Supply And Demand Trading: The Definitive Guide (PDF)

26 Comments / Blog, Latest Posts, Related Posts, S & D Guides / By Admin / September 24,
2019

“Pin-point EXACTLY where the banks are buying and selling.”

“Get into the biggest reversals before they begin.”

Have you ever heard these statements before?

This is where you start…

I’ve got you covered…

Over the last few years, “Supply and Demand trading” has become one of the most popular
Forex trading strategies, taking the best of support and resistance and combining it with the
tried and true concept of supply and demand.

The result IS a strategy that allows you to:

“Pin-point EXACTLY where and when the banks are buying and selling.”

Supply and Demand trading gives you the best chance to “get into the biggest reversals before
they begin.”

Sounds pretty amazing, right?

Today, I’m going to give you a full breakdown of how you can start trading the Supply and
Demand strategy.

Here’s a quick look at what we’ll cover:

• What, exactly, is supply and demand trading, and how does it work,

• Why the normal way of trading Supply and Demand is wrong,

• Finding, and drawing Supply and Demand zones correctly,

• The two ways you can trade the zones,

So, get ready to learn what supply and demand trading is all about.

Let’s jump right into the guide…

IMPORTANT: Click Here To Download My Supply And Demand Guide As A PDF!

Part 1: Overview Of Supply And Demand Trading

Before we get to grips with supply and demand as a strategy, we need to talk about the supply
and demand as a concept.

In economics, the law of supply and demand determines the price people pay for a product.

This law states:

When supply of a product is high and the demand is low, prices must fall to incite buyer’s
interest; when the demand for a product is high and supply is low, prices must rise to represent
the scarcity of that product.
Sound familiar?

So, for example…

When you buy a house, supply and demand determines the price, which is governed by various
economic factors. These factors cause the forces to increase or decrease, impacting the price.
One of the biggest factors is birth rate, the number of people being born.
If a country has a declining birth rate, house prices 25 – 30 years down the road will be lower.
Why?
Because fewer people being born = less demand for houses later on.
If demand is low with lots of supply (houses), prices must fall to incite interest from buyers.
That makes sense, doesn’t it?

Now Forex, as well as all other markets, stocks, commodities, crypto, etc, are driven
by this same concept.

News events, economic announcements, and general market action cause different groups of
traders to buy and sell, resulting in changes to the supply and demand equation.
These changes manifest visually as the rises, declines, and consolidations we see on our charts.

• When price rises, demand outstrips supply.

• When price falls, supply outweighs demand.

• When price moves sideways, S & D are in balance.

Observing the previous image, you can easily see how changes in supply and demand create
the moves we see.

First: supply and demand are in relative balance, resulting in a consolidation. Supply is equal to
demand. That’s why price moves sideways for a while and then it creeps higher as demand
begins to ramp up.

Second: for whatever reason, something changes, and supply suddenly outweighs demand.
Someone, or a group of traders, decides to sell EUR/USD en masse, causing the price to fall.

Supply outstrips demand for a while, as more and more people decide to sell.

They see price fall, so they decide to sell themselves.

Third: demand really comes in and pushes price higher, setting off a new upswing. This
continues before equal supply enters the market and creates equilibrium.

With supply and demand now in relative balance, price moves sideways, and we see a tight
consolidation form.

It is a “play-by-play” commentary that goes on day by day, week, month, quarter, year, etc. Of
course, it also goes on hour, half-hour, quarter-hour, 5-minute, 1-minute, and yes, etc.

How And Why Supply And Demand Zones Form

With all of this in mind, you’re probably wondering:

“How does it all link together?”

“Where do S & D zones form?”
How does the concept of supply and demand create a trading strategy we can use to anticipate
where and when major market changing reversals could begin in the future?

The answer lies in what causes supply and demand to change in the first place.

Changes in supply and demand ONLY OCCUR when the big traders buy or sell.

Being the small fish, we can’t make price rise or fall; we don’t have enough money! Only the big
players, with their deep pockets and unlimited buying/selling power, can actually make price
rise and fall.

Now, here’s where it gets interesting:

In Forex, the banks can never place their full position all at once.

Their positions are so large they must break them into smaller chunks and place each trade
individually, around a similar price, to avoid pushing price away and potentially forcing their
following entries at a worse price.

This way they achieve the effect of placing one huge position, by placing a bunch of small ones
instead.

But here’s the problem the banks face:

Their positions are often so big that not enough people exist on the opposite side, to get
them placed, even if they break them down into smaller chunks. The banks need thousands of
other traders completing the opposite action for them to enter their positions; buying if they
want to sell, or selling when the banks want to buy.

To compensate, they must let price move away and make it return later to get the rest of their
position entered.

On a chart, that process looks like this…

First: the banks place what positions they can, and price shoots away.
Next: the banks make price return to the source, the point they placed their initial position.
That way, they can enter their remaining positions (like trades) at a similar price, replicating
placing one total position into the market.

Then: the banks can allow price to fully reverse, and a large move ensues.

In supply and demand trading, our job is to locate and trade these points where the banks
enter their positions.

These are called supply and demand zones.

Price moves from supply zones to demand zones and back: over and over again.

If we identify these zones, which I’ll show you how to do later, we can get into these monster
reversals precisely at the point they begin. That will give us a low-risk entry with a very
favourable risk to reward ratio.

