Identify Supply and Demand Zones

Identify Supply and Demand Zones

In order to move price on a chart, there must be willing sellers and willing buyers. When you sell a currency pair, let’s say EURUSD you are selling Euro to a buyer or buyers willing to buy Euro from you, and buying U.S. dollar from a seller or sellers willing to sell it to you. If there are no sellers and no buyers in the market, the price won’t move and no transaction will take place.

There are many players placing trades in the market, which make up the “order flow”. These include retail traders, such us yourself, independent and private traders, institutions and professional traders.

The institutions and Hedge Fund Managers are very important because they have big money. Professional traders understand how the Financial Markets work. They trade in the opposite way to the way in which retail traders do things. That explains why only 5% of retail traders make money in the Forex market. Because only 5% know how to trade like professional traders.

The 90% of the retail traders do not know how the Financial Markets work. And most importantly, they trade using indicators and robots and they end up operating in the opposite way in which professionals trade.

By learning how to trade the market using supply and demand, you will be able to enter the market at the same time as professionals and institutions do. We cannot know with certainty where they are placing their orders, but we can use supply and demand to locate high probability areas where big chunk of order flows are still unfilled.

Not all the supply and demand zones yield a 100% guaranteed winning trades, that is why we use price action and other techniques to select high probability setups.

Supply Zone:

In the chart below, the price dropped rapidly after making a small pause

around 1.13237 and 1.13874 (figure 21). The red rectangle on the chart represents the area where institutions and professionals are placing their orders and that is what caused the big drop in price.

Notice at the far left of the trend, the market was in an uptrend and then started going down. Retail traders will think this might be a pullback so they enter long position at that area.

The question that we need to ask ourselves is from whom retail traders are buying EURUSD? They are buying it from Institutions and Professional Traders that are selling it to them in order to short the market and therefore, go against the retail traders.

No one would think that we need to go short at that particular price level, because conventional technical analysis states that we need to trade with the trend and not the way around.

Fig.21. Supply Zone.

The red rectangle represents a pile of sell orders, which is where we are looking for trading opportunities. The imbalance is created by the increasing number of sellers over buyers, and therefore, the sellers are taking control of the market and buying at this price level will be a bad idea.

Let’s place a sell order at this supply zone around 1.3237, and wait for the price to return and test the level.

On the next chart, we can see that the price did actually return to the zone and triggered our order (figure 22). The trade worked out perfectly and the price dropped to approximately 1.08100. That is a very profitable trade with low risk and high profitability of success.

Fig.22. Price returned to the supply zone and hit the limit order.

Demand Zone:

In figure 23, the price created a demand level between 118.772 and 120.230. This is where we need to look for opportunities to go long.

The small green rectangle on the left represents the area where institutions and professionals are placing their orders and that is what caused the big rally in price.

In late February, the market created a nice big bearish candle. Retail traders would consider this a confirmation to go short, but things went a little different and the market went up. The imbalance is created by the increasing number of buyers over sellers, and therefore, the buyers are taking control of the market and selling at this price level will be risky. Again, who’s going to sell here, of course the retail traders, and the buyers are institutions and professional traders.

Let’s place a buy order at this demand zone at 120.230, and wait for the price to return and test this level. The price returned to the zone and triggered our buy order. The trade worked out perfectly and the price rallied to almost reach 131.000. That is again a very profitable trade with low risk and high profitability of success.