6 Secret Tips For Supply And Demand Forex Trading

6 Secret Tips For Supply And Demand Forex Trading

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.

 

 

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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.

 

supply and demand forex trading - accumulation

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.

 

short_time

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.

 

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supply and demand forex trading - spring

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.

 

RBD

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.

 

reversal_empty

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.

reversal

 

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.

 

supply and demand forex trading - support resistance

 

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.

 

Comments ( 18 )

  • Flynn

    For a zone to remain fresh and highly reliable, price should return to it as soon as possible because it is a sign that banks are still wanting to place the remaining positions of their trade at similar prices. A good zone should net let the price break through it at all as banks don’t want their trades going into a loss. If price breaks through, it is a good sign that the market movers are not interested in the zone anymore because all the positions they placed at the zone have already been closed. A lot of people will say that the longer the “fresh” zone has been around, the stronger it becomes. This is simply not true, and as a result, a lot of people have lost trades thinking this way as price just blows right through the zone. Triggering their order, and eventually hitting their stop not long after. The only time an old, untouched zone will cause a reversal is if the zone is within a valid fresh zone on a higher timeframe.

    I trade zones if price returns within:
    5 min TF = 2 hours of zone creation
    15- 30 min TF = 6-8 hours of zone creation
    1 Hour TF = 24 hours of zone creation
    Daily TF = 1 month of zone creation
    Weekly TF = 1 year of zone creation

    • Joshua

      Do you mean if for example if you see the zone on a 2hr chart, you wait 5min for price to return to the zone? And if price does not retrace within 5 min, you don’t use the zone anymore?

      • Danial

        No Joshua, what this person means is the opposite, if he sees a zone formed in 5 min chart, he would wait 2 hours max, if he sees a zone in 15-30 mins, he would wait max 8 hours for price to return. Every trader have their own strategy, I personally won’t keep time, but I completely agree with the fact that a recent zone works better. I would wait even a day for a 5 minute zone but I look at the way price left the zone and the way it is returning. If there is a lot basing close to the zone, I will discard the zone.

        • Shrinath

          Thanks Danial and Flynn. That was some great insights.

    • Sujit

      Thanks Flynn, that was really helpful..

    • Sujit

      I work on intraday equity (day trading) , which time frame do you recommend me to search for these Demand and Supply zones, normally I work on 15 mins time frame using indicators.

  • Giuseppe DAngelo

    I like your method of trading, shown trading forex. Can this method be used trading stocks.

    • Rolf

      We are releasing a new stocks course shortly 🙂

  • Rolf. Hello from Arizona. These are great post. Thank you so.much. I been highly sucessful with envelopes set at 21 shift 2 on 240 and dailey. Now more with supply demand. Thank you.

    Your so helpful.

    • RYan

      Would you mind elaborating on your envelopes strategy? Always looking to learn new things and try new setups.

  • Yogesh

    Does this apply equally to Equity market anywhere in the world as well?

    • Rolf

      Yes, it is a universal principle.

  • Pingback:How To Trade Supply And Demand Zones

  • Ludwig

    Great article and comments, very useful info. Thanks to you all!

  • Pingback:supply and demand theory in trend following

  • Colman

    Thanx for this point of supply and demand because many trader’s fail to know where bullish or bears control markets that’s is good statergies

  • Great Concept

    Thanks for sharing the concept of Supply & Demand Zone .

  • Derby

    the best article ever

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