Amazing, right?

Understanding The Zones

Let’s go over the two zones now, so you can understand how they work.

Demand Zones

Demand Zones represent points where the banks have placed a significant number
of buy positions.

These are the support levels of supply and demand trading.

Demand Zones form when the banks place a large number, or size, of buy positions. This
creates excess demand, and results in the price reversing and moving higher.

The point where price reverses is the demand zone.

Supply Zones

On the other side of the fence, we have supply zones.

Supply zones are points where the banks place a significant number, or size, of sell positions
and these are the resistance points where price could fall.

Supply zones form when the banks decide to sell a large amount of currency. This selling
creates an excess of supply, which causes price to fall, creating the supply zone.

The point where price reverses, usually a prominent swing high, is the supply zone.

If price returns here, it has a high probability of falling again.

The Two Types Of Supply and Demand Zones

We can break these Supply and Demand zones down even further.
Now, we need a quick discussion about the two types of supply and demand zones.

While supply and demand zones are the same thing, zones where price could reverse, the
zones come in two types based upon whether they develop from a reversal or continuation.

The two types are as follows:

1. Rally – Base – Rally (RBR) and Drop – Base – Drop (DBD) Zones,

2. Rally – Base – Drop (RBD) and Drop – Base – Rally (DBR) Zones.

Continuation Zones:

Rally – Base – Rally and Drop – Base – Drop zones…

Form, when price moves in one direction,

Base, i.e consolidates or pauses, then
Continues in the same direction.

These zones always form mid-move, either from the banks taking profits or closing trades.

Compared to the reversal zones, continuation zones don’t tend to work that well. They
develop from banks placing a small number of positions into the market. So, they don’t hold the
power of reversal zones.

That said; they can give you good trades here and there, especially if you know which zones to
watch for in particular.

On to reversal zones now…

Reversal Zones:

Rally – Base – Drop and Drop – Base – Rally zones…

Form, when price reverses direction,
Base, then
Reverse and set off a new swing

These zones form when one major swing changes to the other, usually caused by the banks
buying or selling large quantities of currency.

Reversal zones are the ones you should be trading using Supply and Demand methods.

They’re the highest probability zones in the market.

Reversal zones are formed by the banks and other big traders placing huge buy and sell
positions. These zones are much larger when compared to the much smaller positions they
place to create continuation zones.

At the end of the day, don’t get too caught up on which type of zone you’re trading.

Starting out, your goal is to simply gain experience finding and trading zones.

Focus on the reversal zones if you can, but don’t get obsessed. The types don’t matter as much
as whether you’re finding the right zones and drawing them correctly on the chart. That’s the
key skill you need.

Once you’ve got a handle on that, you can start filtering the zones and only trading certain
types.

Check my article, “The Two Types of Supply And Demand Zones,” for a more detailed overview
of the reversal and continuation zones.

Finding and Drawing Supply and Demand Zones:

If you want to be successful trading supply and demand, you MUST master the finding of high
probability zones and correctly drawing them on the chart.

It takes time, practice, and experience to get this right: But, I know a couple of tricks that
should make everything much easier.
We’ll start with finding the zones…

How To Find Supply And Demand Zones

Now, you’re going to have trouble finding supply and demand zones. I know, I know… that’s
probably not what you wanted to hear. But, stay with me, because I know a method you can
use to make finding zones much easier.

Supply and demand zones are formed by the banks buying and selling large quantities of
currency, right?

Well, what does that look like on a price chart?

Typically: a sharp rise, or a sharp decline, appears in price.

So, to find supply and demand zones look for sharp rises and declines in price.

These tell-tale signs reveal the banks are buying or selling a large amount of currency, which
means a massive build of supply or demand must exist at the source of the rise or decline.

Let’s take a look…

Look at the rises on the chart above… see how sharp they are?

These rises occur when a huge imbalance exists between supply and demand. Demand is
outweighing supply in this case.

But what causes the imbalance?

Why has price suddenly shot higher?

Because the banks have decided to enter a large buy position!

They’ve decided to take one of three actions: place buy trades, close sell trades, or take profits
off sell trades. Those actions ALL require the banks to buy. Now, we don’t know which action
correlates to each rise (at least not yet), but we know those are the three possible reasons
behind every demand forming.
To locate Demand Zones, then, look for sharp rises…

These reveal the banks have decided to take some action in the market, like place buy trades,
which means price has a high probability of reversing once it returns to the source of the rise.

This is the demand zone.

And with the zones marked, this is how it looks…

Right away, you can see how almost all the zones resulted in price reversing or at least caused
a reaction of some sort.

Even when there wasn’t a large reversal, price still moved away from the zone. That gives you
some idea of how accurate the zones are at predicting when and where price could reverse.

Also, notice how the zones are drawn from the base?

This is the point where demand exceeded supply and price shot up.

When it comes to drawing demand zones, which we’ll go through in a minute,we always draw
them from the base, down to the most recent swing low, to cover where the banks placed
their positions.

Let’s switch over and look at Supply Zones now…

To find supply zones we use the same process as with demand zones, only the other way
around.

We’re looking for sharp declines.

Sharp declines occur when excess supply comes into the market, which happens when the
banks sell.

