Supply and Demand Trading
One of the best-kept secrets is how to trade supply and demand zones easily and accurately.
Not many utilise these areas in the markets because they call them support and resistance levels.
They are certainly not the same…
Supply and demand zones, also known as accumulation and distribution zones are insanely powerful price indicators.
The reasoning behind this is down to liquidity.
So, accumulation and distribution zones are areas of the market where there is a lot of liquidity at a particular price.
These are important to watch and take notice of because this is usually where everyone’s stop losses gather.
This is the magic of trading supply and demand zones.
You see, large institutions, hedge funds and banks need huge amounts of liquidity to process their trades – and they can’t just trade off the spot forex markets.
So, they need to look for liquidity in the market.
By understanding this, you will improve your odds because you will be trading with the smart money by following the supply and demand areas to profit from.
Side note: smart money refers to the big institutions, hedge funds and banks from now on.
What is the difference between support and resistance levels and supply and demand levels?
Support and resistance are based on closed pricing and shows areas of the market that struggled to penetrate over time. This is very easy to spot.
Even easier are supply and demand zones.
These areas tend to be where the market consolidates for a short period then continues upwards or downwards.
This is the area orders are accumulated.
Here is an example to help:
In the above image, you can see the blue squares which highlight supply levels.
These areas show where price halted for a bit before moving. These are key areas to focus on.
By understanding supply and demand we can literally see what the professionals are doing.
There are a couple of methods on doing this, but we suggest mastering both.
Plus combining these strategies below with candlestick patterns can lead to some explosive gains!
Supply and Demand Trading: Accumulation Zones
This method of supply and demand trading is where you highlight a consolidated area of the market in blue (like above).
The secret to making the supply and demand zone as accurate as possible is the ensure that all the highs are either exactly the same or just 1-2 pips differences, and this goes for the lows too.
This way you have a nice box to show you which candlesticks are validating the supply and demand accumulation zone.
In addition, any candlesticks price action outside of the blue zone is a fake move.
How to find accumulation zones
To do this accurately mark all of the pricing patterns that are sideways. This is easiest when you can see the majority of the chart in one glance.
Then go to those zones and narrow them down so the rectangles are lined up with the average amount of highs and lows.
Now we know the supply and demand accumulation zone when price re-enters this area – this is where we can take action.
Depending on which direction the price re-enters then exits gives us our short-term trading bias – whether to buy or sell.
How to trade an accumulation zone
The idea behind supply and demand accumulation zones is that these provide areas where the market is building orders from the buyers and sellers. So we have a trading range generated from these orders.
We want to see the market trade above or below these supply and demand accumulation zones.
This identifies that there are more buyers (market trades higher) or sellers (market trades lower) in the market right now.
However, if you can imagine for the price to stall like this there must be a large volume of orders.
Knowing this, we must avoid the initial breakout.
This initial breakout is like a false start in horse racing.
The initial horses are too giddy and want to start running as soon as they can.
We avoid this by waiting for the market to breakout THEN retrace back to the supply and demand accumulation zone a few candlesticks later.
The candlestick’s price can either touch or close within the supply and demand accumulation zone if it has retraced.
Once this has been identified, the candlestick that has re-entered the zone gives us a signal.
If the candlestick closes above the zone, it is a buy signal (place entry level on the candlestick’s high).
If the candlestick is below the zone, it is a sell signal (place entry level on the candlestick’s low).
If the price continues to through the supply and demand accumulation zone then this is an invalid signal, then we would have to go back and wait for another candlestick to retrace back to the zone. Then repeat the process.
Below is an example of how to trade a supply and demand accumulation zone.
In this example, we are able to define that the move following is expected to be bearish thanks to the price action that followed the retrace candlestick.
Using the execution method, we avoided any whipsaws and only entered the trade once the market confirmed our bias.
This is a powerful way of trading as we are able to enter with the smart money.
