Over the past few years a new type of trading method has become widely popular with forex traders. Supply and demand trading is a trading method where the idea is to find points in the market where the price has made a strong advance or decline and mark these areas as supply and demand zones using rectangles.
The main premise of supply and demand trading is when the market makes a sharp move up or down the large institutions i. The problem is the theory above is completely wrong with the way the forex market actually works. Liquidity is the ability to buy or sell something without causing a large price change. Whenever you see the market move is it due to a lack of liquidity in the market, not because there are more buyers than sellers as is commonly taught in trading literature.
If the market order is bigger in size than the opposing pending order, what will happen is part of the market order will be filled but the rest will remain unfilled, so the market must move higher in order to seek out additional pending orders to fill whats remains of the market order.
What this essentially means is pending orders add liquidity to the market, because they are the orders in which market orders will be matched with. Because the trades they place are so big one of the primary goals of a professional trader is get a trade placed into the market with as little impact on the market price as possible, this means finding places in the market where alot of liquidity exist.
Most of the time pockets of liquidity tend to be found at places where retail traders put their stops losses. The reason why stop hunts are seen frequently in the forex market is down to professional traders placing big trades into the market, they purposely push the price into the location of the stops to unload large trades all at the same price without moving the market a significant distance.
Before we get into the rules themselves I thought I would shed some light on the idea that institutions wait for the market to return to supply and demand zones to get their pending orders placed. I mean, If there is a supply zone which is three years old and the market has not returned to it for the past three years does it really make sense the banks still have a pending order to sell placed at the zone? One of the primary rules supply and demand traders use to gauge whether a zone has a high probability of working out successfully is the amount of time the market has spent away from zone.
Apparently, according to many supply and demand teachers, the longer the market has been away from a supply or demand zone the better chance the market has of turning when it eventually returns. If the bank places a pending order to buy or sell for when the market returns to a supply or demand zone are they really going to wait a long time for this to happen? If we compare the old supply and demand zones colored blue , with the more recent zones colored orange, its easy to see how trading zones which have been created recently is far more profitable than trading zones which were created a long time ago.
So really the example above proves to us the quicker the market returns to a supply or demand zone the better the chance it has of giving you a successful trade, older zone do not tend to work out very often, therefore its better if you only place trades in zone which have been created recently.
In other words, if you mark a zone on your charts which has a strong move away from it, how likely that zone is to result in you having a successful trade depends on how big the move which created the zone was.
If you marked a supply zone which had a huge drop consisting of multiple bearish large range candles then according to the rules the zone has a really high chance of working out successfully if you decide to trade it. Unfortunately the likelihood of a supply or demand zone giving you a successful trade has nothing to do with whether the move out of the zone was strong or not. How many times have you placed a trade at a supply or demand zone which has a strong move away only to see the market fly straight through it when it returns?
This is because the strength of the move away has nothing to do with how strong the area is. Common supply and demand teachings would say this is a strong area, yet as you can see the market breaches it without even stopping! Which brings me on to my next point…….
Whoever brought when the market was down here has a lot of money at their disposal. As a trending movement increases in length, more and more people begin trading in the same direction. Look at the last drop you can see on the chart before the demand zone is created, at the time of this drop tens of thousands of traders are all beginning to go short expecting lower prices, in order for the market to be able to move up from here, someone needs to come into the market and buy from all the traders who are going short.
The market eventually stops falling lower and begins advancing higher, creating the demand zone marked on the image. This zone has a very high probability of giving us a successful trade, not because it has a strong move away, but because we know whoever brought down here creating the zone has invested a lot of money into the market.
Why would someone spend all that money buying up all the sell orders from thousands of traders if their still expecting the market to move lower? Apart from the change of time frame the example above is a very similar to what we looked at previously. First we have a significant downtrend which many people can easily see with one look at the chart, then we have a strong, near vertical move up. This move up tells us somebody has come into the market and brought up all the sell orders from the traders going short into the downtrend.
Again why would someone come into the market and buy from all the traders going short if they were expecting the downtrend to continue? The supply and demand zones which have the highest probability of working out successfully are the ones found at trend reversals. A demand zone created after the market has been going down for a long duration of time has a much better chance of working out profitably than a demand zone which forms at the beginning of a down-move.
In a situation where the market has been going up for a long time a supply zone which forms late into the lifespan of the move up has a far better chance of resulting in a successful trade than a zone which is created at the bottom of the move up. The first is intra-day trading, in which the aim is to capture many small market movements over the course of the trading day generating small amounts of profits in the process.
Bank traders who trade intra-day will want their trades placed during that day, none of them will hold their positions overnight, this means the market makers will have to work the price in the market to places where these intra-day traders will want to buy or sell. You should only trade zones which the market manages to return to in 24 hours.
The reason for this is due to the other type of trading banks participate in, long-term position trading. These long-term positions the banks take is what causes trends to occur in the forex market. The large institutions who operate in the forex market all collaborate together in which direction their planning to take the market and then manipulate the prices so it makes everyone think the market is going to go in the opposite direction to the way in which they are going to be placing their trades.