If the banks sell large quantities of currency, whether to place trades, close trades or take
profits, chances are they haven’t been able to sell the full amount they need to accomplish their
entry.

This means it is likely the price will return to the same point, the supply zone, so they can get
the rest of their positions executed.

If we mark the zones on the chart, this is how it looks.

Again, almost all the zones cause some sort of price reaction. Most result in a large reversal.
But, a couple only cause minor declines, which last for two or three hours.
It will take some practice to get good at finding the right zones.
If you follow these guidelines, you will pick it up fast.

Keep in mind: Zones are formed from ALL rises and declines, sharp or not.

The sharp rises are the easiest way to find zones; but, many great zones are formed from the
non-sharp rises/declines as well.

How To Draw Supply And Demand Zones

Learning how to find the right supply and demand zones is one thing; but, what’s even more
important;what you really need to get right…

Drawing the zones on the chart.

Your entry depends on whether you’ve marked the zone properly, so you MUST get it right.

Draw the zone too big and your risk will be higher.
You must cover a larger area with the zone.

Draw the zone too small, which is probably even worse, and price may not touch the edge
before reversing. This will cause you to entirely miss the reversal and not get into a trade at all.

Luckily, drawing supply and demand zones isn’t that difficult, once you know the trick.

Here’s how to draw demand zones:

How to Draw Demand Zones

To draw a demand zone, find a sharp rise where you think a zone has formed.

This rise seems good enough.

Now you need to locate the source of the move. The source is the point where this most recent
rise originated.

The point is where the banks placed their buy positions (in this example).
If the banks still have positions left to place, they will bring the price back to this point.
We need to cover it with a zone large enough to ensure price reverses within it.

To draw this demand zone:

Open the rectangle tool from the tool menu, and

place the rectangle on the MOST RECENT SWING LOW that
formed at the source of the move.

Technically, the swing low represents where the banks placed their buy positions.

It’s the point where the market looked super bearish to everyone, meaning the banks had
thousands of willing sellers ready to take the opposite side of their buy positions.

The banks need sellers to buy from; remember, this is the key: opposing orders.
However, we can’t just mark the low; because, buying came in above as well.

So, here’s what we look for:

Leave the bottom edge of the zone on the low, and

move the top edge up to the LAST SMALL CANDLE that
formed before price shot upwards and created the first big bull candle.

If the small candle is bullish, mark it to the close.

If the small candle is bearish, draw it to the open.

If you have drawn it correctly, it should look like this.

The lower edge should sit on the most recent swing low, and the upper edge should rest on the
last small candle before the first big candle appeared – a small bull candle in this case.

Can’t figure out which small candle to draw the zone from?

Simple: draw the zone from low to the point where price took off.

If you can’t figure out which small candle from which to draw the zone because the price action
is too confusing, just draw the zone from the low to the point where the rise really takes off.

Nine times out of ten, that will suffice as a valid zone.

Your risk will probably be a little bigger, as the zone won’t be the ideal size. But, it will cover
the right price range and provide a valid trade if price reverses.

On to supply zones:

How To Draw Supply Zones

The way we draw supply zones is practically the same as demand zones.

We find the source of sharp decline:

Place a zone on the most recent swing high,

bringing it down to the last small candle
that formed before the decline.

Here’s how to do it:

First, find a big decline where you think a supply zone has formed.

As with demand zones, we always draw supply zones from the base or source of the move.

That is the point where the banks placed their sell positions.

If the banks still have positions left to enter, they will bring price back to this point to place
their remaining positions at a similar price before causing the reversal.

Once you have found the source:

Place the rectangle tool on the most recent swing high,

drag the opposite edge down to the LAST SMALL CANDLE that formed beforeprice fell
sharply and created the first big bear candle in the down move.

• If the small candle is bullish, mark it to the close.

• If the small candle is bearish, draw it to the open.

With the zone drawn, it should like this…

You can see the top of the rectangle rests on the swing high and the lower edge sits on the
open of the last small candle before price fell sharply, which was a bear candle in this example.

Again, if the price action gets too confusing and you can’t figure out which candle is the small
one: draw the zone from the high to the point where the decline really takes off!

Look for the first big candle in the decline.

That will give you a valid zone, just with a slightly bigger risk due to the increased size.

And with that, you’re all set!

How to Trade Supply and Demand Zones

As trading strategies evolve, new ways of trading them get created. Sometimes these ways
work better than the previous methods or better suit a particular style of trading.

Supply and Demand has also gone through this process, and today, there are TWO different
ways of trading the zones…

Price Action entry, and Set and Forget entry.

Each method has pros and cons, and it is possible to be successful with either.

I have made money with both in my time trading Supply and Demand.

Let’s go over each method now, so you can see how they work.

Set and Forget Entry

Popularized by Sam Seiden, the set and forget entry is the original way of trading supply and
demand. It’s the simplest way to trade the zones and is the method most gurus and sites teach.

With the set and forget method, you trade the zones using limit orders.

The idea is that by placing a limit order at the edge of the zone, when price returns, it will
execute the order and put you into the trade.
The upside being you will never miss a reversal, which happens from time to time with Supply
& Demand.
The downside being price may just blast through the zone, causing you to lose money, which
happens a lot!

