Supply And Demand: How To Find And Trade The Best Zones

In today’s post, I’m going to show you how to trade one of the most popular forex strategies
available right now…

Supply and demand zones.

Centred on trading reversals from rectangular zones (S & D zones), supply and demand
has become a very popular strategy over the last few years, with many traders seeing it as
a better method of finding reversals than the inconsistent but well-loved support and
resistance levels.

While supply and demand has become popular in recent years, there are still many traders
who don’t know what it is or how it works.

Today that changes…

This post is a complete guide on how to trade supply and demand zones. Everything you
need to know about supply and demand is in this guide. You’ll learn what supply and
demand is, how it works, how to find and draw the zones, and of course, where to enter
trades and place stop-loss orders.

There’s a lot to get through, so let’s jump in and take a look at what supply and demand
trading actually is.

Understanding Supply And Demand Trading

Created in the late 2000s by Sam Seiden, supply and demand is a trading strategy that uses
the concept of supply and demand to identify points where a currency has a high probability
of reversing.

The idea is that because supply and demand governs how all markets work, there are
points on a chart where demand exceeds supply and vice versa. By locating these points
(supply and demand zones), you can find where price is likely to rise and fall in the future,
and then use them to get into trades.

Like support and resistance levels, supply and demand has you locate two points where
price has a high probability of reversing.
Demand zones, which are points where price is likely to stop falling and start rising.

And supply zones, points where it’s likely to stop rising and begin falling.

Of course, price doesn’t reverse from supply and demand zones for no reason. Rather, it’s
because of the way big traders (banks, hedge funds, etc) buy and sell large quantities of
currency.

According to Sam, when big traders place their trades, they never have enough orders to
place them all at once; some get leftover at the point where they decide to buy or sell (the S
or D zone).

Obviously, the big traders can’t let these trades go to waste, otherwise, they’ll miss out on
making a lot of money. So, to get them placed, they make price return the zone, which
triggers their trades (they use pending orders) and then causes price to reverse and move
away.

So that’s how supply and demand zones work, but how’d you trade them?

Well, let’s take a look…

How To Trade Supply And Demand In 4 Easy Steps

Supply and demand isn’t the most difficult strategy in the world to trade, but there are a
couple of things that will take some time and practice to get good at, manly finding and
marking the zones on the chart.

Let’s take a look at the first one: finding the zones.

Step 1: Find The Zones

To trade supply and demand, you must know how to find and mark the zones on a chart,
and this…

…takes a bit of practice.

However, it’s not as hard as you might think.

Supply and demand zones form as a result of big traders/investors buying and selling large
quantities of currency. So, to find where the zones have formed, we just need to figure out
where they’ve bought and sold.

This also sounds difficult, but it’s not due to one simple fact…

When big traders/investors buy and sell, they cause price to quickly increase or decrease
by a large amount. On a chart, this appears as a sharp rise or decline in price.

So, to find a zone, all you have to do is look for the times when a sharp rise or decline in
price occurred.

Take a look at the rises marked above.

See how they’re constructed?

Each rise is made up of either multiple big bullish candlesticks that from one after the
other – or are separated by a few small red candlesticks – or one huge candlestick that
forms on its own (red arrows).

This is what I mean by a sudden sharp rise in price.

These rises tell us the big traders and investors decided to buy a large amount of currency
Eur/Usd in this case. That means a demand zone must have formed at the point where the
bought, the beginning of each rise.

And here’s what the demand zones look like when marked on the rises.

(I’ll show you how to mark the areas in a minute).

Take note of the fact price usually reversed once it returned to a zone (black arrow),
further highlighting how good the zones at predicting where price will reverse.

Now supply zones are created from the big traders/investors selling a large amount of
currency, so to find them, you have to look for sudden, sharp declines in price.

Here are 5 sharp declines on Eur/Usd.

Notice that, like the rises we just looked at, each decline is constructed of either multiple
big red candlesticks that form one after the other (blue arrows) or one massive red
candlestick that forms on its own.

These are the types of declines you must look for to find supply zones.
Again, if I mark the supply zones found at each decline on the chart, you can see price
usually reversed upon returning to each zone, confirming their validity.

Step 2: Mark The Zones On The Chart

It’s one thing to find supply and demand zones, but it’s another thing entirely to mark them
on the chart in the right location.

Marking the zones correctly is extremely important. The zones have to be marked in a
specific way, otherwise, they won’t work correctly. If you get them wrong, even by a tiny
amount, you could miss the reversal or place your stop in the wrong place, leading to a
losing trade.

Luckily, with a bit of practice, marking the zones isn’t that difficult.