Here is an example highlighting how important it is to wait for the confirmation:
By waiting for the confirmation and re-entry level, we are able to take advantage of the second wave of buy orders.
What are supply and demand zones
Supply and demand zones are really obvious areas where there have been huge volumes of orders taken.
The evidence in the market is candlestick a bundle of wicks followed by a sharp market move
As you can see in the above image, we are able to find a supply zone easily with the accumulation of wicks in one area and bringing the price back down whenever it touches the area.
What this means in terms of the market is that this is an indicator that there are large amounts of selling orders in that area.
This is golden information because we know that the only participants that would hang out at these levels are the smart money.
The supply zone gives us a reference point in the past to find current trading opportunities in the present.
We know that in the past there was a huge selling order flow, so at this supply zone, we are looking for any orders that were not executed to be executed when the market re-attempts at these levels.
Now based on the supply or demand zone will give us the intentions of a future trade.
For example, supply zones are areas to sell from and demand zones are areas to buy from.
Let’s show you how the market can react to the supply zones.
As you can see the market retraced back to the supply zone and immediately reversed again.
This is because the previous sell orders in the market were still available in the supply zone.
This would have been the perfect place to short the GBPUSD.
The opposite of this is true for the demand zone.
This is primarily when we see buy orders about to enter the market.
We use the opposite set up, so we look for a cluster of large wicks combined with a sharp movement upwards.
Just like the supply zone, the large wicks tell us that there is liquidity there.
We want to be on the right side of these moves as this is the smart money buying.
From this demand zone, you can see the price retraced towards it several times providing strong entry levels.
Any point would have been a great entry point.
Remember: for supply and demand zones to work, the price has to retrace back to the zone.
You don’t trade off the first time you see the zone.
How to trade supply and demand zones
Firstly, this is one of the biggest crimes we’ve seen on the Internet with articles teaching you this.
So many poor examples on the internet, there is no wonder why people still can’t understand them.
To draw the supply and demand zones accurate is SO easy!
To draw a supply zone you must first identify a market that has a cluster of high wicks and a sudden, sharp drop.
Step 2: Identify the highest close and the highest wick then draw using the rectangle tool to cover them. So draw from the highest wick to the highest close body in a downward direction then drag the rectangle all the way to the final bar before the steep drop.
Step 3: Keep an eye on the future price movements to see if it retraces back to this supply level because in theory there should be more sell orders waiting to get executed.
As price draws closer to the supply zone, highlight the rectangle and expand the zone over the retracing price to see how it reacts.
If it is a true supply zone, then the price will be rejected strongly.
Step 4: Place your trade
That is it, that is exactly how to draw supply levels accurately.
You will need to practise finding these in the markets, sometimes they are easy to spot – others can be difficult and hidden. The more you practice, the better you will become at spotting them.
Now let’s identify the demand areas.
Step 1: Find an area where there is a cluster of low wicks combined with a rapid move outwards.
Step 2: Draw from the lowest wick to the highest close and cover as many candlestick wicks going to the right.
Step 3: As price unfolds continually drag the rectangle across the chart until price retraces to the zone and reacts.
Step 4: Place the trade as per execution rules. Profit.
Now, when you start to recognise all of these areas in the market you will start to see how one another interacts with each other.
They can add validation and create confluence in a trade, which generates a stronger signal to enter the market.
Combining both methods together:
As you can see in the example above that combining both techniques together can give you a highly accurate opportunity to trade.
For example, above demonstrates that by gathering intelligence from previous technical analysis (supply zone) you would have been able to avoid the fake long breakouts from the accumulation zone.
Getting the gist of it?
Go look for these areas on a chart, take your notes and have a look.
Advanced Supply and Demand
Basics are done now. Learning this topic alone can provide highly accurate trading opportunities to the pip, with very little drawdown against your account.
Supply and Demand Trading: Advanced Accumulation Zones
To give you more chance in the market, there are some obvious accumulation patterns that can be easily spotted.