Here’s a quick example, so you can see how it works:

Start by marking a zone on the chart.

Once you’ve found a zone, place a limit order at the edge CLOSEST to the current price.

If price is going to reverse from the zone, it must at least breach the closest edge, either by
spiking through or by moving in via normal price action.

With the entry placed, now put a stop loss at the opposite edge.

Remember; don’t place the stop exactly on top of the edge. Place it slightly outside the zone,
so there’s a small gap between the edge price and your stop price.

Now, just wait to see what happens…

In this case, the trade was successful: price came up, spiked the upper edge (triggering our
order), before reversing and moving lower.

It’s a great trade, in anyone’s book.

Like I said, the limit order entry is a decent way of trading supply and demand. I used it for a
long time, and the results were overall pretty great.

The problem is: It is flawed in a way the price action entry simply is not.

Sooner or later, you will get tired of this issue cropping up over and over again.

More on this in a minute.

First, let’s go over that price action entry.

Price Action Entry

This is my preferred way of trading supply and demand, and the method most pro traders
utilise.

With the price action entry, you trade the zones using price action, candlestick patterns to be
exact.

Rather than place limit orders at the edge of zones, you wait for candle patterns.

Look for pin bars or engulfing candles to form inside a zone and then enter. These price-
action candles indicate the banks are interested in making price move away.

So, the price action gives you more confirmation price will reverse.

Here’s how it works:

First, find a zone you want to trade and mark it on the chart using what we learned.
Now with the price action entry, we must wait for price to enter or touch the edge of the zone
BEFORE entering. We want to see evidence price is going to reverse in the form of
a pattern before we get in.

This way we know our trade has a better chance of being successful and making money.

A bearish engulfing pattern forms soon after price enters the zone. This is our signal to get in.
The engulfing pattern confirms the banks likely want price to reverse from the zone, so it
gives us additional confirmation a reversal is about to take place.

Note: You can use pin bars for the entry too, but in my experience, engulfs tend to work
better.

With our entry set, we place a stop above the zone, as price could still rise and reverse from
much higher inside the zone. This happens from time to time.

Now, we wait to see if it reverses.

And in this case, it does…

A few hours after the engulfing pattern appears, price reverses and exits the zone.

Now our next task is to:

Next: lower the risk by getting our stop to breakeven.
Then: take profits as price continues to drop.

Taking profits really comes down to personal preference.

Any method will do, so long as it is safe. I like to take my profits whenever price makes a new
swing: a lower low, if I am short, or a higher high if I am long. Once I see price make a new
high or low, I will move my stop to the new low, or new high if I’m short, of the swing that
caused the market to make the new higher high or lower low.

This newest swing is the point the banks entered their most recent positions, so the chances of
price breaking past this swing, are extremely low.

So, in our example, I would take profits like this…

I also use the same method to move my stop to break-even.

When I see price first make a new higher high/lower low, I will move the stop to the low/high
of the swing which was created from price making that new higher high/lower low.

That way, I reduce risk AND secure profits.

Why The Price Action Entry Is Better

I am not going to knock the set and forget entry too much, because it is a decent way of
trading supply and demand, and you can be quite successful with it. I will attest to that.

When it comes to trading the zones, you need to stick to using price action.

The problem with using limit orders is a problem we price-action traders know all too well:

Confirmation.
The limit order entry provides NO confirmation price will reverse from a zone. You will blindly
place the order at the edge and hope price reverses. This would not be a problem if all zones
worked all the time; But, that is the thing, they don’t!

Price blasts through zones frequently, usually without stopping.

With the limit order entry, you cannot avoid this.

So, you end up with a crap-ton of losing trades.

With the price action entry, however, things are different.

You must wait for a pattern to form inside or at the edge of the zone before placing a trade.
This patience confirms the banks want price to reverse. The extra confirmation allows you to
avoid zones where price just blows through.

That said, it’s not fool proof…

Zones still fail even with the right price action entry.
It still stands as a better, safer way of trading the zones.

So, the point is clear:

Stick to trading supply and demand with price action.

3 Rules for Profitability

Now you know how supply and demand works and the two ways you can trade the zones (and
which way is better). You are ready to begin using the strategy in your trading.

But wait, not so fast… there’s more…

Before you start trading Supply and Demand, there are a few key rules you need to understand
to find the right zones on the chart and trade them correctly using your amazing new entry
method.

Here’s what they are…

1: Old Zones Rarely Work,

Avoid Old Zones !

If you search for supply and demand trading online, almost every guru, expert, teacher, etc will
tell you old zones have the same probability of working as new zones, and those gurus are fine
with you losing your trades.

I am going to tell you right now, in fact, I insist, that is complete hogwash!

THE FACT IS:

It is one of the biggest lies in the supply and demand community, and if everyone would stop
and think about it for a minute, they would understand why it simply does not make sense!

As we all know, supply and demand zones are formed by the banks:
The banks need to be buying and selling with huge orders.
The banks cause the zones to form by placing a few positions.
The banks make price return to get the rest of their orders placed.
Then, and ONLY THEN, can the banks set off the reversal.

That is why price returns and reverses from the source of sharp rises and declines.

Now, here is my problem with the idea of old zones causing reversals. If the banks want price
to return to a zone, whether to place trades, close trades, or take profits, they would want it
to return quickly, relative to the timeframe they are trading.

