The Ultimate Guide to Master Supply and Demand in Forex (P2)

The Ultimate Guide to Master Supply and Demand in Forex (P2)

How to Trade Supply and Demand

We stock up in high-demand areas and unload in low-supply ones. This tactic is easy to understand and use. Finding new trading zones based on supply and demand is easy. Wait for the price to return to your supply or demand zone before placing any orders, and set your limit orders at the proximal line and your stop loss at the distal line.

Some instances are as follows:

This graph shows two areas of high demand and one area of high supply.

The supply zone saw a price spike, consolidation, and subsequent collapse with large candles. This pricing level reflects a significant mismatch. We mark out an area, put in a buy order, and sit tight till the price visits our mark. We successfully canceled our sell orders both times that price came back.

Additionally, the price decline from the supply zone generated two demand zones on the way back up to retest the supply zone. The market saw a rise followed by a halt, establishing a rally base pattern. Both of these regions are where we put our purchase orders. Our purchase orders were activated if the price got close to one of our demand zones. Look at how the pricing behaves around these areas—drawn; it’s there like a magnet.

To the left of this chart is a demand area that the price dipped into, prompting the price to rally and form a new demand area. After waiting for the price to re-enter the demand zone, we placed a buy order here. But, again, the price rebounded, filling our order and increasing further

The price spiked, formed a base, and then collapsed. So, we mark out our supply area, put in a sell order, and wait for the market to rebound. However, after a retest of the supply zone, we only placed one sell order since the candle’s tail had already broken through the zone. This indicates that the available goods in this supply area have been depleted, making the success of a subsequent sale order unlikely.

• The price action in this chart shows a rally off of a base. Rally-base-rally and drop-base-drop zones should be given more attention since they occur inside the trend, where most trades fail. Therefore, we choose to investigate the structures that emerge during the flip (drop-base-rally and rally-base-drop). These are sturdy and dependable commercial constructions.
• The price action formed a rallying basis and led to a subsequent rally. We marked out a buying territory and waited for the market to reach inside it. However, the price did return, and after testing the zone, a rally ensued as expected.
• Waiting for the price to test the zone and offer you some bullish or bearish evidence before placing your order might be a good strategy if you are unsure whether the zone will generate a profitable trade. That way, you’ll have more opportunities to make a good transaction.
• Again, we choose reversal-point structures over trend-following ones because of their greater strength and likelihood of success.

• Another structure that exists inside the trend may be seen here. Despite the weakness of such structures, it is essential to illustrate this trading arrangement.
• However, if they occur early in developing a trend, they might be profitable trading opportunities. This base is quite close to the inflection point. Because of this, the area in question is now open for business.
• However, if the drop-base-drop formation occurred farther down the trend, we wouldn’t consider it since the trend may quickly reverse, and the price would continue to rise after passing through the zone.

How to Identify Supply and Demand Curve

• The current price may be used to determine the dominant supply and demand zones that define the curve.
• The curve represents the distance between the two lines of supply and demand zones we just determined to be closest to each other.
• To determine which supply and demand zones are now in charge, we find the current price on the chart and then look upwards and downwards.

We can tell without a doubt that the price is inside the demand zone now that we have drawn the zones. So the price is at a low point on the curve.

We only purchase at low points on the price curve.

The following illustration shows that the pricing is close to the dominant supply area. Therefore, only when the price is at its peak can we consider making a sale.

We enter a trade in the direction of the trend when the price is halfway between the supply and demand zones.

When a price is considered to be at equilibrium, it is always the same. Take this as an illustration:

On the graph, the price level corresponds to the halfway point along the line. An equilibrium has been reached when the number of buyers and sellers is equal.

Until one player passes the other, prices tend to drift sideways in this part of the curve.

If there are more buyers than sellers, the price will move upward, which will cause the curve to steepen.

If sellers outnumber purchasers, the price will drop, causing a downward trend.

Why is it important to identify the curve?

This is the defining characteristic between those who succeed and those who fail.

• When prices are high on the curve, professionals realize they need to sell to regular traders, anticipating a further upward trend. Therefore, retail traders join the bandwagon and initiate purchase orders.
• It is common practice for institutional traders to “short” the market or bet that prices will fall by taking advantage of the considerable liquidity offered by regular dealers.
• Retail traders often mistake a sharp decline in price for an excellent opportunity to short the market. But, once again, when the price approaches low territory on the curve, experienced traders pounce at the chance to place their buy order, signifying a significant bullish reversal to the upside.
• Because of this, knowing the curve before making an order is crucial.
• As a rule of thumb, we purchase when the price is low and in the demand zone, and we sell when the price is high and in the supply zone. For the most part, we go with the flow of the market and only make exceptions when the price is stable.

Odd Enhancers to Find High Probability Zones

• We can narrow our supply and demand zones to those with the highest likelihood of success by talking about the four essential odd enhancers.
• Each peculiar enhancer will be assigned a score, which will be added to get an overall rating.
• Generally, if the final score is 10, we will place a limit order and wait for the price to reach our entry objective.
• We will join the transaction using a market order if the final score is between 8 and 9. With a final score of less than 8, there is no trade.

