My big problem with supply demand - maybe supply demand people can help

Beginner Questions
1

Ok, supply and demand, its helpful, but my biggest problem I recognise is that I keep on trading against the trend on many occasions. The reason is I am looking for reversals. The supply/demand levels I expect will give a bounce, but against the overall trend direction.

For example, if the trend direction is down for the day. Naturally, the price action will hit areas of ‘demand’ and not bouncing up into supply because the trend is DOWN. So I will be constantly skimming off the demand areas against the main flow. I am not finding areas of supply because the price action heads down, and the areas of supply have already been breached.

On the other side, on an uptrend will constantly hit supply areas, where I will short, whereas I will not see demand areas, as they have already been penetrated.

Of course, in side trends, s/d is good. I’ll illustrate below where the red lines are shorts off supply areas and green lines longs off demand areas. As you can see, its the circled trades that i should be taking where I think simple s/d areas lets me down.

Let me have some thoughts please!

2

hi golden.

today i’ve used this indicator:
h tp://dl.dropbox.com/u/6300281/fx/Supporto_%26_Resistenza_Barry.mq4

it’s good on 15 min chart

obviusly you have to keep in mind what is the major andament (bearish or bullish) and watching at support and resistence you can understand when they are broken.

try if you like it

3

the Barry indicator only automates the drawing of [I][/I][B]possible[/B] S/D static levels… so it saves a couple of minutes

the problem is to know how to trade around these areas…

4

I think your problem is [B]patience[/B]

do not try to guess tops or bottoms… you should just follow the price

S/D areas are only as a guide to look for PA

actually institutional traders will look to breach those S/D lines that we retailers love to draw

so what is left to us is to wait for PA to confirm that a S/D is valid…

In the image I can see you have the same number of opportunities to sell as well as to buy…so I don’t know what you mean with [I]“I am not finding areas of supply because the price action heads down”[/I]

5

Hey golden, as someone has pointed out, S/D lines for trading against the trend is commonly breached. And in the big scheme of things, if there is a downtrend, it means its heading down. Whether or not there is a particular retracement at a specific s/d level is negligible, because it is NOT ALWAYS THERE. If 100% of the time there is a retracement, then your strategy is good. But because its not, everytime you trade against the trend, chances are you will get burned unless you find a very very significant S/D level (so your chances of failing is less likely). I used to try and trade against the trend like you hunting for reversals, but I have found it much more profitable to use the retracements as a way to re-enter the existing trend at a better price (it tends to travel farther for more pips too).

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6

Golden the trades where you have circled you are entering late. You should enter AT the level. not after confirmation or waiting. Yes not all levels have the expected amount of upshot, but no one in any system can guarantee how much the market will give them. I know I can find price reactions. I have no idea how much, but price usually moves my way. It may then dive back down but there is profitability. Actually I am doing my weekly analysis for all my currencies and I have found a great example of being able to hit a level that is WITH the trend. If you consider how you drew your drawings, each and every trade at the supply demand levels in every situation would have been profitable IF and ONLY IF you would have entered exactly at the level. This is where it comes down to confidence in your levels. I knew that everyone would keep being bearish on fiber on Monday, i had my trade in my thread from the weekend.

So here is a 4H chart of Eur/Usd. it has bounced off the demand level from Monday and moved up about 440 pips. (i wish i held lol) Anyway. So the 200 EMA shows the current trend, which is down. So you have this supply level here that the retracement will make contact with in the same direction as the trend. Yes it is absolutely possible to trade S/D with the trend. The level i have included above is classic rally base drop. in the overall picture of a down trend, and significantly far away from a longer term demand level.