They would NOT want to wait a long time!

Their reason for entering may change.

I mean, think about it…

If a bank bought 50 million EUR/USD, and still had 50 million to buy at the same price, would
they really wait another 3 months for price to return to the same spot!

Of course not, the whole market could have changed by then!

For one: the price action will have changed.

Second: the economic situation would also be different, and possibly not in their favour.
Plus: the orders entering the market might not be enough to fill their remaining positions.

So, it does not make sense the banks would wait a long time for price to return to a zone to get
their remaining trades placed.

Really, they would want price to return ASAP.

The quicker they get their remaining positions placed, the less chance something could happen
and change their outlook on the market: be it economically, price-action based, or something
else, like maybe a pandemic.

Don’t trade old supply and demand zones:

they just DON’T work.

You will often see price reverse from old zones, yes. But, it is not the zone causing the reversal.
It is probably some other technical factor.
It could be a:
Support & Resistance level,
big round number,
economic announcement, or
any number of other triggers.

Follow these guidelines to know when an old zone’s usefulness expires:

1. Daily zones = 90 days
2. Hourly zones = 20 days
3. Less than H1 = 1 day.

2. Always Put Your Stop Slightly Outside the Zone

You probably already know this; but, I thought I would put it in since it is a mistake I see many
new supply and demand traders make all-too often.

When you trade a zone, put your stop slightly above or below the opposite edge.

DO NOT put it on the edge itself to skimp on the risk.

It is all- too-common for price to spike through the edge of a supply or demand zone before
reversing. If you put your stop at the edge rather than leaving a slight gap, the spike will take
you out and make you miss what could be a successful trade.

You can see that happen here…

Just when it looked like price was about to reverse from this zone, price spiked through the
upper edge. Bye, bye stop loss!

To add further insult, price reversed in a big way soon after, meaning you missed out on a
great trade as well as losing money.

SO: always leave a little gap between your stop price and the edge of the zone.

How big should that gap be?

Well, it’s relative to the volatility and time-frame.
Higher Time Frames = larger gap, in pips, due to size difference.

In my experience,
15 – 20 pips should be sufficient for most zones.
Add a few pips for higher time-frame zones: think 4-hour, daily.
Remove a few for low time-frame zones: 5 minute, 15 minute, etc.

That should give you headroom to avoid any random spikes while still keeping risk low.

Another big mistruth you will hear in the supply and demand community is the idea zones have
the power to cause reversals more than once like support and resistance levels.

And again, this is not true, not even close.

Supply and demand zones are ONE TIME USE: Not two times, or three times, one time ONLY.

Once price hits a zone and reverses, that’s it!

The zone loses its power and validity.

The probability price will reverse again in the future is extremely low.

The only exception to this rule is if a zone forms at the top or bottom of a consolidation. These
zones can cause price to reverse two or three times. They show the banks are buying/selling
from similar points, so price may reverse from a zone more than once before the consolidation
ends.

However, once the consolidation is over, the zone loses all its power and probably will not
cause another reversal.

If you think about why a zone forms, It is obvious why they lose power after one touch.

Remember: the banks cause supply and demand zones to form because they cannot get all
their positions placed in one go. They have not been able to place/close all their trades or take
all their profits.

Soon after placing what they can, they bring price back to the same point, the Supply of
Demand zone, to get their remaining positions placed.

That way, they can place the trades within their position at a similar price. That allows them to
make a similar level of profit from each trade with a similar amount of risk.

With this in mind, why would the banks want price to return a zone a second or third time?

After bringing price back to get their remining trades placed a first time, why bring it back
again? They would only bring it back the first time if they knew enough orders were free to get
their remaining positions placed.

This makes it pointless to bring it back more times.

So, this idea that zones can cause multiple reversals like support and resistance levels… yeh, it’s
not the case.
Sure, price will return and reverse from the odd zone more than once, but it is not often. And
usually, it is not because the zone itself is causing the reversal; it is due to some other technical
factor that has nothing to do with Supply & Demand.

For this reason, only trade free/untouched zones.

FAQ and What to do Next

Supply and Demand is a MAJOR focus for me on this site. I have used the strategy for a long
time. It is a core component of how I trade, and view the markets.

That said, it was impossible for me to cover everything about supply and demand trading in this
one writing. So below, I have put together a list of my Supply and Demand articles for you to
add to the knowledge you have gained from this writing.
These additional articles cover all the bases of supply and demand.

You will learn:

• How to find the highest probability zones,

• Why the normal way of trading S & D (a la Sam Seiden) doesn’t work,

• The biggest mistakes to avoid,

• How to draw the zones correctly…

• AND many other important aspects of a total trading regimen.

It’s a good idea to get my book too…

This will go over the 5 key rules you need to know when trading supply and demand.

Many of the rules or beliefs traders have on how to trade Supply and Demand don’t make sense
in the real world, as I explained earlier. So, I created this book to clear them up.

These 5 rules will improve your trading, by helping you find and trade the best zones.

I’ve also left a small FAQ containing the most common questions people ask about supply and
demand at the bottom… Check it out if you have any questions about S & D – or leave a
comment if your question isn’t answered.