Here’s how to do it:

Demand Zones

So, the first step in marking a demand zone is to find the sharp rise in price where you
think the zone has formed.

(We’ll use one in the previous example to make it easy).

Once you’ve found the rise, locate the LAST small candlestick that formed before the first
big candle in the rise appeared.

If the rise is constructed of one huge candlestick, find the last small candle that appeared
immediately before the big bull candle formed.

If the rise is made up of multiple large candlesticks that form one after the other or are
separated by one or two small bearish candles, like the rise in our example, find the last
small candle that formed before the first big candle in the rise appeared.

Now here’s where things get a bit tricky…

To mark the zone, you must place the rectangle tool on the open or close (close if it’s
bullish, open if it’s bearish – red) of the last small candlestick that formed before the big
rise, and then drag down so that the edge of the rectangle sits on the point where the most
recent swing low formed.

Finding and placing the tool on the open or close is easy enough, but locating the last swing
low that formed before the rise can be a bit tricky.

Luckily, Tradingview has an indicator that marks all the lows automatically.
Here’s how to set it up:

Go to the “Indicators” tab on Tradingview, enter “Swing high” into the search box and then
click the “Swing High Low By Patternsmart” Indicator that appears to the right.

Some blue and red dotted lines will appear on the chart.

These lines show where each swing low (red line) and swing high (blue line) has formed.

By default, the indicator doesn’t show all of the lows and highs. So you need to change it’s
settings so that it shows all the lows and highs we need to see.

To do this, right-click one of the blue or red lines, select “Settings” from the options, then
change the “Swing Length” option to 4.

You should see more blue and red lines appear on the chart.

With that done, you’re now ready to mark the zone.

So, select the rectangle tool from the side menu.

Locate the open or close of the last small candlestick that formed before the first big
candle in the rise (close if it’s bullish, open if it’s bearish).

Now click on the open or close and drag the rectangle down until sits on the most recent
swing low (red line) that formed before the rise.

If drawn correctly, the rectangle should cover the area between the swing low and the
open or close of the last small candle that formed before the rise.

Important Note: After marking a zone, make sure you right-click one of the edges and
change the “Visual Order” setting to “Send To Back”, otherwise, the rectangle will cover up
the candlesticks.

Supply Zones

You mark supply zones in pretty much the same way as demand zones; you find the
open/close of the last small candlestick, place the rectangle on top, then drag up to the
most recent swing high that before the decline.

Here’s a quick guide on how to do it:

First, find the sharp decline where you think a supply zone has formed.
Next, find the LAST small candlestick that formed before the decline began.

Again, if the decline consists of one massive candlestick as it does above, the last small
candle is the one that formed immediately before the huge candlestick appeared.

If the decline is constructed of multiple large candlesticks that form one after the other or
are broken up by one or two small bullish candlesticks, the last small candlestick is the
one that formed immediately before the first large bearish candle appeared.

The next step is to mark the area using the rectangle tool.

So again, select the rectangle tool from the side menu.

Find the open or close of the last small candle that formed before the rise (open if the
candle is bullish, close if it’s bearish).

Now click on the open or close and drag the rectangle UP until it sits on the most recent
SWING HIGH (blue dotted line) that appeared before the decline.

If you’ve done it correctly, the rectangle should encompass the area between the open or
close and the swing high, as you can see it does in the image.

Top Tip: Only Mark The Areas Closest To The Current Price
When you mark supply and demand zones, make sure you only mark the ones CLOSEST to
the current price of the currency you’re trading.

Don’t go back and mark every zone that’s ever existed, as it will make the chart confusing
to understand, and you won’t know which zones to focus on for reversals.

Just mark the zones closest to the current price.

If a zone gets broken, mark the next closest one e.g if a rise causes price to break a supply
zone, find the next closest supply zone and start watching that for signs of a reversal.

Step 3: Wait For A Signal Price Is About To Reverse

On their own, supply and demand zones don’t signal price will reverse. So you can’t just
enter a trade as soon as price enters a zone, assuming it’s going to cause a reversal. You
have to wait for price to signal it’s likely to reverse out of the zone and then enter a trade.

And the two best signals price is going to reverse from a zone come from either an
engulfing pattern or hammer candlestick forming.

Let’s take a look.

Engulfing Patterns

The engulfing pattern is a two-candle pattern where the body of the second candlestick in
the pattern is always bigger than the body of the first candle.

They come in two types:

Bullish engulf – these signal price is about to rise.

Bearish engulf – these signal price is about to fall.

