Over past years we could find many concepts of supply and demand trading on the internet.
Some stuck to the core basics. Some thought that it would be smart to rebrand those concepts to make them in forms of magic rectangles in the charts.
In this article, I will show you everything I was able to learn in past years about supply and demand in trading.
The reason, why I love this strategy so much is that you can apply it into every market you desire to trade. So you can trade Forex, Crypto, Stocks or basically any market you want.
In this article, you are going to learn everything about supply and demand trading.
So what is this Supply and Demand?
Like I already mentioned in my previous article about forex basics.
Supply and Demand trading is used in the whole economy and it is way more than just watching some cool boxes on your chart.
I am not going to go deep into explanation of how world works and how is everything determined by worlds supply and demand.
I know that you are probably not here because of this and I really don’t want to bore with a lot of stuff.
If you want to learn a little bit more about the economic model of supply and demand, you can head to this Wikipedia article, where you can find more background about supply and demand in economics.
If you are around for some time now, you should know what happened to Bitcoin in 2017. Price skyrocketed into $20 000 per one BTC.
Why this happened?
Of course, we can speculate here and come up with many theories why Bitcoin was able to reach this astronomic price, but the easiest explanation is here that there was just too big of a demand for it.
Price was driven by mainstream media, people were taking loans and demand to own cryptocurrency was extreme.
I dont want to bring all cryptocurreny speculators here, but I hope you get the idea here.
And we have a same rule in forex as well.
If many banks and companies want to change their base currency for the yen – the value of yen will increase and the exchange rate will change against other currencies.
In this particular
How to use Supply and Demand Strategy in Trading
So now you should have some basic understanding of what supply and demand is.
Now you have to realize that what you see on your chart is not some sort of art.
If you are using any complicated patterns, good for you, but at the end of the day. Anything that is happening in forex is changing one currency for another based on current market conditions.
All of us retail traders cant see behind the curtain to take a look how big players trade.
So we must be able to spot levels in the charts where those big transactions are made.
But if there are more traders who are willing to buy all the currency offered for sale at those levels, the price will be pushed as the buyers demand more currency than is available at that level.
In the chart above you can see prime example of trading supply and demand.
If you don’t know how to spot those levels don’t worry, I will show you later on.
Take a look at a blue demand on the chart, price tested this level twice and in both times we were able to find a nice long opportunity there.
This is because there was a lot of orders sitting at the level.
You can also see how on the second test we had
On the third test of the zone, there were just not enough orders to hold and price and we broke a level.
You can notice how price tested the zone from the opposite side as supply before continuation lower.
Number of touches
Same as with support and resistance.
Each touch of supply or demand is weaker because there is more and more orders consumed.
First touch – best touch.
Second touches are working as well, but on the third touch you want to stay away because price si more likely to break.
Just take a look at the chart above.
How to find Supply and Demand
Obviously you should understand right now that supply and demand zones are not created by retail traders.
In forex, I see claims that because it is market with $5.3 Trillion daily volume, it can’t be manipulated.
Do you know who move the market?
Of course not, markets are moved by big institutions which has to engineer liquidity.
This is one of the concepts we teach in MasterThePrice Academy, so if you are seeking to learn more, click on the image below.
How to identify Supply and Demand Zones?
To identify Demand / Supply we look for Down / Up candles that precede a significant move in the opposite direction.
The move has to be significant and has to shift the market structure.
In another way, it has to move fast from the level and also have to take previous swing high or swing low.
You have a very clear example on this EURUSD chart.
You can see up candle before a very obvious and significant selloff.
This is the place where supply is created and where you want to jump in your short trade.
There are two clear things on this example.
You can see how we used the demand zone – The down candle which precedes big rally as our entry.
And also, the next supply zone – The up candle which precedes big selloff as our exit.
I hope you got the basics now. If not, you can still take a look at the video down below.
Strength at Origin of a Move
There are two simple things you should watch while trading supply and demand.
First one is how price left the area, second is how came back.
This should be pretty self-explanatory.
Stronger the price will leave, the higher probability trade we are going to get on retrace.
Taking a look at Bitcoin, you can see how strong origin of the
Price basically collapsed, this created a valid supply zone and you could be able to find very decent trading opportunity once we came back into the area.
On the other hand, take a look at Silver here.
You can see that we had a up candle which led to move lower.
But the move was overall very weak and market didnt have problem to break through it.
Retrace to the level
When price is coming back to the level we identify 2 types of retrace.
V-Shape and Rounded.
When we experience V-shape retrace to the level it means that level is less likely to hold.
You can identify V-shape retrace by very strong rally back to the level, without any signs of stopping out.
Just take a look at the USD/CHF example.
You can see that even though we had strong selloff from supply, on retrace price just rallied back into the level.
This is the sign that level is less likely to hold and you should be careful jumping into the short trade.
Rounded retest is something we like and really trade.
Same as support and resistance, there should be time and space before returning to the level.
You can see great example of rounded retest on this NZDCAD chart.
This is not complicated stuff, just let the price do its thing.
If you are going to see the level of supply or demand where price is immediately rushing back, it might not be the best idea to trade it.
Marking out Supply and Demand zones
I have seen lot of discussions about this.
Lot of people are wondering if they should use whole move, single candle bodies, to include wicks or not.
Well, there is no straight answer to this. This really is up to you preference and risk tolerance.
What I do is that I am using whole move on lower timeframes like 15min or H1 and single body candles on H4, Daily, Weekly etc.
For supply, I always use upper wick of the candle.
For demand, I always use alower wick of the candle.
Here is example on marking out Demand zone on H4 on USDJPY.
The different thing is here on 15min TF. You can see how I marked out a whole up move before the selloff.
Is there any way to know for 100% if the level will hold ?
Even though Supply and Demand trading is one of my favorite trading strategies, nothing in trading works 100% of the time.
There are two things you can watch for.
Wait for candle close
This is pretty conservative approach, there are going to be a lot of cases when price come to the supply or demand and before the candle close it will already be 20-30 pips away.
Obviously this will result in lower RRR, but It will give you heads up that the might work out.
What you dont want to see is close inside supply and demand zones.
Even that you can argue here that this looks like V-Shape retrace, you can notice how non of those candles could close inside the demand zone.
This gives us signal that price might be ready for next leg up.
50% of the level
Little more agressive approach is marking out 50% of the level.
You can see here that we had daily close inside the level.
Some might see this as warning sign, but on the next day price pushed higher and had perfect reaction from 50% of the supply zone.
This is giving us signs of weakness and we can look for short entries on lower timeframes.
What I really like about supply and demand trading is that you can make profits even when levels dont work on the first time.
You can see on USDCAD chart how a
After that, we had a nice retest and we could found a short opportunity on the test from the opposite side.
Take a look at some more examples in the video
Supply and demand trading is great strategy. It has been my go to for quite some time and had great success with it.
This does not mean that it works everytime. Trading is a probability game and most important thing is always to stick to your risk management.
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Are you using Supply and Demand in your trading? Let us know in comment section below!