6 Secret Tips For Supply And Demand Forex Trading.
Contents in this article.
Whether we look at strong price turning points, trends or support and resistance areas, the concept of supply and demand is always at the core of it. It can really pay off it you know our 6 tips for supply and demand forex trading.
A strong uptrend can only exist if buyers outnumber sellers – that’s obvious, right?! During a trend, price moves up until enough sellers enter the market to absorb the buy orders. The origin of strong bullish trends is called an accumulation or a demand zone.
Bearish trends are created when sellers outnumber buy orders. Then, price falls until a new balance is created and buyers become interested again. The origin of a bearish trend wave is called a distribution or a supply zone.
Supply and demand drives all price discoveries, from local flea markets to international capital markets. When a lot of people want to buy a certain item with limited quantity, price will go up until the buying interest matches the items available. On the other hand, if no one wants to buy a certain item, the seller has to lower the price until the buyer becomes interested or otherwise there won’t be a transaction.
The 6 tips for supply and demand Forex trading.
Wyckoff’s “accumulation and distribution” theory describes how trends are created. Before a trend starts, price stays in an “accumulation” zone until the “big players” have accumulated their positions and then drive price higher. They can’t just swamp the market with their full orders because it would lead to an immediate rally and they weren’t able to get a complete fill, thus reducing their profits.
A short accumulation zone before a strong breakout can point to unfilled buy interest.
It is reasonably safe to assume that after price leaves an accumulation zone, not all buyers got a fill and open interest still exists at that level. Supply and demand Forex traders can use this knowledge to identify high probability price reaction zones. Here are the six components of a good supply zone:
1) Moderate volatility.
A supply zone typically shows narrow price behavior. Lots of candle wicks and strong back and forth often cancel a supply zone for future trades.
The narrower a supply/demand zone before a strong breakout is, the better the chances for a good reaction the next time typically.
2) Timely exit.
You don’t want to see price spending too much time at a supply zone. Although position accumulation does take some time, long ranges usually don’t show institutional buying. Good supply zones are somewhat narrow and do not hold too long. A shorter accumulation zone works better for finding re-entries during pullbacks that are aimed at picking up open interest.
Good supply zones are somewhat narrow and do not hold too long. A shorter accumulation zone works better for finding re-entries during pullbacks that are aimed at picking up open interest.
Narrow and short accumulation zones, followed by a strong breakout, are more meaningful.
3) The “Spring”
The “Spring” pattern is a term coined by Wyckoff and it describes a price movement into the opposite direction of the following breakout. The spring looks like a false breakout after the fact, but when it happens it traps traders into taking trades into the wrong direction ( read more: Bull and bear traps ). Institutional traders use the spring to load up on buy orders and then drive the price higher.
The “Spring” is a pattern used by professionals to acquire larger positions – buying from amateurs.
4) Strong force leaving the zone.
This point is important. At one point, price leaves the supply zone and starts trending. A strong imbalance between buyers and sellers leads to strong and explosive price movements. As a rule of thumb, remember that the stronger the breakout, the better the demand zone and the more open interest will usually still exist – especially when the time spent at the accumulation was relatively short.
When price goes from selling off to a strong bullish trend, there had to be a significant amount of buy interest entering the market, absorbing all sell orders AND then driving price higher – and vice versa. Always look for extremely strong turning points; they are often high probability price levels.
Strong turning points can offer great re-entry opportunities.
5) Freshness.
If you trade of supply areas, always make sure the zone is still “fresh” which means that after the initial creation of the zone, price has not come back to it yet. Each time price revisits a supply zone, more and more previously unfilled orders are filled and the level is weakened continuously. This is also true for support and resistance trading where levels get weaker with each following bounce.
6) Amateur squeeze.
The Rally-Range-Drop scenario describes a market top (or swing high), followed by a sell-off. The market top signals a level where the sell interest got so great that it immediately absorbed all buy interest and even pushed price lower.
The amateur squeeze allows good and patient traders to exploit the misunderstanding how market behavior of consistently losing traders. It is reasonably safe to assume that above a strong market top and below a market bottom, you’ll still find big clusters of orders; traders who specialize in fake breakouts know this phenomenon well.
Typically, price will go beyond the initial zone to squeeze amateurs and triggers stops and pick up more orders.
How to use the concept of supply and demand?
Most trading concepts sound great in theory, but only if you can actually apply them, it’s worth investing your time and effort to master them. The concept of supply, demand and open interest can be used in 3 different ways:
1 – Reversal trading.
We at Tradeciety specialize in reversal trading (here is our Forex price action course ) and that’s also the best use for supply and demand zones. After identifying a strong previous market turn, wait for price to come back to that area. If a false breakout occurs, the odds for seeing a successful reversal are extremely high.