Both bullish and bearish engulfs form from the banks buying and selling, respectively, so
seeing one form inside a supply or demand zone is a good signal price is probably about to
reverse.

Here’s what 5 bullish engulfing patterns look like.

You can see that each pattern, despite not looking exactly the same, all follow the same
structure mentioned above. The first candle is bearish, and the second candle is bullish,
and the body (the colored part of the candlestick) of each bullish candle is always bigger
than the body of the bearish candle.

Bullish engulfing patterns from the big traders/investors buying a large amount of
currency.

So seeing one appear inside a demand zone is a strong signal price is about to reverse
because it shows the big traders/investors have just bought a large amount of currency.

Above, you can see the price close to entering a 1-hour demand zone.

If a bullish engulfing pattern forms after it enters or touches the edge, it’s a good sign the
banks are buying, so is a signal for you to place a buy trade.

And as you can see, after price falls into the zone, a bullish engulfing pattern forms, giving
you a signal to place a trade.

So now you would place a trade and wait for price to reverse, which it did in this case.

Easy.
Bearish Engulfs

Now to get into sell trades from supply zones, you have to look for the bullish engulfing
candlesticks brother, the bearish engulfing candle.

Here’s what the bearish engulfing pattern looks like.

You can see, like the bullish pattern, the bearish engulf contains two candlesticks that form
one after the other.

The big difference is that the first candlestick, instead of being bearish, is bullish. And the
second candlestick, which is always bigger, is bearish.

The bearish engulf is created by big traders and investors selling into strong buying, which
means it’s a great sign price is likely to fall out of a supply zone, making it a good signal to
sell.

You can see that when price entered this supply zone, a large bearish engulfing candle
formed.

This engulf is a signal the banks have probably sold a large amount of currency, so price is
likely to fall, which you let you know that a large drop might be about to take place, giving
you a chance to close an open trade at a profit or to take some profits off a trade.
Hammer Candlesticks

Aside from the engulf, the other candlestick pattern that signals price might be about to
reverse from a supply or demand zone is the hammer candlestick or pin bar as it’s often
called.

The hammer is a candlestick with an extremely long wick at the end.

Like engulfing patterns, they form from the banks buying and selling (hence the long wick),
so upon formation, signal the price has a high probability of reversing.

They also come in the same two types:

Bullish hammers – these signal price is about to start rising.

Bearish hammers – these signal price is about to start falling.

Here’s what bullish hammer candlesticks look like.

Hammers are characterized by having a really small body with an extremely long wick, but
the bullish hammer always has its long wick below the body, as you can see above.

As it’s created from big traders/investors buying, seeing a bullish hammer from inside a
demand zone is a good sign price is about to reverse.

Here you can see price is close to entering into a demand zone.
If a bullish hammer forms when it falls in, it’s a good sign price is about to reverse, so is a
signal for you to place a trade.

Sure enough, when the price enters the zone, a bullish hammer forms.

So seeing this would be your signal to place a buy trade, as the appearance of the hammer
means the banks have probably bought a large amount of currency, making it likely price is
about to rise.

Here are some examples of what the bearish hammer looks like.

Like the bullish hammer, the bearish hammer also forms with a small body and big wick.

The only difference, as you can probably see from the image, is that instead of being below
the body – as it is in on the bullish hammer – the long wick on a bearish hammer always
forms above, with the body being below.

The bearish hammer forms as a result of large traders and investors selling, so it’s
appearance inside a supply zone indicates price is probably about to fall.
You can see that after the price entered the supply zone above, two bearish hammers
formed, indicating price was about to fall, which it then did a short time later.

Step 4: Place A Stop Loss Above Or Below The Zone

Supply and demand zones often cause reversals, but they don’t work all of the time, so you
need to have a stop loss whenever you place a trade to protect against large losses.

The stop loss on a supply or demand trade always goes above or below the zone.

For demand zones, it always goes below.

And for supply zones, it always goes above.

You can lower your risk by moving the stop down, but make sure you only do this after
price has reversed from the zone. And make sure you only move it to the swing high or low
created by the reversal. Don’t bring it down to the opposite edge, as price will often spike
back in, just keep at the high or low.

Once price is clear of the zone, that’s when you can bring it down to the opposite edge or
lower.

Summary

For beginners and experienced traders alike, supply and demand is a great strategy. It’s not
the easiest to learn, at least not at first, but it’s simplicity and effectiveness at finding
reversals more than makes up for its issues, and I wholeheartedly recommend you try it
out as a strategy.

The Easy Way To Trade Supply And Demand Zones

By Admin Posted on February 21, 2020 In Strategies, Strategies No Comments

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Supply and demand is one of the best price action strategies; it gets you into trades right at
the point where price is about to reverse, and it gives you a road-map for where it might
move in the future.