First notice how there is a significant downtrend which by this point had been in place for nearly three years, due to the fact the market has been going down for such a long time it means the majority of the traders in the market are going short. Then out of nowhere we get a sudden up move. What the banks do then is very clever, they let the price drop, this makes everyone think the downtrend is going to continue so they all start selling again.
When the market returns to where the banks initially brought, they buy again, this second round of buying coupled with the mass liquidation of losing positions by the traders who were selling is what causes the market break significantly higher and begin trending.
When large institutions place trades in the market they will want all their trades to be entered at a relatively similar price range, they will not place one trade at one location and then wait until the market has moved far away from their first trade before placing the second one, this is why the market returns to the daily demand zone shown on the image.
As with most forex trading strategies supply and demand traders incorporate the concept of trend into their analysis of the market. Typically what a trader will do is go on the daily chart and see that overall the trend is down, therefore they are only going to take trades at supply zones as they have been told to always trade in the direction of the daily trend. There is nothing wrong with this so long as the trader is taking trades off the daily chart.
If the trader is taking trades off a lower time-frame then problems can arise as they are always going to be trading against the trend on the time-frame they take trades off. If for example the trader take trades off the 1 hour chart then they are unnecessarily going to lose on multiple trades because they believe they should be trading in the direction of the daily trend, regardless of whether the trend on the 1 hour chart is up.
If you trade the daily chart then you should be trading in the direction of the daily trend, if you trade the 1 hour chart you should be trading in the direction of the 1 hour trend.
The links below are to all the other articles I have written about supply and demand trading found on this site. Thank you so much for clearing the misconceptions of Supply and Demand trading. Your explanations contains much fresher air and crystal clear. I have a book coming out at the end of December that goes into more detail as to how money actually gets made in the forex markets and why retail traders typically tend to lose money.
The book will be sent to all the people who have subscribed to my daily support and resistance level service, i see that you have signed up too but have not confirmed your subscription, if your interested in receiving this book along with the support and resistance levels please find the confirmation email and confirm your subscription. I have been trading for about 8 months now, and when I came across this concept of Supply and Demand, it immediately caught my attention.
Further research had brought up the name Sam Seiden a lot, so I figured I would check him out. He mentions a LOT that pending orders move the markets… and me as a very novice trader felt almost stupid, to think anything otherwise, simply because he was a floor trader so he must know what he is talking about. I read a lot of comments and he confused a lot of people with this. Teaches me not to be so naive.. You guys have no idea lol Supply and demand is so real. The realest concept in trading.
Its the only thing that makes sense in buying and selling anything. Google fibbonachi and then explain what the hell that has to do with buying and selling anything.
Trendlines, fibbonachi, chart patterns are all illusions. They dont exist in buying and selling, so why put them on your chart. Trading isnt that complicated so why complicate it? Do your research on supply and demand properly and put into practise. You will be suprised and scared of how real it really is. Only thing that makes sense. If I might question the fx internet websites the utmost protected and dependable web-site what it is, I want in direction of start out mastering around forex small by little.
Hi, I do believe this is an excellent site. Money and freedom is the greatest way to change, may you be rich and continue to help other people. Yes around 10 — 20 pips for zones on the 1 hour chart and pips for zones on the daily chart. This will vary depending on the current volatility and the currency being traded. The chart examples you gave are the 1hr TF, which is ok if you accompanied them with a top down chart analysis of the weekly and daily TF charts so we know where we are in the big picture.
While the 1hr chart may show a valid supply zone, we could be sitting right in the weekly demand. I get that logic. Seeing where we are in the bigger picture has nothing to do with the points I was explaining in the article which is why there are no images of the daily or weekly charts showing top down analysis.
Teaching people why the move away from a supply or demand zone has no effect on whether the zone itself will work out profitably or not, does not require me to show whether we are in a daily or weekly supply or demand zone because it has nothing to do with it. Really it makes no difference whether pending orders move the market or not, they are not placed at supply or demand zones ready for when the market returns because the banks cannot predict ahead of time, whether the number of buy or sell orders coming into the market upon its return to the zone will be enough to fill the pending order they have placed there.
That is something which can only be worked out when the market is inside the zone, at which point, the banks will use a market order to get their trades placed. Anyone who has read my supply or demand book will remember the example in the book of the banks getting trades placed at multiple different prices that were close together.
If the banks have any orders left which they need to get placed the market will revisit the range before proceeding to move in the direction of the trend. You the real MVP!! Hi friends and fx mentor great articles indeed and they are valuable. My challenge is some of the articles they never show pictures it says error some picture can not be reloaded. Can you send it to my email? Hi, the book you sent me this week about the swing low and highs.
When I try to view it,it says file damaged or corrupted even if I try converting to a work format it still gives me problems. Its the word book you sent on swing lows and highs. Can you send it via my email address? This is not my normal strategy and after attending a Sam Seiden seminar a few years ago, I tried it and failed. Now I know why!More...