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7

Well said jwl, I will add that retracements are excellent points for pyramiding in the trend direction. Also some treat s/r lines as absolute, they are not, they fail under various market conditions. That is why we have stops :5:

The Ever Observant VIPER

8

ID Supply and Demand Areas consider Rally Base Drop (Supply) and Drop Base Rally (Demand). On A daily chart these areas indicate where price action is showing you an imbalance exists between Buyers and Sellers.
Trim this down to a Pivot Low or Pivot High on a 4hr or 8hr chart. If this Pivot High or Pivot Low candle is in the liquidity period depending upon the currency pair ie Europe opening, US opening, Asian opening then consider this candle as the Candle In Control.
What you have identified above is a Price Range (CIC) where there is Buyer vs Seller imbalance at a time when there is liquidity thus volume. Depending upon the direction of the trade Buy or Sell the first pullback into that CIC.
Don’t forget your trade entry and exit rules regarding News, number of whiskeys consumed at start of day etc.

9

supply & demand is the same as support resistance right?:confused:

10

Essentially yes. Marking out the zone gives you a price range.

11

Here goes my cryptic and total oversimplication… hope it helps:

Price moves to size. Price moves from an area of size on a small time frame, to an “equivilent” area of size on that same small time frame. it will bounce between these until the area with “smaller size” is fully filled by various market participants…then it will move on to another area of size…which it will reverse at…and move back to an area of equivelent size.

It does this forever. this, in fact, is exactly how the mechanics of the market operate…by definition of a auction based, free market. (such as our forex and nearly all other other capital markets)

but not all size is equal size.

Some size…as illustrated on a 1 minute time frame by a quick drop in price…a sudden stall…and quick reversal, is not very significant in nearly all cases. try to get more than 2 - 5 pips, and sup/dem theory and analysis alone on that 1 min chart will not help you

other size… as illustrated on a daily time frame by a quick drop in price… a sudden stall, and a quick reversal, is very significant in nearly all cases. try to get 50 - 1000 pips at least, otherwise, you are diminishing the opportunity available.

Funny thing about size though… when price drops down many pips and then finds significant size on a daily time frame, it tends (always i’d say) to move back up to where it will find size again, generally at least 50% …and often about 100% of the way back from where it last left significant size.

and on it’s way from signifigant daily level demand size, up to significant daily level supply size, it tends (lots of the time) to plow right through supply levels found on lesser time frames during the previous drop down to the daily demand from which it just turned up from.

Particularly the smaller time frame supply levels closest to that daily demand level.

For you see, professionals buy low, and sell high. amatures do the opposite…and lose of course.

The lower price drops relative to where it last stalled at…the fewer and fewer professionals are going to be interested in selling. And conversely, the more and more will be looking forward to buying when this market is on “sale”

And we all should know who went short at the tick low of a 1000 pip uptrend…thats right, a retail guy (probably figured he was just “following the trend, and selling the new breakout of this monster strong downswing”). And we all should know who was taking the opposite side of his trade and bought that lot he sold at the pip low of a 1000 pip uptrend…thats right…someone who is absolutely a master at buying at the right time… IE: a professional (and probably one that really swings some size)

if the problem is your supply or demand zones are being cut through like a hot knife though butter… maybe you are ignoring whether price is moving from demand to supply…or supply to demand, on a longer (daily, weekly, or even monthly) time frame

If the problem is your market is not pulling back up to trigger your supply or demand zones… congratulations! you found a very strong trending market… if you could hold on to those pips you arn’t making…you’ll be rich in no time. This problem is equally simple to fix. just sell or buy as the soon-to-move-fast-in-your-direction market is not yet moving in your direction.

Where is that you ask? hmm…lemme pull up a daily chart…and see where price topped out before it started this gut wrenching, bank account exploding, trending-so-hard-down-there-are-no-pullbacks move. Oh right, kinda as it came right in to a daily supply level that was established however long ago…and was waiting for that pullback ever since.

Jay

12

Sounds very complicated, what is size? :63::63::63

13

Perfect explination.

