What are Forex Supply & Demand Zones?
Forex Supply & Demand Zones, if properly identified, show Institutional Order Flow (where the big money was at particular levels). Anything over current price represents Supply (Resistance levels), and anything below current price represents Demand (Support levels).
Supply could be considered Retail trade locations, and Demand could be considered Wholesale trade locations.
We could go on and on about this, and try to complicate the subject, but we won’t. We’re going to keep it nice and simple, because it is. This is not rocket science. You’ll see in a very short time that Supply & Demand is in fact, Super Charged Support and Resistance levels that were created by Large Institutional moves.
What Markets do we personally trade?
We primarily trade Supply & Demand in the Forex market; however, many day traders also use this method for trading Equities.
We watch the following twelve (12) Forex pairs in one profile: EUR/USD, EUR/JPY, GBP/USD, GBP/JPY, AUD/USD, AUD/JPY, USD/JPY, USD/CHF, CAD/JPY, EUR/CHF, USD/CAD, EUR/AUD. You can also trade any of the other currency pairs.
We trade Supply & Demand on the 1 hour chart. This happens to be our favorite time frame to trade. You can trade on any time frame, many day traders do.
The Psychology behind the Power of Forex Supply and Demand Zones
Now, when we look at the following charts, remember that when these zones were created they were created by large orders, which were more than likely big banks and institutions. These orders were so large that many limit orders (usually retail trader’s orders) were never filled, because price left in such a hurry. So, when price returns to our zones, you’ll typically see the price bounce off of these levels. Now isn’t that logical? Doesn’t that take the mystery out of this?
Remember, we are not just looking for the big bounce. We’re looking for the highest probability trade with substantial risk/reward ratios. We’re also looking for the highest win ratios possible. THIS IS WHY WE ADHERE TO THE FOLLOWING GUIDELINES.
We only trade Fresh Zones with proper Exit Strength, with emphasis on Risk Management
Not to worry, this is explained in detail on the next page “Fresh Zones, Exit Thrust & Risk”.
Avoid Trades where Price is Consolidating on its Way Back to a Zone
With consolidation, you’ll find a lot of retail traders playing breakout or breakdowns. Hence; trading against us.
We use RSI as a Filter to Pass on Questionable Trades
Demand Zone Trade Example
If the RSI ever drops below 35 on the way down to our demand zone, we pass on the trade. This is telling us there’s a good chance price will blow right through the zone. If the odds are against us, why would we subject ourselves to entering a trade?
Supply Zone Trade Example
If the RSI ever exceeds 65 on the way up to our supply zone, we pass on the trade. Again, high win ratios are the name of the game. We love successful winning trades.
Is using the RSI as an entry rule a fool proof strategy? No. Sometimes price will bounce off the zone for a winning trade. Sometimes price will blow through the zone for a failed trade. However, we will say that overall, the RSI has been an incredible filter for keeping us out of many failed trades.
The Time Window for Price Returning to Zones
Banks and Institutions that trade intra-day typically return to zones within 36 hours. So when trading the 1 hour time frame, if price fails to return within 36 hours, we are no longer interested in that zone. We consider the odds are against us and the zone in question becomes low probability.
Do all Forex Supply & Demand Zone trades profit by 700 pips? Of course not. However, trading with fresh zones, and having proper exit strength, along with following our guidelines, has made us quite successful.