Supply and Demand in forex is the most basic and essential element for technical analysis as well as fundamental analysis. It is the key to understand the forex market.
The main benefit of Supply and Demand in technical analysis is to capture a Pinpoint entry exactly from where banks start buying and selling. Another Main benefit is that we can increase our risk-reward using a tight stop-loss or an open take profit with a breakeven.
What are supply and demand zones?
There are two types of states in the price
- Balanced state
- Unbalanced state
In a balanced state, the price is moving in a range like moving sideways. Simply means forces of buyers and sellers are balanced. Both of them don’t have the ability to create a trend either bearish or bullish trend. After breakout (usually happens in London session) of this sideways (range) movement of price, imbalance in price occur. And after the breakout, the recent range will be called a base zone and the price will again come to this base zone to pick unfilled orders.
How to identify supply and demand zones?
I will start from basic. There are four concepts of supply and demand.
- Rally Base Rally
- Rally Base Drop
- Drop Base Rally
- Drop Base Drop
Simple Formula = Big candle + base candle + Big Candle
Criteria to Follow
- Body to wick ratio of the big candle should be more than 75%
- Body to wick ratio of the base candle should be less than 50%
Have a look at the picture below
Supply and Demand zones are everywhere on the chart I will show you at the end of this Article. The Above image is of Drop Base Rally type of S&D. See in the chart above Market comes down to this level and just picked orders from the demand zone and went away. Supply and Demand are the Ever-Green Technique of forex technical analysis.
How to identify strong supply and demand zones?
Time matters a lot to identify a strong supply and demand zone. Because less time spent by the price at a certain base zone indicates a more powerful zone and more unfilled orders at the recent base zone. On the other hand, more time spent by the price at a certain base zone indicates a less powerful zone and less unfilled orders by institutions.
Another method to identify strong supply and demand zones is by using the Fibonacci tool. Most of the Supply and demand zones between Fibonacci 61.8 and 78 levels are stronger.
During drawing a base zone in supply and demand trading, remember to not go far back in history for finding a base zone because it’s common sense that institutions will not be going to hold their trades for years or months during intraday trading. I’m not talking about swing or long-term trading here.
How to trade supply and demand?
Supply and demand trading is not tough. Just simple is to look for the best and fresh base zones and that base zone will be the entry zone. Stop loss will be few pips above or below the base zone depending on the timeframe.
For example in the case of Rally base Rally, we will draw a zone at the low and high of the base candle. like in the below image.
In the case of RBR, a Pending buy order will be placed one to two pips above the base zone (remember to include spread) and stop loss will be a few pips below the zone (remember to include spread).
The disadvantage of supply and demand zone trading is that this technique will never tell you about take profit level. Its obvious price is moving from one zone to another zone but there is an unlimited number of zones on the chart that’s why Supply and demand zone trading doesn’t tell us about the take profit level. There are many strategies to tackle with this like if you are trading a simple trend line breakout then after trend line breakout and pull back in the price we will confirm precise entry from a demand or supply zone with a tight stop loss and high risk-reward ratio.
Key Point to Remember:
The number of Base candles indicates the strength of the zone. More base candles more weak a zone will be. On the other hand, the fewer number of base candles more strong the zone will be. I will show you in chat how to draw zone and some other examples in a single chart.
Unlimited Supply and demand zones
Now I will explain How the supply and demand zone is everywhere in the chart just you need the right angle to see the chart like a pro. A pro trader never changes timeframes again and again. A pro trader can analyze all the timeframes just from a single timeframe. Now Let me show you a chart.
All in one image
Supply and demand forex trading system
The supply and demand zone is used for the exact entry point with a tight stop loss. Price moves from one zone to another zone. I don’t use supply and demand to find take profit level. Here I will explain a simple trend line breakout system with supply and demand zone. This is just to show you how it will work. Any strategy with the supply and demand zone technique will improve your method a lot.
Watch the image below. After the breakout of the trend line, the price gave a pullback to the supply zone to fill the unfilled orders. Stop-loss was just above the zone and a high-risk-reward setup just using trend line breakout. This example is just to show the power of the supply and demand trading method.
Supply and demand trading rules
Four things to remember while looking for a supply or demand zone
- Time spent by price
- Number of base candles
- Time price took to pull back towards a base zone
- Location of Supply or Demand zone
Teach a Parrot the terms ‘Supply and Demand’ and you’ve got an Economist.
Note: All the viewpoints here are according to the rules of technical analysis. we are not responsible for any type of loss in forex trading.