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The supply and demand zones offer excellent insights into the structure of any market. If you have an idea of how to trade support and resistance zones, you can find very similar supply and demand zones.
How To Trade Supply And Demand Zones
The supply and demand zones are very similar, if not the same. However, there are certain rules that make them stand out and IMHO they shine more than just support and resistance. I’ll make sure you find out exactly why in this article.
Supply And Demand Forex
In the picture above you see the German stock exchange DAX. The red zone is marked as the supply zone. This can also be defined as an active resistance level or a place where traders sell large amounts.
On the other hand, a demand zone is a broad support area, as pictured below.
In the chart above you can see a supply zone or in other words a very wide support level. It is also a customer focused level. As you can see, every time the price approaches the supply zone, it quickly moves back up.
Another characteristic of supply and demand zones is the rapid price action. As noted above, price action is very fast around these levels, so if there are opportunities, they will be quickly absorbed.
Read On Exmasters Degree: What Are Supply And Demand Zones And How To Trade Them
A very important element of supply and demand trading is the use of candlestick charts along with it. Although I have written a very extensive article about Candlesticks, I will touch on them briefly here.
The two most important candlestick patterns used in relation to supply and demand levels are the pinch and the surround pattern. Most traders using supply and demand zones will look for rejections or confirmations from these levels.
Therefore, it is essential that you recognize at least these two candlestick patterns. An example of both is given below:
In the example above, there are two candlestick patterns – a Pinbar and a 2 Bullish pattern. As you can see in the chart above, the price rises quickly after these candles are formed.
How To Use Trend Trading With Supply And Demand Zones
As explained earlier, support and resistance levels are very similar to zones. The only difference is that the zones cover a larger area. The other difference is how to draw the supply and demand zones, but we’ll get to that later.
In practice, support and resistance zones and supply and demand are beasts of the same origin.
If it helps, you can even think of supply and demand zones as large areas of support and resistance with a huge concentration of buyers and sellers respectively.
The good news is that supply and demand zones can be used with equal success on all time frames. I would still recommend using them in time frames greater than 60 minutes. Anything below that is a lot of noise and more false signals.
Supply And Demand In Forex: Secrets To 10x Your Results
In my experience, the best time to identify supply and demand zones is 4 am and daily.
The best way to find supply and demand zones is to look at a candlestick chart. This is the order of things to do to identify supply and demand zones:
You can see in the image above that the three areas show areas of rapid price movement. These are exactly the types of market moves you should be looking for. Now the question remains: how to define the supply and demand zones.
The best way to show this is through an illustration. Let me draw them so you can see them better:
Definitive Guide To Trading Supply And Demand
As you can see in the image above, the demand and supply zones comprise the bottom at the beginning of the movement. It is very difficult to be precise with these levels and here it is more art than science.
The good news is that after a while you get used to identifying these levels and your eye becomes an automatic scanner.
Remember: the most important thing is to first make a sharp move in any direction, after which you will be able to identify where you started and roughly define the demand/supply zone.
In the image above, there are two possible scenarios. In the first one on the left, we have the price going down (D), then forming a base (B) and then going up again (U). I will call this configuration the DBU configuration.
How To Trade Using The Supply And Demand Zones Strategy
In the right image above, there is an uptrend (U) first. So we have the price forming a base (B) after which we have a continuation of the uptrend (U). I will call this configuration UBU.
In the left image above, we have prices rising (U), then forming a base (B) and then falling (D). I will call this the UBD configuration.
In the image above to the right, we have the price going down (D), forming a base (B) and then continuing its decline (D). This is a DBD configuration.
So the 4 settings (no need to remember the abbreviations) are DBU, UBU, UBD and DBD. This way you can identify the different supply and demand zones.
How To Draw Supply And Demand Zones ?
So how to identify these 4 main types of supply and demand formations. As mentioned above, you should follow the three steps to identify supply and demand zones.
As already described, it is difficult to draw a precise zone – it takes time and practice to identify these areas. What you need to do is follow the rules and practice enough until you feel confident to pull off these levels.
Don’t forget that this is how everyone else using these levels has learned successfully. After a while, it will become second nature and you will be able to identify them quickly.
It is important to note here that demand/supply zones can and often do include candlestick tails. As you can see in the demand zone above, there is a large lower tail involved in the zone.
Trading Setups Using
The following image is taken from the AUDUSD daily chart. As you can see, this is a typical UpBaseUp (UBU) pattern (as defined above).
The following setup is taken from the USDCAD daily chart. In it, you can see a typical DownBaseDown (DBD) pattern.
Let’s continue with entry, stop loss and profit rules, and then look at some more examples.
In the image above, you can see the supply and demand trading rules. This is just one way of trading supply and demand zones. Different traders will have different rules, but the important thing to note here is that you should always aim for higher rewards than the risk you take.
Supply And Demand Vs Support And Resistance
In the example above, the ratio is 1:3. The entry is usually in the middle of the supply or demand zone. The stop is usually 5-10 pips below the demand zone as indicated by the red line. Your target should be at least 2x or 3x your risk (as indicated in the image above).
These are indicative parameters only. To achieve trading mastery, you will need to spend more time and practice than just reading an article. If you are interested in learning more about my professional trading strategy and joining others in learning, you can get it HERE.
This example is taken from the USDJPY daily chart. You can see we have an UpBaseUp (UBU) template above. The demand zone is clearly defined by upper and lower limits.
An alternative way to access these levels is to use another confirmation tool or other merger timeframe.
The Difference Between Supply & Demand And Support & Resistance
You can see two zones of supply and demand. The demand zone is where all the big buyers are. The supply zone is where all the big sellers are.
I can go on and on and give more and more examples, but ultimately it’s up to you to start identifying these areas. You have to practice until you get it. It may take some time, but demand and supply zones are a wonderful tool for the price action trader.
As with anything else, supply and demand zones have their drawbacks. There is no such thing as a perfect trading strategy or tool. What makes the difference down the road is your attitude towards trading.
If you can tick these 5 boxes it will give you more freedom than you can imagine. As Oberon Herbert said:
Supply And Demand Zones: A Profitable Trading Strategy
“You will not make a man wiser by taking away his freedom of action.” A man can only learn when he is free to act.”
In case you want to know more about Support and Resistance, here is probably the most comprehensive article on the internet.
Disclaimer: Any advice or information on this site is general advice only – it does not take into account your personal circumstances, please do not trade or invest based on this information alone. By viewing any material or using information contained on this site, you agree that this is general educational material and will not hold any person or entity liable for any loss or damage arising from the content or general advice
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