Odd Enhancer 1# Strength of the Move

the strong movement away from zones of good supply and demand. Here, we examine what caused the price to break out of the range.

Did the price take a few significant candles or many little ones?

We’ll give this a maximum score of 2 points.

To illustrate, let’s say the price exited the supply zone on the back of many strong bearish candles to the downside, for a total of 2.

• Watch how drastically pricing broke away from the pack. First, considering the price was trading with such little volume, this area received a score of zero. Then, see how the price retraced upward and passed through the supply area above.
• Avoid trading in weak zones when the price is likely to disregard resistance and breakthrough.

Odd enhancer two # Time Spent at the Zone

Time in the zone is the second non-standard enhancer we analyze. One to six candles at the base denote a favorable zone. After six candles, the zone might be weak, leading to a lost trade.

Odd Enhancer #3  Fresh Levels

Examining the zone’s freshness is the third unusual booster.

• A new area has yet to be subjected to pricing pressure. The likelihood that this zone will operate decreases if the price continues to rise.
• If prices have already retraced twice back to the zone, then it’s best to disregard it since there may not be enough supply to drive the price down again.

Here’s an example:

The price dropped after testing the supply zone during the first retracement, and it did the same thing during the second and third retracements. This is because there was no additional supply located below the demand zone. Therefore, the price broke above it after the third retracement.

Keep an eye on how each retracement brings the price closer to the supply zone. This is a strong indicator of the zone’s continued viability.

Odd Enhancer 4# Reward-to-Risk

The reward-to-risk ratio is the last non-standard booster. To accept the zone for trading, we need a ratio of at least 2 to 1.

Examples

• Below is a chart displaying a supply zone with a perfect score of 10. The price action formed an attractive drop, base, and decline with big ERC candles. This demonstrates the reliability of the supply corridor. If the price moves back up to retest the supply zone, we have a decent chance of winning since our reward-to-risk ratio is more than 1:3.
• To place a limit order at the proximal line of the supply zone and a stop loss order at the distal line, we need a perfect score of 10 out of 10. …and wait out for a price to retrace back up.

As expected, the price rose again until it reached our stop-loss order.

• Our following illustration shows a supply area with a score of 8.5/10. In this case, we have a score between 8 and 9, which gives us the option of waiting for the price to either retest the zone and then make an order or break through the zone and then retreat out of it and then place an order.
• Because the price has previously tested the supply zone and the score is below 10, there is a minimal chance that the price will succeed in moving over the supply zone.
• For this reason, we will not enter until we have confirmation of the price.

In the end, the price was able to break out of the range, and it moved to the next, greater supply area to see whether it would hold. This is why we need to shift our attention from trading continuation patterns to reversal patterns.

• Now, let’s examine a trade opportunity in which we influence only one-time zone.
• Using a monthly time frame, we locate a region of increased supply above the current price.
• In this case, there is no apparent demand zone from which to draw our boundary. For as long as the price remains at these record lows, our only option is to trade with the trend using the supply zone.

• In the weekly chart below, S&D zones are often drawn at the prices at which they appear. Nice rise from the weekly demand zone, with the price now testing resistance at the weekly supply zone.
• It is widely agreed that this particular supply area is very robust. However, since there was such a significant outflow from the supply zone, many orders have not yet been fulfilled.
• Generally, things are going downhill. The downtrend is confirmed by the succession of lower highs and lows established by price.

• To implement our plan, we must go to the daily chart. To put a limit order and a take profit, we first locate the daily supply and demand zones around the current price.
• The price is getting close to the supply zones we’ve seen daily and weekly. So the price will go down to test the daily demand zone after testing the overlapping supply and demand zones.
• We have placed a sell limit order at the day’s proximal supply zone line. The stop order is located outside the daily supply zone’s farthest edge.

The daily chart below demonstrates that the price made a downward move to test the demand zone after a series of tests of the overlapping supply zones.

Conclusion

Aligning oneself with prominent participants in the forex market is crucial to the trading process. Retail traders can’t collectively make a half-basis-point difference in the market. That’s why it’s so important to have a handle on market strategy and the instruments you may use.

When trading the foreign exchange (FX) market, one of the finest strategies accessible to the general public to emulate the professional trading method and become consistently successful over the long term is the supply and demand strategy.

• Prices fall when supply is abundant and rise when demand is strong.
• As a result, the evenly developed region expands outward to the sides, whereas the unevenly developed region expands upward.
• Good (balanced area) prices and reasonable (beneficial) prices are the two main categories of pricing (imbalanced area),
• Both short- and long-term traders are looking for favorable pricing.
• When there is an imbalance in the market, it will either go up or down until it elicits a countermovement. Once the market receives a reaction in the other direction, the directional move is halted, and the range (balanced area) is established. The market will trade within this range until it breaks above or below the flat area.