risking
has to be preceded by a decline in price, futures. the distance from your entry to where true
not a rally in price. That is, a decline- demand is, which is enormous. 

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