SUPPLY AND DEMAND CONCEPT
1. As a general rule, when supply exceeds demand, prices fall and when demand
exceeds supply, prices rise. In forex, supply & demand is majorly controlled by big
wholesalers like banks and corporations of the market in order to set current price.
2. Tip: Supply / Demand concept for trading sets little SL as compared to TP.
3. Supply Zone. It is created when due to high prices demand reduces and
supply increases. Due to this increased supply, Support Zone is created.
4. Demand Zone. It is created when due to low prices demand increases. Due to
this increased demand, Demand Zone is created.
Creation of Demand Zone
5. Demand level / zone can be created when;
(a) In a bullish trend market goes a bit bearish with min. 3 candles (called
base) / with a single wick and then again goes bullish. If base comprises of
large no. of candles, only last 5 candles are considered. As a thumb rule,
smaller base is stronger than larger one OR
(b) Market goes bullish by rising from a range.
6. Tip: Due to these multiple chances given above, we cannot ascertain in 1 st
instance that Supply / Demand level has been created. However, when market would
clearly define Supply / Demand level by making a trend then it would be marked.
7. The higher end of wick from where market had gone bullish would be marked
as demand zone. At this first level, trade is not taken.
8. Entry for Buy Trade. When market would retest this level, buy trade would be
taken. In intra-day trades, SL would be set beyond nearest lowest wick while TP
would be set below nearest highest wick.
Demand Zone for Case (a)
Start of Demand Zone
Buy trade point
Demand Zone for Case (b)
TP
Demand level
Entry Point
SL
9. If supply / demand zones are correctly drawn, they are very strong zones. They
are retested twice / thrice and do not break easily so trade at these zones is very
predictable and safe especially in TF 1H and above.
10. Movement of market immediately after forming Supply / Demand zone with
large sized candles makes the respective zone strong.
Retracing of Market (How Supply / Demand Zones are created?)
11. In the chart shown below, at the starting point of Demand Zone, 1000 buy
orders were left by Smart Money, so in order to take those orders market retraced
back and at that very point we would place buy order.
12. Whereas, at the starting point of Supply Zone, 1500 sell orders were left by
Smart Money, so in order to take those sell orders Smart Money retraced back while
touching demand zone and at that very point we would place sell order.
Market is retracing back to pick pending 1500 sell orders
Market is retracing back to pick pending 1000 buy
orders
Strength of Supply / Demand Level
13. It depends on following factors;
(a) Supply / Demand levels in larger time-frame say 1 H & above, would be
stronger than in shorter TF
(b) The more fastly market moves out of supply / demand zone, the more
stronger Supply / Demand levels would be created
Sessions for Making Supply / Demand Levels
14. In NY session (PST 1700 hr - 2100 hr) market moves with more volatility hence
we use Supply / Demand concept in it.
15. It is also used in Asian session (near to Fajr time as per PST)
16. Tip: In UK session, USD does not give large moves.
Difference b/w “Supply / Demand” and “Support / Resistance” Concept
17. In support / resistance, market may / may not leave after going in opposite
trend while in Supply / Demand scenario it has to.
18. In support / resistance, trader cannot determine how much pips market would
go in uptrend/ downtrend respectively. However, in Supply / Demand zones, trader
can determine how much pips market would go in uptrend / downtrend. In the chart
below, support / resistance have been shown but they do not depict Supply / Demand
levels.
Resistance
Support
19. Institutional Move. A move that occurs because of news.
Assignment. Draw Supply / Demand levels
Types of Supply and Demand
Demand Zone
Rally Base Rally (Trend Continuation).
(a) Rally Rally represents that price started from a lower point but due to increase
in demand, it closed at a higher point.
(b) Base. For a certain time, market halted and remained in consolidation. This is
our Demand Zone.
Drop Base Rally
(a) Drop. Price opened at a higher point but due to excessive supply, price
dropped and closed at a lower point.
(c) Base. For a certain time, market halted and remained in consolidation. This is
our Demand Zone.
(b)
Supply Zone
Drop Base Drop (Trend Continuation)
(a) Drop. Price opened at a higher point but due to excessive supply, price
dropped and closed at a lower point.
(b) Base. For a certain time, market halted and remained in consolidation. This is
our Supply Zone.
(d)
(c)
Tip: For Demand Zone, the last word should be Rally.
Rally Base Drop
(e) Rally Rally represents that price started from a lower point but due to increase
in demand, it closed at a higher point.
(d) Base. For a certain time, market halted and remained in consolidation. This is
our Supply Zone.
Tip: For Supply Zone, the last word should be Drop.
In diag below;
Top two are Trend Continuation Supply & Demand
Bottom two are Trend Reversal Supply & Demand
Supply Zone Demand Zone
Supply Zone
Demand Zone
Conditions for Formation of Supply / Demand Zone
a) Base formation
b) Zone should comprise of minimum 3 candles (applicable at all TF). Any zone
bearing candels less than 3 is a fake zone which may be created when low vol.
Are in market / no session is open.
c) Powerful Move from Base - Market should go far from the Base (instituiional
Move)
Drawing Conditions
If zone is small - Only l;ast candle is considered
If zone is big - last 5 candles would be considered. However, it must be noted that
zone must not be very big
Tip. Shorter the zone, more stronger it would be.