3 Key Facts Sam Seiden Gets Wrong About Trading Supply And Demand

While Sam Seiden gets credit for coming up with Supply and Demand, many of the ideas he
promotes about the strategy are flat out wrong and at odds with how the market really works.

In this post, I detail the 3 most important facts, and explain why they don’t make sense in the
market…

Read More

Why You Should Avoid Rally-Base-Rally/Drop-Base-Drop Zones

Supply and Demand zones come in two flavours.

These two types of zones perform very different to one another due to what causes them to
form. However, most traders don’t realize this… they mistakenly assume both zones form for
the same reason.

I’ve written this article to explain why they don’t, and why you should stick to only trading one
type of zone if you want to see good results.

Read More

Profit Taking Zones Vs Trade Placing Zones: What’s The Difference?

On top of two types of zones, they can also form for two different reasons: either the banks
placing trades, or taking profits off trades. Each type of zone has its own quirks and
characteristics which, if you know, can help you trade them and make fewer mistakes

To learn what these are, check out my profit-taking zones vs trading placing zone post.

Read More

3 Mistakes That’ll Destroy Your Supply And Demand Trading

In the case of supply and demand, there are 3 key mistakes traders make over and over again
that you MUST avoid to become successful. My post below details what these mistakes are, why
traders make them (and it’s not all their fault in some cases), and most importantly… What you
can do to avoid them yourself.

Check it out below if you’re interested.

Read More

Don’t Make This Mistake Drawing Supply And Demand Zones

Drawing a zone correctly is the single biggest thing to get right in supply and demand trading,
but many traders make a simple mistake that causes them to draw the zone the wrong
way…They don’t include the nearby points where price reversed.

When you fail to incorporate the nearby rises or declines when drawing the zone, you end up
missing trades that otherwise would have been successful.

To avoid this, make sure you read my post below to draw the zones correctly.
Read More

Frequently Asked Questions About Supply And Demand Trading

Q. How long will it take to get good at finding and drawing the zones?

A. If you practice, it shouldn’t take too long.

It’s best to spend some time finding and drawing the zones yourself. By going back and
finding/marking the zones you’ll start to get a sense of how to draw them and what the good
ones look like. Over time, you’ll get better and better until eventually you’ll know exactly what
they look like and how to draw the properly.

Q. Can a zone be used more than once, like support and resistance?

A. No, supply and demand zones are a one-time use.

Sometimes you’ll see price reverse from a zone after it’s been touched, but these zones typically
form at the top and bottom of consolidations, so are okay to trade. For all other zones though,
only take the trade the first time price returns to a zone.

Q. Is supply and demand trading profitable?

A. It is if you learn from the right places.

Most supply and demand gurus don’t really understand how the zones work, so if you learn
from them, you’ll probably lose money or you won’t be very successful.

If you learn from the people who actually use them in their own trading you should have a
decent chance.

Thank-you for your attention,

PAN

Post navigation
3 Mistakes That’ll Destroy Your Supply And Demand Trading

14 Comments / Blog, Related Posts, S & D Guides / By Admin / January 10, 2020

What better way to start the new year than with a post about mistakes.

Making mistakes is a part of trading, a part of life even. And there’s a whole bunch of them you
can (and will) make trading supply and demand.

Many of these will be small things, like entering with the wrong signal or trading the wrong
zone. These will cause the odd loss from time to time, but nothing too damaging. However,
there are other, much bigger, mistakes that can do real damage to your account, and that must
be avoided at all costs.

We’re going to look at the 3 biggest of these today.

I’m going show to you what they are, why traders make them, and give you some advice on
how to avoid or mitigate them in your trading.

Let’s take a look.

1. Thinking Supply And Demand Is How The Whole Market Works

I’ve seen this one A LOT over the years, and it’s something I did myself when I first started
trading S & D.
Supply and demand is a trading strategy, but more than that, it’s a theory on how the forex
market works. The strategy tells us how and why things happen in the market, which we
automatically accept as being true by using the strategy – we wouldn’t trade it if we didn’t think
it works.

The theory is basically summed up as:

The banks cause zones to form by placing trades, taking profits, and closing trades. They then
make price return to these zones to get their remaining trades placed or to take the rest of their
profits off. This causes upswing and downswings to form and creates the price action we see on
our charts.

The theory makes a lot of sense, and obviously, we can see it works from the many reversals
that take place from supply and demand zones on a daily basis.

However, many people make the mistake of applying this theory to the entire market.

In other words, once they start trading S & D, they assume everything that happens is in some
way caused by a supply or demand zone.

They don’t think support & resistance levels, round numbers, or any other technical points are
behind upswings and downswings, only supply and demand zones. And if they do see a reversal
that isn’t from a zone, they pass it off as being from a zone on a different time-frame, not
anything else.

Maybe you’ve done this yourself?

It’s understandable why traders think this, and as I said, I made the same mistake myself.

I thought S & D caused every move in the market. If I saw a reversal, I assumed it was from a
zone even if one wasn’t present on that timeframe. In fact, I’d often go down in timeframe until
I found a zone that lined up with the reversal, just to prove that a zone was behind it.

What I realized later on, however, is that this isn’t true, not in the slightest.

