"Whether we're analyzing significant price shifts, ongoing trends, or key support and resistance zones, the fundamental idea of supply and demand trading is always at the heart of it. Familiarizing yourself with our six essential supply and demand forex trading tips can be highly beneficial.
In a robust uptrend, it's clear that buyers outnumber sellers – this is a fundamental truth. As the trend progresses, prices rise until enough sellers join the market to absorb the buy orders. This initiation of a strong bullish trend is called an accumulation or a demand zone.
Conversely, bearish trends emerge when sellers surpass buy orders. In this scenario, prices decline until a new equilibrium is established, rekindling buyers' interest. The beginning of a bearish trend wave is often referred to as a distribution or a supply zone.
Supply and demand are the driving forces behind all price fluctuations, whether in your local flea market or on the global stage of capital markets. When there's a high demand for a limited quantity of a specific item, its price will naturally rise until it matches the level of interest and available supply.
Conversely, if there's minimal interest in a particular item, sellers must adjust the price downward until a buyer's interest is piqued, or a transaction may not occur."
"Wyckoff's 'distribution and accumulation' theory provides insights into trends. Before the commencement of a trend, the price remains within an 'accumulation' zone, during which the 'big players' gradually amass their positions before propelling the price upward.
They cannot simply flood the market with their entire orders because doing so would trigger an immediate price surge, preventing them from filling their positions fully and potentially diminishing their profits.
It is reasonable to assume that after the price exits an accumulation zone, not all buyers have executed their orders, and open interest still exists at that level. Supply and demand forex traders can apply this understanding to pinpoint areas with a high likelihood of significant price reactions."
1. Moderate Volatility:
A supply zone usually exhibits limited price movement. Excessive candle wicks and frequent reversals can nullify the effectiveness of a supply zone for future trading. The narrower the supply/demand zone before a strong breakout, the higher the probability of a favorable reaction next time.
2. Timely Exit:
Prolonged periods of price residing within a supply zone are not ideal. While it takes some time for positions to accumulate, extended ranges typically do not signify institutional buying. Effective supply zones are relatively narrow and don't persist for too long.
A shorter accumulation zone is better suited for identifying re-entry points during pullbacks to capture open interest.
3. The "Spring":
Coined by Wyckoff, the "Spring" pattern refers to a price movement in the reverse direction of the subsequent breakout. In hindsight, the spring often resembles a false breakout, but it traps traders by inducing trades in the wrong direction (read more: Bull and bear traps). Institutional traders utilize the spring to accumulate buy orders and then increase prices.
4. Strong Force Leaving the Zone:
This point holds significant importance. At some point, the price exits the supply zone and begins to trend. A notable imbalance between buyers and sellers results in forceful and rapid price movements.
Remember, the stronger the breakout, the more robust the demand zone tends to be, often with retained open interest, especially when the time spent in the accumulation phase was relatively short. Look for exceptionally strong turning points, as they often represent high-probability price levels.
When trading supply areas, ensure the zone remains "fresh." This means that the price has not been revisited after the initial establishment of the zone. Each time the price returns to a supply zone, more unfilled orders from the past are executed, weakening the level progressively. This principle applies to support and resistance trading, where levels lose strength with each subsequent bounce.
6. Amateur Squeeze:
The Rally-Range-Drop scenario characterizes a market top (or swing high) followed by a sell-off. The market top marks a level where the selling interest becomes so pronounced that it absorbs all buying interest, pushing the price lower. The amateur squeeze allows patient and savvy traders to exploit the behavior of consistently losing traders who misunderstand the market.
It's reasonable to assume that clusters of orders still exist above a strong market top and below a market bottom. Traders who specialize in fake breakouts are well aware of this phenomenon.
"Many trading concepts may sound promising in theory, but their true value becomes evident when you can effectively apply them. The idea of supply, demand, and open interest can be employed in three distinct ways:
1. Reversal Trading:
At Tradeciety, our specialization lies in reversal trading, which is also the most beneficial use of supply and demand zones. After identifying a robust previous market turnaround, patiently wait for the price to revisit that area.
When a false breakout occurs, the likelihood of a successful reversal is notably high. To enhance the probability of successful trades, consider combining fake breakouts with momentum divergence and a feigned spike through the Bollinger Bands.
2. Support and Resistance:
Supply and demand zones naturally serve as support and resistance levels. It proves advantageous to have these zones on your charts for several reasons. Traders can better understand price movements by blending traditional support and resistance principles with supply and demand.
Supply and demand zones are frequently below or above support and resistance levels. While support and resistance traders may find themselves caught in a difficult position, supply and demand traders possess a better perspective.
3. Stop Loss and Take Profit:
Supply and demand zones can also be invaluable tools for positioning your profits and managing risk. Always position your profit target just before a supply or demand zone to prevent the risk of relinquishing all your profits once the open interest in that zone is fulfilled. As for stop losses, placing your orders outside these zones is advisable to avoid being prematurely triggered by stop runs and squeezes."