14

Size = a comparatively large block of buy or sell orders.

this is how a market works. if someone wants to sell 100,000 lots of Euro/USD at 1.400, and someone else wants to buy 90,000 lots of euro/usd at 1.3970…and everyone else trading is buying or selling no more than 100 lots…most of whom are not even buying or selling 1 full lot (like most retail traders)… price will get pushed around by the little guys between the price of 1.3970, and 1.4000. price will play ping poing between these two levels. it will not break up, or down, until one of these large blocks is completely filled…and since traders who trade such large size dont chase the market…they just fill a little bit at a time, as price is pushed into them… it can take more than 1 or 2 retracements for that order to be consumed by the market, considering its the LITTLE GUY who is actally pushing prices (well, little to medium… the largest orders…the biggest size…doesn’t ever chase a move)

And until one of those two massive orders is fully filled by other market participants… price will NEVER move 1 pip higher than 1.4000, nor even 1 pip lower than 1.3970. because that is how a market works. price will not move above or below a level, until the very last lot or contract or share or whatever is sold or bought…and there finally no others who wish to sell or buy at that level…then, price moves up 1 pip or down 1 pip to the next level where there ARE orders available.

As long as an order has contracts that remain unfilled, the market will NEVER move past it.

So, since it has an easier time absorb a 10 lot order than a 90,000 lot order, it cuts through the smaller orders…until it finds a huge order. then it turns around…that is, untill it hits another huge order…then back the other way again.

Price…moves to size. always. period.

Jay

P.S. Just in case anyone actually doesn’t know. its always surprising to me how many folks know how to read a stochastic oscillator (sounds like a made up word…nevermind tool), but don’t realize that the market is NOT actually primarily used for directional speculation, or even consider that for EVERY buyer… there MUST be a seller…so how does price actually move up or down? Learn how a market works and how the various players work within it…and the rest is MUCH easier.

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15

Thanks eremarket! Great insight!

16

eremarket, thats a good explanation, but still on that massive drop, the only way to trade it was to be at the very top and short. If you missed that one, you would be looking constantly for it to hit demand levels all the way down - trading against the trend. If you look at how many supposed demand levels it flew through, if you were strictly adhering to s/d, your win/loss ratio would be poor.

ie: if you shorted at the very top, and took out 100 pips - thats a reasonably big chunk, and you were anticipating longs on the demand levels - losing 25 pips per time, at the end of the move, you would end up with 1 win and about 3 losses, so your overall wins would be low. Is there a way using s/d that you can figure out that these demand levels are going to be chopped?

17

Here is method i use to “chase trades.” Yes you can take the S/D levels opposing your major level movement as a short term trade or scalp. But if you want to look to get in on that long term train ride find an opposing ‘minor’ level and use the retracement its going to create to enter. Remember to look at the big picture, its one of the top 3 elements to using supply and demand properly (according to sam seiden). So lets use the chart i already posted. So you see the 4 hour supply level that is right above price as it has left the daily level. So you could short that level for the price reaction which I am probably going to do. But you can also get long after you see its going to turn back towards the supply level above. So you can use the levels in 2 ways and they are not mutually exclusive. You know the minor levels cause a reaction in the opposing direction of price. Well either take the reaction trade or use the reaction to get long at a better price. The S/D is just a tool to find levels where price will react. How you choose to deploy your trade knowing that information is up to you.

18

Golden, on a daily chart of EUR/USD, i saw approx 5 levels on the way down that I would have considered “demand levels”

Of those 5 levels…4 had seen price retrace into them previously (and all of them held very well for that initial first retracement)

The 5th level held perfectly. As I see it…every single one had a positive bounce generated off of it the first time it was retraced into

Now, some of those levels overlapped each other a bit… which is further reason to suspect that they won’t be as strong anymore. stacked is fine…overlapping…not so fine.

you can’t just look at every turning point at all times and say “there…were good, that’s a level worth trading”… you have to make a careful determination based on other concepts to understand if there will be demand or supply actually at the level…

bit i will add this: Check out a MONTHLY chart of EUR/USD…it came into monthly supply about6 months ago…and had not dropped down to size yet…which would be the closest MONTHLY demand level. wanna know where the top of that monthly demand level is? about 1.3500…almost to the pip.

so: price hit monthly supply, price action on monthly shows stalling, but had not yet dropped into monthly demand. All daily levels between monthly demand and where price was before the drop have seen price drop into them at least once…consuming any demand… classical technical analysis shows lower highs and lower lows on a daily chart, and classical tech analysis also says the longer a period of ranging…the stronger and faster the break out.