To create even higher probability trades, combine the fake breakouts with a momentum divergence and a fake spike through the Bollinger Bands.
2 – Support and resistance.
Supply and demand zones are natural support and resistance levels and it pays off to have them on your charts for numerous reasons. Combining traditional support and resistance concepts with supply and demand can help traders understand price movements in a much clearer way. You’ll often find supply and demand zones just below/above support and resistance levels. And while the support and resistance trader is being squeezed out of his trade, the supply and demand traders know better.
3 – Stop Loss and Take Profit.
When it comes to profit placement, supply and demand zones can be a great tool as well. Always place your profit target ahead of a zone so that you don’t risk giving back all your profits when the open interest in that zone is filled. For stops, you want to set your order outside the zones to avoid premature stop runs and squeezes.
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How To Use The Reward Risk Ratio Like A Professional.
How To Become A Profitable Trader With A 9 To 5 Job – 12 steps.
6 Secret Tips For Supply And Demand Forex Trading.
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How To Trade Supply And Demand Zones.
Contents in this article.
The difference between supply and demand, and support and resistance may seem small, but a trader who understands the implications of supply and demand can develop his trading edge beyond his expectations. I use supply and demand in my own trading strategy to find better trades and you can learn even more about in our Forex course .
Supply and demand is a concept that analyses how financial markets move. On every price chart, there are price points and areas where the shifting balances between buyers and sellers are obvious and jump right at you – those are usually supply and demand areas. The attentive observer can easily spot those price areas and use it to his advantage while the amateur often fails to understand this fundamental price principle.
Order absorption – why common trading knowledge is wrong.
The scenario below is something we all have seen hundreds of times. It shows the classic price behavior around a support level. Common trading wisdom tells you that with each touch of a price level, the support area becomes stronger. This couldn’t be further from the truth.
What makes price go down is an imbalance between buyers and sellers and there is more selling activity than buying going on. And when price reaches the support level, buyers enter the market again and outnumber the sellers. Then, price goes up until sellers become interested again and drive price down. This is a very basic view but it explains how markets move.
But each time price makes it to the support level, there will be less and less buyers waiting because, at one point, all buyers who were interested in buying have executed their trades. This is called order absorption . The screenshot shows that price bounced less high with each “touch” and eventually it broke the support level.
When everyone has bought and when there are no buyers left, the support level will break and price falls until it reaches a price level where buyers will get interested again.
Think of order absorption around a price level like a ball that bounces off the floor. Each time the ball hits the ground, some of the energy is absorbed by the floor. Thus, each consecutive bounce will be lower than the previous one until all energy is gone and the ball comes to a standstill.
Identifying high probability supply and demand zones.
Now let’s take a look at some charts and see how we can apply our knowledge to find trading opportunities.
The highest probability price levels are the ones with the greatest imbalance between buyers and sellers. What does that mean? Whenever you see a rally and then suddenly, without any prior warning, it reverses on the spot and drops like a stone – those are the areas of major imbalances.
Think about it from a neutral perspective. What does it tell you about price when you see a rally and then all of a sudden price reverses in one candle and starts a strong sell-off? Exactly. The amount of sellers who have entered the market at that price outnumbered buyers in such a fashion that price wasn’t able to withstand it. It takes a lot of sell orders to stop a trend and even reverse it.
But this is not only hindsight market analysis; you can use this knowledge to make assumptions about future price movements too. Whenever you see such a price area it is – reasonably – safe to assume that not all sellers were able to enter at that price on the first sell-off. We have all seen it before: during a high impact news event price just ran away and we weren’t able to get a fill – this is what happens as those runaway supply and demand zones too.
Furthermore, it is also very likely that, in case of a sudden sell-off, more sellers were waiting to sell just above that level. If price fell from $50.00, it is very likely that other traders were willing to sell at $51 too – who wouldn’t like to sell for a higher price? This is a trading concept called “ trading the white space ” and although it can be challenging to wrap your head around it when you hear about it the first time, it helps traders understand markets in a new way.
Chart example – supply and demand imbalances.
There are three things in particular that we look for when identifying high probability price areas:
1) A strong trending move prior to the reversal.
2) The strong reversal itself. Price reverses immediately and does not stay at the level.
Don’t let supply and demand trading turn into predicting tops and bottoms. Waiting for a confirmed squeeze and entering AFTER price has already reversed is they key to supply and demand trading. It is also the hardest lesson to learn.
3) A strong trend into the opposite direction.
The chart below shows 6 price points that qualify as high probability price areas. All of those 6 areas show great imbalances between buyers and sellers and a sudden shift in direction. The turning points marked with numbers are initial price imbalances between buyers and sellers. The trading opportunities exist when price moves back into those areas – the areas marked with green checkmarks.