While supply and demand zones are behind most moves, they don’t cause everything. Other
events also set off reversals. These usually form from supply and demand zones, making it
seem as though the zone was behind it when in reality it was something else.

A great example of this are big round numbers.

At first glance, this reversal looks like it was caused by the supply zone. And most supply and
demand traders would say the zone was behind the reversal because they naturally believe all
moves are caused by zones.

But take a look again…

A big round number 1.25500 and a resistance level also fall in line with the zone.

These could have also caused price to reverse, and their respective traders would believe they
are what caused the reversal, again because of what I said earlier.

So who’s right then?

What really caused this reversal?

Was it the supply zone, like the supply and demand traders believe. Or was it the big round
number or resistance level, like the people that trade them believe?

Now the honest answer is I don’t know.

I don’t know which of these technical concepts caused the reversal. There’s no way to know for
sure because none of them have any sort of statistical backing behind them; they’re simply
theories created by traders who think they understand the market.

That being said, by understanding how and when each strategy works, we can figure out which
one it is through the process of elimination.

So, let’s start with the supply zones.

In supply and demand trading, old zones don’t cause reversals because of the way the bank’s
trade. Like I’ve explained before. So if the supply zone in the image is old, we know it didn’t
cause the reversal, it must have been the big round number or the resistance level.

And as it turns out, the zone is old.

It formed 35 days before price returned, which is considered old for the 1-hour time-frame – I’ll
talk more about old zones later on. So because it’s old, we can rule this supply zone out of
being behind the reversal.

Next up is the resistance level.

Now to me, support and resistance levels aren’t a real concept in trading. By that I mean, I
believe they exist, but only as short term levels like supply and demand zones.

I don’t buy into the idea levels with multiple past touches cause price to reverse, as it just
doesn’t make any sense.

Why would the banks think it appropriate to buy from the same spot where price reversed 3 or
4 times in the past? What rational reason would they have for doing that? I’ve never been able
to think of one, so to me, support and resistance levels only exist when they have recent
touches.
As you can see, our resistance level doesn’t have that.

It has multiple touches as all levels should, but none are unbroken. They two most recent that
were unbroken (blue arrows), got broken when price shot up before the reversal began.

It has multiple touches as all levels should, but they’re from a long time ago, none are recent.
On top of that, the most recent touch was broken by a large decline at the end of last year,
which invalidated the level as having any value or significance behind it.

So the reversal probably wasn’t caused by the resistance level either, which only leaves one
more option…

The 1.25500 big round number.

Unlike the other two concepts, big round numbers do have statistical evidence backing them
up. Scientific papers have been written about their significance in multiple markets, and if you
look at Oanda’s order book, you can clearly see orders build up around big round numbers all
the time.
But why would price reverse at a big round number?

Well, because of how the banks trade, they have never have enough orders to buy or sell in
one go. They have to split their trades up and place them when enough orders are available.
They typically do this at similar prices, to replicate the effect of having their trades placed all in
one go.

This will be familiar to those of you who have read my books.

To make this process easier, the banks always try to push price to points where they know a
bunch of orders have built up. That way, they can use them to get more trades placed in one
go, lessening the amount needed later on.

And where do lots of orders build up?

At big round numbers prices.

So the reason price reverses from big round numbers is because the banks use the orders that
have built up to place trades, take profits or close trades. And the reason the reversal in our
example was most likely caused by the BRN is that it’s the only level with sufficient evidence
behind it.

Now, what am I suggesting with all this?

Do I think you should cross-examine every supply and demand zone to see whether it’s going
to cause a reversal or if it’ll be something else?

No, that would be crazy, and pretty time consuming too.

All I’m saying is that don’t assume every event, reversal, or whatever happens as a result of
your trading strategy.

Forex is a huge market, full of complicated variables that interact with one another in strange
ways. To break it down to the point where only one theory (S & D in this case) is behind
everything is a massive oversimplification that will only result in you losing money and not
knowing why.

As Einstein once said, make things as simple as possible, but not simpler.

I know it’s not easy to figure out what’s caused a reversal, so before we move on, here’s a
quick overview of what technical points cause reversals depending on where price is at.

1. Most short term reversals – reversals close to the recent price action – are caused by new
supply and demand zones, as the banks always want to get their trades placed/profits taken
quickly.

2. When a supply or demand is too old to cause a reversal, the next most likely candidate are
big round numbers. Some short term reversals are caused by big round numbers too, but it’s
impossible to determine whether it was them or a new S + D zone, so it’s better to just assume
it was a zone.
Note: Big round numbers are best viewed as zones rather than levels, kind of like S & D. Check
my VIP post to learn how to draw the zones properly and use them in your trading.

3. Support and resistance levels in their traditional form don’t exist. However, levels with at
least two unbroken recent touches can and often will cause short term reversals.

You’ll usually see this when price moves sideways after a sharp move and creates two swing
lows or highs at similar prices. After the second low or high forms, price will come back and
reverse from a similar point. A weak demand zone sometimes forms from the second high/low
too, but not always.

2. Drawing The Zones The Wrong Way

Drawing zones the right way is THE most important skill in supply and demand trading. If you
don’t know how to draw the zones properly so that they encompass the right points, you won’t
be able to enter trades correctly, and it’ll be extremely difficult for you to make consistent
money.

