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Supply and demand zones:
Trading in general, whether it is Forex trading, cryptocurrency trading, CFDs trading, and other forms of trading needs a proper and reliable profitable trading strategy to excel as a trader. Therefore, the importance of mastering a trading strategy and making it into a profitable one cannot be overlooked by any trader aspiring to become successful in their trading journeys.
Price action strategies are arguably one the most commonly used strategy among Forex traders today and this is because they have a more practical approach when it comes to interpreting market data and events on the chart. These strategies also help the trader to easily identify the sentiment of the market and locate or spot great opportunities in the market.
There are several notable price action strategies that traders use to improve their chances of profitable trading, such astrendlines and channel strategy, which we have already talked about in one of our articles here on the platform, another one is the breakout and breakdown strategy, which is also a great strategy, but in this article, we would be looking at one of the best andprofitable trading strategyknown as supply and demand zones strategy.
Introduction
Theeconomic law of supply and demandhas always been a governing law in the market and therefore governs all market prices. This is why the supply and demand zone strategy is a very great trading strategy as it helps the trader identify supply and demand zones on the chart which then interprets to buy and sell positions. The law of demand and supply states that when there is a higher level of demand than supply, the price increases, in this case, we say the price is bullish while when there is a higher level of supply than demand, the price falls leading to a bearish market.
The above explanations should already give you an idea of how the supply and demand zones trading strategy works. Now, let’s move over to understanding what supply and demand zones are.
What are Supply and Demand Zones?
From the above explanation, supply and demand is basically aggressive selling and buying. While supply and demand zones are zones where the price starts making big and massive prices on the chart. When we spot these supply and demand levels, what it tells us is that the big boys like banks and institutions are entering the market and pushing the market in the direction where the major price movement is going and this should be the right time to enter a buy or sell position, depending of the price movement at the time.
Looking at the chart above we can see at the supply side there is a serious bearish momentum, with the price falling aggressively, while on the demand side, we can see there is a great bullish momentum with the price level rising aggressively.
Putting it in simpler terms, for you to spot a supply zone, we would see it forms before a downtrend, while a demand zone forms before an uptrend. This is how you would be able to spot your demand and supply zones. Furthermore, these momentum candles shown in the diagram above tell us smart money is in the market, but if you see small candles like the one in the diagram below, it is not demand or supply at all, what it means is that we just have the retail traders trying to scrape some funds from the market, as there is no real liquidity in the market yet.
Why Should We Trade Supply And Demand Zones?
Why you should use the supply and demand zones trading strategy in your trading is because it helps you to trade when the big boys like the banks and institutions are trading with smart money, you are reacting with them as they react and you would be able to get enough liquidity from the market as a result. The best way to easily identify when the big boys like the banks and institutions are entering the market is by using the supply and demand zones trading strategy.
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You might want to ask why should I want to always trade with the big boys rather than scrape the market, but you should remember that you are a retail trader, and retail traders in most cases always provide liquidity for the big boys. How? you may ask again, we should not forget, that while you and all your trading colleagues are trying to trade with $1000 to $10,000 these big boys like banks, institutions, and hedge funds deal with hundreds of millions and billions of dollars in the market every day.
Now if you are a professional trader you should already know that liquidity drives the market in whatever direction it wishes, so when these big boys come into the market with lots of cash liquidity, they more or less stare the market in a particular direction, if you are able to discover the supply and demand zones which can also be called order blocks where they enter into their trades, it is very likely you would make your profit from the market. This is why I mentioned earlier that it is one of the most profitable trading strategies around.
Let’s look at it from another angle, If you had insider information about one of the big boys’ buy or sell position, the key level they would move into a trade, would you enter the trade or not? You would be a dumbass if you don’t because that is free money, but we all know that insider trading is illegal so we can’t start sourcing for insider information, which is what makes the supply and demand zones strategy unique.
Now that we have talked about why you should trade the supply and demand zones let’s now talk about how to spot and draw these supply and demand zones.
How to Draw Supply and Demand Zones
1. Momentum Candles:
The first step is to look for at least 3 momentum candles in a row, this means it can be more like the circled one in the diagram above but never less than 3 big momentum candles. You can see that in the chart above. Also, remember, you don’t want to see tiny momentum candles like those represented in the diagram below as this does not indicate a supply or demand zone.
To illustrate this, I would use the three momentum candles in the chart below to better explain.
After identifying or spotting the momentum candles, the next step is to find the area where the move started, which is very important. So in the diagram below, we can see that the move started from the previous red candle. Our previous red candled is circled for you to see.
After identifying the previous candle before the momentum candle, the next step is to take your rectangle tool and draw your rectangle taking it from the highest point of the previous candle to the lowest point of the same candle and dragging it to the right across the chart as also illustrated in the diagram below.
So now the area between these two lines which we have marked out with our rectangle tool can be called the demand zone in the chart below.
One thing of note which is also a very important skill you must have as a trader is waiting for confirmation. If you check the diagram where we identified when the move started, you would see that by the time we were drawing our rectangle tool to identify the demand area in the diagram below the demand zone has been tested one more time, in the area circled red in the diagram below, this retest can serve as a confirmation as the price was unable to break through the demand level.
The third time when the price retested the same demand zone, we could see what happened in the chart below. There was a massive bullish momentum and the great thing about it is you are able to enter the trade right on time.
This is another example right here to illustrate the supply zone and how to identify it since the first illustration was for the demand zone.
To Read more on using the supply and demand zone trading strategy both as a cryptocurrency trader or a forex trader, click here to read the full article or visit the website: https://www.dipprofit.com/supply-and-demand-zones-trading-strategy/.
