Supply and demand trading course

How to qualify supply and deman…

The Freshness of the zone (Detailed
Text Lesson)

Supply and demand

The Freshness of the zone

(Detailed Text Lesson)
LESSON 29 MODULE 5

One of the most crucial criterion that will make

a difference in trading supply and demand
zones, is the freshness of the zone, because it
is a key odd that enhances trading supply and
demand. The more the level is tested, the
weaker it gets.

When you identify a supply zone, you should

pay attention to how many times the level was
tested. This will help you determine whether
the zone is worth trading or if you should
ignore it. Look at the illustration below to
understand how we determine whether the
zone is fresh or not:

As you can see in the illustration above, the

number of retracements is crucial to qualifying
the power of the zone. The first zone is very
strong, because it is fresh, and the first
pullback represents a high probability setup to
enter the market after the confirmation of a
price action signal.

The second zone is strong as well, but not

stronger than the first one, because it was
tested twice. The second pullbacks represent
a good opportunity as well. However, you will
always need a confirmation.

The confirmation can be a pin bar, an inside

bar, or an engulfing bar; waiting for a
confirmation is a must to enter the market if
you are a beginner trader.

The third zone is a very weak demand zone,

because it was tested for a third time. Hence,
we can’t trust this zone anymore, because if
buyers were powerful, they will not need to test
a zone more than once. So, if the level was
tested more than two times, you should
eliminate the zone, and focus only on the fresh
ones.

Now, let me give you a real chart example of a

fresh zone to help you better understand how
to determine the freshness of supply and
demand zones. Please view the chart below:

This is the GBP JPY 1H chart; as you can see,

the supply zone was fresh. The freshness of
the zone represents the strength of it. So,
when the market will test the zone for the first
time, we can predict a strong move down,
because prices will hit the unfilled limit orders
that were left in the zone.

As you can see, when the market retraced

back for the first time to test the zone, prices
were rejected, forming a pin bar candlestick
pattern. Look at another chart example of a
strong supply zone, but this time, the level was
tested twice. Look at the chart below:

This is another example of a GBP JPY H4

chart. The supply zone was fresh; the first
pullback represents a high probability entry
point. As you can see, when the market
retraced to test the zone, it was strongly
rejected.

The second pullback is a good opportunity to

short the market, because the zone is still valid
and strong. When the market pulled back for
the second time to test the zone, we had a
nice pin bar candlestick pattern as a signal to
short the market. Look at the reference
example below:

This is the EUR USD H4 chart: and this is a

nice Rally-Base-Drop supply zone. As you can
see, the move is fast and strong; the candle’s
size is big, which indicates that the order was
made by a bank or any other financial
institution.

The freshness of the zone gives more strength

to this high probability setup, so the first
pullback to test the zone should be taken into
consideration. As you can see, when the
market returned to the zone, prices hit unfilled
limit orders and the market was rejected,
forming a nice Doji candlestick. Look at
another example below:

This is another example of the EUR USD H1

chart; it reveals that the market formed a nice
supply zone, the first pullback and the second
one worked because the zone was still fresh,
but the third pullback failed because the area
was tested couple of times. So please, take
this as a rule: the first and second pullback can
be traded if there is a clear price action signal.
However, the third pullback to the supply zone
should be ignored.Let’s move to the demand
zone to see how to decide whether it is fresh
and tradable or not; please see the example
below:

This is the GBP USD H4 chart; and as you can

see, this is a clear fresh demand zone,
because it was only tested for a first time.
When the market goes back to test the area, it
is obviously rejected. You can consider the
zone still strong, even if it is tested for the
second time. But you should always wait for a
confirmation to make your trading decision.
Review the example below:

This is another example of the USD JPY H1

chart, showing the market formed a Drop-
Base-Rally demand zone, as you can see, the
move is quick and strong, and the candle’s
size is big. This indicates that the order that
caused this strong move up was made by a
financial institution.

The basing candle is the engulfing bar pattern,

so to draw the zone, you draw the proximal
line at the close of the first candle, and the
distal line at the open of the second candle to
get this strong demand zone.

The zone is fresh because it was not tested for

a couple of times; the first pullback did not give
us a strong price action signal to buy the
market; However, in the second pullback, the
market was rejected and formed a nice tailed
bar. This reveals that the zone is valid during
the first and second pullback, if the market
makes another pullback, this zone should be
ignored. Look at another example below:

This is the AUD USD H4 chart. In this

example, we have a clear demand zone; the
move is quick and strong, and the candle’s
size is big. The basing candle is the inside bar
pattern, which you can consider it a Doji
candle as well. So in this instance, to draw the
zone you simply draw the proximal line at the
upper shadow of the inside bar or (Doji), and
the distal line at the lower shadow of the
mother bar or the Doji; both ways of drawing
are correct.

This demand zone was fresh, and this gives it

more strength, because when prices retrace
back to test the zone for the first time, we will
see a clear rejection and a strong move up. As
you can see, that’s what happened after the
first pullback; sellers were rejected, and prices
moved up strongly again. Look at another
example below:

In the EUR USD H1 chart above, as you can

see, the market formed a clear demand zone,
when the market retraced back to test the
zone. Prices were rejected at the first and
second pullbacks. However, the third pullback
failed because the zone is no longer valid.

So, no matter how strong supply and demand

zones are, the zone should be fresh. This
means price has not attempted to break that
level before. Each time price comes back to a
zone, the zone becomes weaker and will
eventually break.

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