In itself, drawing the zones correctly isn’t difficult:

You find the source of the move the supply or demand zone has formed on, then drag a
rectangle from the beginning of the move to the most recent lowest or highest high; highest
high for supply zones, lowest low for demand zones.

So why do so many traders get it wrong then?

Well, because they don’t get taught to draw zones correctly in the first place.

Over the past 10 years or so, supply and demand has gone from being a niche strategy only
used by a few traders in forums to rivaling support and resistance trading. In fact, supply and
demand today receives almost as many google searches as support and resistance trading…

It’s good that supply and demand has become more popular – the more the merrier after all.
But one unfortunate side effect of this is it creates many guru’s who claim they know how to
trade S & D but don’t really have a clue.

I’m sure you’ve come across some of these yourself.

These gurus teach traders their interpretation of how to trade supply and demand. The problem
is because they don’t really know how to trade the zones, a lot of what they teach isn’t correct.
With the perfect example of this being the way some gurus teach traders how to draw the
zones.

Tell me, have you ever seen someone draw zones like this…

Looks pretty crazy, doesn’t it?

Believe it or not, this is how many guru’s teach traders to draw supply and demand zones.

According to them, this is the right way to draw the zones because the candle body is where
the banks bought or sold, therefore it’s the point where price will reverse upon returning to the
zone.

Now obviously, this isn’t correct.

The banks always place their trades at swing highs and lows, as that’s when the maximum
amount of opposing orders are coming into the market. So drawing the zones this way, while it
may net you the odd winner here and there, will consistently cause you to lose money and miss
trades.

The right way to draw zones is from the open of the first small candle in the rise/decline that
created the zone to the most recent highest high or lowest low; highest high for supply zones,
lowest low for demand zones.
Here’s how that looks like with a demand zones.

And here’s how it looks for supply zones.

There’s a bit of a knack to drawing the zones correctly, but if you spend a couple days on it, it
shouldn’t be too hard to pick up. My supply and demand trading guide goes into much more
detail, so check that out if you want learn more.

3. Trading Old Zones

And last, but not least, we have trading old zones.

Trading old zones is a mistake born out of misinformation.

When supply and demand was created many years ago now, the main guru was Sam Seiden.
He created the strategy using his experience working at the Chicago Mercantile Exchange and
translated it into a retail trading strategy.

Sam came up with many of the concepts now familiar to user trading S & D today.

Concepts like the idea the banks make price return to zones because they can’t get all their
trades placed at a single price comes from him, as does the fact zones form at the source of
large rises and declines as a result of the banks placing trades, which is a core component of S
& D trading.

We have to thank Sam because without him we wouldn’t have S & D trading, and this site
probably wouldn’t exist. But just because he created the strategy as we now know it, doesn’t
mean he got everything right.

And nowhere is this more evident than his insistence old zones work just as well as new zones.

While Sam hasn’t said this himself – at least from what I understand – it is heavily implied
through his teachings and how he often cites old zones as examples of successful trades.

It’s obvious why Sam thinks old zones cause reversals and why so many traders believe him. I
mean, take one look at the charts, and you’ll see price reverse at old zones all the time.

The thing is, while price looks like it reverses because of these zones, in reality, it has nothing
to do with it.

And here’s why…

Supply and demand zones form from the banks placing trades, and in some situations, taking
profits. They place their trades, a zone forms, then they make price return later on. They make
it return because they weren’t able to get all of their trades placed, due to a lack of orders
entering the market.

So far, so supply and demand 101.

The important point that no-one seems to think about is why would the banks wait weeks,
months, or even years in some cases, for price to return to a zone?

I mean, think about it…

If a bank bought some Eur/Usd, but didn’t get their entire order filled – so had to make price
return to a demand zone – are they really going to wait 3 or 4 months just for price to return?

Of course not, right?

By that time, the whole economic situation may have changed. And your reasons for entering in
the first place might not be valid anymore, making it riskier to buy again.

This is why old zones don’t cause reversals.

It doesn’t make sense for the banks to wait a long time to get their remaining trades placed.
The longer they wait, the more that changes in the markets; the sentiment changes, the
economic situation changes, and many other things change, all of which make it much riskier
for them to buy or sell again.

So I guess the next question is:

How do you determine whether a zone is old or not?

Nobody knows for sure what constitutes to an old zone or not. Like I said, most guru’s see all
zones as the same, so they don’t distinguish between them.
That being said, I do have some guidelines you can follow to determine if a zone is old or not:

1 min/5 min/15 min charts – 1 day.

30 min/1 hour/4 hour charts – 20 days.
Daily chart– 3 months.

Obviously, these won’t be accurate 100% of the time, so it’s a good idea to give it an extra
couple of days/weeks for price to reverse – depending on the timeframe, of course.

Keep in mind too that if a zone forms inside a higher timeframe zone, like a 1-hour zone inside
a daily zone, for example, the 1-hour zone falls under the same time as the daily. There’s no
difference between them because the banks will use the 1-hour zone to place their daily trades.

You can find more about old zones and their times in my rules post.

Summary

It’s impossible to not make mistakes trading supply and demand. It’s a fact of trading we all
just have to live with. That being said, I hope with this guide, you now know which of the big
ones to avoid when trading S & D, and can stay on the right track without suffering major
losses.