Add it all up, and this move was actually predictable. I will admit i didn’t take it, and hurt myself once or twice fading the move… but i saw something in the chart i had not seen before…and that was I was confused each day as to where price would likely bounce up from, so after 2 losses, i quit going long until this recent demand level… at which going long the E/U was my most profitable trading this last week.

And seeing that demand levels were stacking up on daily, and 4 hr chart…and each being used… and fresh demand far below… helped me catch a killer drop on crude oil on friday. Crude had same problem: no fresh demand levels…and ranging for a while…moving up a bit tighter, but needing to fall to fresh monthly demand. Not sure it this drop will continue…but i’ll probably be betting on it this week.

supply demand level trading, like every discretionary form of trading, can be both extremely powerful, and extremely neuanced. The devil IS in the details. I learned something too here. I did NOT expect the drop…but i was very unsure about the quality of the levels as price dropped. I also nailed that crude short. Now…i know at least one way that a price chart looks before a big drop. So I add this to my bag of tricks, and wait for more opportunities.

My point here is there is a LOT to learn, and it will likely take a year or two to gain even a basic level of mastery. I’m still learning all the time. Even to be proficient, you’ll have to watch price every day for about 6 months to a year before you can probably expect to take profits. Always ask yourself “why didn’t this work? what happened that where i thought buy or sell orders were…that they wernt?”

Jay

19

do you have a screenshot?
supply demand is a new concept to me but,
as I understand it, supply is nothing else than resistance and demand is support,
if you see the price bounce from a level on the chart several times you can draw a line,
in general, where price has bounced or touched most times is the strongest area,
you begin drawing the line from the wick,
and I see someone also draw another line from the close,
or body of the candle and calls the space in between supply demand zone,
support resistance zone might be something else or same? which concerns,
areas where price has been going sideways for a long time,
this creates a lot of support resistance or supply demand if you whish in that area,
in general I would like price to have atleast touched the area 3 times before I would give it any credit.
2 times touch = weak
3 times touch =valid line
4 times touch = strong line
5 times touch and beyond = very strong line

a support resistance or supply demand zone change when breached,
in other words if a supply zone is breached, it becomes a demand zone,

it’s tough for the price decline through a demand zone but if it succeed
the area is not a demand zone anymore, it has now beccome a supply zone
and price will have a hard time rising to new heights through it,
overlapping is usual to happend when the market change momentum between the bulls and bears,
when the momentum is high to the downside we can sometimes see a lower touch,
and then the bulls get momentum and we see a touch that don’t go so far down,
the best way is to draw the line where price has touched most times,

20

Ya… supply is not “resistance” by the classical definition. resistance is something that occurs on a chart. supply, on the other hand, is an area of the market that has a large cluster of sell orders. Yes, sell orders will act as resistance of course…
but a large institutional order of supply will, over time, be consumed by the market.

This is the reality of a market. I realy don’t know why book authors put stuff in their books that has no direct connection to the way a market actually works.

The reality is a quick, fast drop into an area that has not seen a price reach it since a breakout passed through it last…and then a subsequent fast turn indicates a level of buying interest…AKA demand.

It is MORE LIKELY that there will be unfilled orders at this level the NEXT time price gets there…but since every time price reaches a level, some of that institutional demand is absorbed. once it’s all gone, that level won’t hold price up anymore.

So, i like to trade the first retracement into an area where price recently turned for the first time from a breakout.

Maybe i’m just in the minority…but the more times price touches a level, I find, the LESS LIKELY it is to hold. Makes more sense this way anyway…doesn’t it? I mean…every price level will run out of buy or sell orders eventually, and the more times price reaches those levels…the more orders are filled…and the less remain.

So, I actually ONLY trade levels that have been touched once, MAYBE twice.

After all, a “double bottom” isn’t just a pattern on a chart. it is an area that…after the FIRST bottom found sizable demand that outpaced supply…it rose. Then…as it sold off again…it came back to the same area… where that sizeable demand still has some left. Plus a TINY bit more…in the form of MY order

Jay

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