However, one critique of the strategy is that it’s not easy to trade, mainly for one reason:

The entry.

To enter trades at supply and demand zones, you have to wait for either a hammer
candlestick or engulfing pattern to form. The problem is hammers and engulfs come in
many different types, which makes knowing whether the right one has formed inside the
zone extremely tough.
But what if I told you there’s another way to trade the strategy… a way that doesn’t require
you to watch for candlesticks patterns nor sit in front of your PC all day?

Sound interesting?

Let me explain…

The Problem With The ‘Normal’ Way Of Trading Supply And Demand

Anyone who has read my post on how to trade the supply and demand strategy knows that
trading the zones is a 3 step process:

1. Step 1 is to mark the zones on the chart.

2. Step 2 is to wait for the price to return to a zone.

3. Step 3 is to enter a trade when an engulfing pattern or hammer candlestick appears

inside the zone.

Step 1 and step 2 are easy enough (well, maybe not step 2 – that can also be difficult) but
it’s step 3 that causes people the most trouble, and that’s mainly because of how tough it is
to determine whether a hammer candlestick or engulfing pattern is valid or not.

To signal price is going to reverse from a zone, a hammer or engulf must have certain
characteristics.

For engulfing patterns, both candlesticks must have a large body, and the engulfing candle
itself needs to have a body bigger than the prior candle.

For hammer candlesticks, the wick must always be really big.

Figuring out whether the wick of the hammer or body of the engulf is the right size is what
makes trading S & D so difficult. And since there’s no way for me to tell you whether it’s the
right size or not, other than to simply say it needs to be “big”, you’re pretty much stuck with
guessing, which naturally leads to unnecessary losses.

Luckily, you can trade the zones in a way where you don’t need to know how big the wick of
the hammer or body of the engulf is.

In fact, with this method, you don’t even need to look for hammers and engulfs AT ALL.

Here’s how it works…

The Easy Way Of Trading The Strategy

So if you don’t use hammers candles and engulfing patterns to enter trades at supply and
demand zones, then how the hell do you enter?

The answer is simple…

By placing a limit order at the edge of the zone.

A limit order allows you to buy or sell once a certain price is reached.
By placing one at the edge of the supply or demand zone (the edge closest to the current
price), you can enter a trade without having to wait for a hammer candlestick or engulfing
pattern to form, making the zone much easier to trade.

Here’s an example…

You can see price is about to enter this demand zone.

Normally, you’d have to wait for price to fall into this zone and form a bullish hammer or
engulfing pattern to enter a trade. With this method, however, you just place your limit
order on the edge and wait for price to trigger it.

When price comes down and spikes through the edge, your buy order gets triggered, and
you get entered into the trade at a much more favourable price.

Easy.

How To Trade Supply And Demand Using Limit Orders

Aside from entering using limit orders, this way of trading the supply and demand strategy
is EXACTLY the same as the way taught in my other post.
I won’t go over everything here again (as you can just read the other post), but here’s a
quick step-by-step guide on how this way of trading the zones works, just in case some
people are still unsure.

Step 1: Mark The Zones On The Chart

So step 1 is to mark the supply and demand zones on the chart to see which one the price
enters.

The way you mark the zones is the same as it is using the normal version of the strategy;
you look for large rises and declines in price, find the source of the rise/decline, and then
mark a zone around it.

For rises, you mark a demand zone.

For declines, you mark a supply zone.

For this example, we’ll use a supply zone.

Step 2: Place A Limit Order At The Edge Of The Zone

Okay, here’s where things get a little different.

After you’ve marked the zone, you need to place a limit order at the edge of the one you
think price is going to reverse at, to capture the potential reversal away.

To do this, just move your cursor over the edge of the zone…
…And then see what the price is.

In our example, it’s 108.402, so that’s the price you place your sell order at.

Step 3: Wait For The Order To Execute

The third and final step is to wait for the price to hit the edge of the zone and execute the
order.

How long this takes depends on the distance between the zone and the current price.

In our case, price wasn’t far away, so it returned to the zone quite quickly. If price doesn’t
reach the zone, which it often won’t, make sure you remove the limit order using the open
orders tab on your broker.

If you leave it open, the market might trigger it after you’ve forgotten about it, which could
cause you to have a nasty surprising loss.

Closing Words

Supply and demand will never be the easiest to understand and trade. However, this new
method of trading the zones, whilst not perfect by any means, should make it a lot easier,
and hopefully, allow you to start making some money.