The first point was a major swing high after a rally. Price reversed with just one pinbar and dropped afterwards. When it came back to the level the second time, it did not immediately reverse but it sold off eventually. Sometimes the accumulation can take a while, but as long as price does not violate the level, it remains valid.
The second point was a pullback during a downtrend. The bullish pullback was a strong one with 3 large bullish candles. Still, price reversed in a strong fashion and continued its downtrend afterwards. The next time price came back it sold off again.
The third point was a price bottom. After a long downtrend, price bounced strong and the next time price came back, it found buying support again. And it goes on like this forever…
Just pull up any price chart and try to find those areas when the trend immediately reversed. The stronger the rejection of the level and the stronger the trending moves before and after the reversal, the higher the likelihood that you will see a new reaction the next time price comes back.
Some anti-examples.
The best supply and demand zones with the greatest imbalance between buyers and sellers are very obvious and they should jump at you when looking at a chart. If you have to think about a setup and wonder if it really qualifies as a high probability area, it probably isn’t one. This is true for all trading methods and types of setups.
The screenshot below shows 4 points where many traders would have ran into problems. But they either lack a strong reversal pattern or do not have a strong enough follow-through after the reversal itself.
A timeless market pattern.
You can find this pattern on all markets, asset classes and timeframes because it is the manifestation of the interaction of buyers and sellers. Of course, the pattern won’t work all the time, but it provides enough information about orderflow that it enables traders to find high probability price levels.
Especially in the case of Forex majors or stocks with a high market capitalization, it requires a significant imbalance between buyers and sellers to let a market reverse immediately.
To take your trading to the next level, check out our Forex trading course where you’ll learn my whole trading system.
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14 comments.
Hi Rolf & Moritz: Thanks for a number of great articles. It is particularly pleasing to see comments about “WHAT NOT TO DO”, I have only ever seen articles saying HOW TO DO IT, but how do you avoid the pitfalls if you are not even aware of them.
thanks for taking the time to leave a comment. Indeed, looking at what not to do can help people understand the concepts in a different and deeper way.
Your statement from above seems back to front to me”And when price reaches the support level, buyers enter the market again and outnumber the sellers.” Surely that should read SELLERS ENTER THE MARKET AGAIN!!
at a support level, you get a bounce to the upside which is driven by a buyer surplus. I hope that makes sense.
I will have to keep reading some more – my understanding is that at a Supply level is where the Sellers come in & push price down.
p. s What are the settings for the SMA you use?
yes that is correct but there is a difference between support/resistance and supply/demand.
The MA is a 20 SMA.
Hi Rolf: In your video on Supply & Demand trading it appears to me that you are saying to wait for a confirmation candle BEFORE placing a trade. If that is correct do you explain anywhere on how to calculate Stop Loss & Lot size along with the TP using this method. With normal S & D trading you have the zones to work off for both SL & TP but how would this work on a second candle which could be an extreme distance from the outer edge of the S or D hence in the case of the SL decreasing your lot size considerably.
Looking forward to your comments – Cheers Peter.
good question. I will answer this step by step once we relaunch Tradeciety. We are preparing a lot of new material where we discuss every part of the strategy.
It’ll be available in 2-3 weeks probably.
Hi Rolf: How do you find a Supply zone in the instance of say the AUDCAD H1 19/01/17 ?
I have found many instances of this type of problem today.
I will address the AUD/USD and EUR/USD situation in Sunday’s watchlist 🙂
Excellent lesson, thank you. I don’t know guys how you do it but you make things really easy to understand (like the advice to look for a sharp move and then where it initiated from to find the supply/demand area – so easy to spot it that way).
Thanks, Piotr. I am glad to hear that. And yes, we try to make trading easily accessible. It doesn’t have to be complicated.
Love the example of the ball bouncing but would think that if it was bouncing on a Table then got to the end and fell off towards the floor that would be a better example of how Support is eventually broken.
thanks a lot. article a good.
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Our Tradeciety Forex Academy.
Who We Are.
Our Trading Journal.
Popular Articles.
8 Price Action Secrets Every Trader Should Know About.
5 Ways To Identify The Direction Of The Trend.
How To Use Moving Averages – Moving Average Trading 101.
Candlesticks – Forget Candlestick Patterns – This is All You Need To Know.
MACD – How To Use The MACD Correctly.
Bollinger Bands ® Explained – The Best Trading Indicator.
How To Use The Reward Risk Ratio Like A Professional.
How To Become A Profitable Trader With A 9 To 5 Job – 12 steps.
6 Secret Tips For Supply And Demand Forex Trading.
The Perfect Trading Routine – Our Complete Step By Step Guide [Updated]
Risk Disclaimer.
Tradeciety used images and image licenses downloaded and obtained through Fotolia, Flaticon, Freepik and Unplash.