Although not common, they identify as areas of the market where a larger than usual volume of orders is hit.
Unlike standard accumulation areas, these are short and sharp and can be easily missed or go unnoticed to an untrained eye.
Fortunately for you, you’ll be taking advantage of this and making them pips!
To spot these patterns just imagine an N shape, where the final line of the N is larger than the initial line.
This can be seen in the market place when you have a large candlestick move, followed by 2-3 (MAX) candlesticks trading the opposite way, then another larger than the others candlestick that closes higher than the other’s highs.
Let’s show you visually.
How to identify the accumulation block – the rules:
The first and last pattern must be large, healthy candlesticks. No small bodies with large wicks. As a rule of thumb, it must be super obvious at first glance. If you have to justify the first and last candlestick as a large, healthy candlestick then it should not be traded.
The order block must be in the direction of the trend. The trend is your friend. So bullish accumulation blocks must be traded in an upward trend and a bearish accumulation block must be traded in a downtrend.
The pattern must be a total of 4-5 candlesticks – No MORE, no LESS.
The last candlestick must close above the highest high in the block in a bullish move and it must close below the lowest low in the block in a bearish move.
Optional Filter: The retracement of the initial large candlestick must be less than 50%.
The reason these are so effective is that we can instantly tell which direction the orders that are waiting in the market place to be executed. We know there is volume thanks to the 2 spikes in the same direction.
In addition, these usually appear when the market is trending, which also adds confluence because we rarely trade against the trend.
Let’s break down this pattern to something useful by showing you how to trade it.
Once we identify the trade, we must the first candlestick that has retraced back towards the zone.
Once this is in play, we simply enter the trade at the break of the last candlestick’s high on the pattern (the one that completes the accumulation block pattern).
Some times the market can be retraced on the next candlestick, some times a few sessions later. The retracement must be within a reasonable timeframe to reverse back otherwise it’ll become invalid.
For example, if you saw the pattern on a 15-minute chart and it takes 2 days to retrace back to the zone, then this is certainly invalid. The idea MAX time to give it is about 5-15 sessions worth of candlesticks. The longer the wait, the less powerful the pattern is.
Remember, we want to jump on the surge of orders – not guess the market direction.
How to trade the accumulation block
So, once you have found the accumulation block, grab a rectangle tool and draw from the wick low to wick high, do not include the final candlestick with this.
Important: In a 4-bar pattern, only include the first 3 bars. The above example shows a 5 bar pattern, which you include the first 4 bars.
Here you can see the price immediate retraced back to the zone on the next session. This is the signal you look for.
You can set up an alert on MT4 to alert you when this happens.
By using the last candlestick of the pattern (the last large healthy candlestick), we are able to place our execution rules. So in the example, above we can set the order limit a couple of pips higher than the high and the stop loss at the candlestick’s low.
Fairly simple yet effective pattern.
Another cool trick is when you see this on larger timeframes, you can zoom into a smaller timeframe and get confluence.
Using the example above, we zoomed into the 30 minute window and discovered the accumulation zone – which confirms that the market is accumulating orders. Talk about a one-two punch combo!
Nothing in trading the forex markets is luck, it’s pure knowledge. Learn, memorise, apply and execute your knowledge. You will become a more successful trader in no time!
Bearish accumulation blocks are the reverse of the bullish accumulation blocks.
Very simply, just apply the same rules.
Must be in a downtrend
Initial and last candlestick must be large and have healthy bodies.
The last candlestick must close lower than the lowest low in the pattern
There we have it, an absolute gold mine of information on supply and demand trading.
The key to success here is to practise and be patient with learning how to trade supply and demand zones.
Supply and demand trading is a trading strategy that can be used on any timeframe with great success.
Now over to you.
Will you start using the teachings from our supply and demand lessons?
Let us know on social media how you get on.