Trading charts have been obtained using Tradingview, Stockcharts and FXCM. Icon design by Icons8.
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How To Easily Draw Supply And Demand Zones.
Important Note: You can now receive supply and demand zones for all 4 major currencies sent to your inbox each day by signing up, just use the form found below the summary of this article.
Drawing supply and demand zones is a skill many people fail to master correctly.
Ever since supply and demand trading first came to prominence 4 -5 years ago there have been many different interpretations of how to draw the zones properly. This is to be expected since everyone has their own method of trading supply and demand zones. Today I want to give you the definitive guide on how to draw the zones correctly as well as a quick overview on how to locate supply and demand zones in the forex market.
Locating Supply And Demand Zones.
Before we get to how to draw the zones I think its best if I show you how to locate actual supply and demand zones in the market just in case anybody is new to the supply and demand trading method.
Firstly I recommend you go and read my other article on supply and demand trading titled “ Supply And Demand Trading The Essential Guide ” to understand how I trade the forex market using supply and demand zones.
The method I use differs greatly to how the majority of traders trade supply and demand and the rules I use to determine whether a zone has a high probability of working out successfully are also unlike the rules implemented by the vast majority of supply and demand traders.
My strategy is based on the most well-known rules given by Sam Seiden which are found in typical supply and demand trading methods, but with some small tweaks which bring them more in-line with the reality of how the forex market really works.
Locating Supply Zones.
Supply zones can be located by looking for a swift drop away from either a single candle or small consolidation structure commonly known as a base.
The base consists of a few candlesticks in a tight sideways range (consolidation)
This is an example of a supply zone formed with a base.
Below is an example of a supply zone formed from a single candle.
Finding Supply & Demand Zones That Work!
How Old Supply And Demand Zones Do Not Cause The Market To Reverse And The Reason Why Traders Mistakenly Believe They Do Why The Time It Takes For The Market To Return To A Supply Or Demand Zone Will Determine Weather The Zone Has A High Chance Of Causing A Reversal To Take Place The Differences Between Zones Created By Bank Traders Taking Profits And Zones Created by The Bank Traders Placing Trades.
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23 Responses.
Thanks for the heads up 🙂
I’ve heard that there tends to be problems with word press sites through safari so I’ll see if i can find some sort of fix for this issue.
Thanks for your kind comments as well.
you …. whoever did this guide , i love you !
Once again Great article . would really appreciate if you could do a part -2 article on the above but this time around covering the various permutation and combination of candlesticks forming at the zone and how you would have used your discretion or the above mentioned rules to plot the zones under different circumstances…Your insights with regards to identifying the basing candles in the zone will greatly help as all charts are made/formed differently when watched in the live markets….Thanks in advance and God Bless.
Np Floyd thanks for the comments.
Some truly select content on this website , saved to my bookmarks .
I had been facing difficulty on supply and demand. Your post solved many of my puzzle in my head.
one question, do you draw supply and demand areas on the daily timeframe aswel?, for a top down approach.
Yes I always develop an outlook of the market from the higher time-frames first and then trade in-line with that outlook is on the lower time-frames. I’ll talk more about this in an article coming out soon.
Most of the Aviary Photo links are not working. Any way to get them linked up again?
At the moment there isn’t Don, I’ve been trying to find a fix for it all year but so far had no success. I’m going to go back and re-link all the images, hopefully that might solve it.
Thank you so much for your article. I’ve been struggling with supply and demand, and now I believe this new found knowledge you have blessed us with will help me a lot in becoming a consistently profitable supply and demand trader. I started out using support and resistance but I couldn’t really master marking the correct levels as sometimes there were too many swing points in the market and I would and up with a lot of levels and not really know which ones are key. I appreciate the daily s I receive concerning the levels but I think from now on I will stick with supply and demand zones, as people always say to look at support and resistance as zones and not levels anyway.
No problem Kgosi, I’ve got some new articles coming in the next few weeks so be on the lookout fr them.
I came here from trading S/R lines and demand/supply zones seem like natural progression. Quality stuff you have here! Thanks!
This information is very much appreciated.
I have not seen anyone so generous offering this kind of information freely.
Thank you for sharing and a tip o the hat !
I think I have subscribed your site but I haven’t received nay daily yet 🙁
Is this rules applicable to all time frame or the smaller time frame are better setup? In fact, which time frame is best suitable for trading demand and supply zone. Thanks.
It is universal. It works on all timeframes…even 1 second 🙂
Are you still offering the morning supply and demand zones?
Not at the moment David.
Thank you for your reply.
if we have 2 S/D zones near each other … which one is important ?
for example price dropped down then comes up then down .. we will have 2 S zones … which one has priority ?
Usually the last one but depends on market conditions and the zone we’re into.
How To Identify Fresh Supply and Demand Levels in The Forex Market.
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