Let me start by saying this. Price movements are not random. There is motive behind it and it does have a destination. Supply and Demand is what moves the markets and is the ONLY thing you need to trade. No indicators, no volume, nothing. My goal is to have you fully understand and agree to this statement by the end of this post.
This post is not intended to become an everlasting thread and I do not teach. I will not be explaining in detail what a Supply zone is or how to identify one. There are plenty of videos out there explaining this. I am simply going to show the steps required to properly analyze the charts from top down to pin point a high probability trading opportunity. Hopefully taking away some of the questions and confusions you may have.
A word on picking tops and bottoms. All I want to say on this really is if you are able to enter trades on the same side as the institutions, by definition you are picking tops and bottoms. So how is this a bad thing? Also, ask yourself why you need to be one of the people entering once a trend is already in motion. Who started that motion and why couldn’t you have been a part of it? You must apply the same rules to trading as you do to anything else in life. If a product is being sold for £10, you pay £10. You do not wait until it costs £12. It’s really that simple. Buy low sell high, sell high, buy low.
I have chosen a random time in history on the EUR/USD to explain what is really happening in the markets. This trade is not one I have cherry picked. It is taken from my own back testing log in which I analyzed price without knowing future outcomes.
Note - I will be charting on MT4. I do not use MT4 for trading however for showing this back test example I used “FX blue trading simulator” on the MT4 strategy tester. I highly recommend you getting this as it allows for multiple time frame back testing completely free on MT4.
Here we go.
Firstly we must use three time frames. More is too much, you will end up with too many zones clouding your judgement. Less is too few and you will end up trading into supply and demand. If like me you trade the 4hr chart, You also require the Daily and Weekly charts to prevent what is mentioned above and too help see the bigger picture.
What I have shown in the above charts is exactly what you should be doing on every single trade you take.
Plot out Weekly Supply and Demand zones.
Apply those Weekly zones onto the daily and 4hr charts. This is important. Applying higher TF zones onto your actual trading chart (4hr) helps keep your mind clear and concise aswell as showing you the fractal nature of price action (TF within TF).
Plot out Daily Supply and Demand zones.
Apply those weekly zones onto the 4hr charts.
Now lets talk about trends. Trends are a part of trading but not in the way you have been taught. Trends are an after effect of price moving between the imbalance of supply and demand. You need to keep things simple. You need to stop applying trend lines that show you when to buy and when to sell and no one can agree where trend lines should be placed. Trend lines should only be used on the chart to show signs of momentum change. Most traders lose and most traders use popular trading tools. This is not only MACD, RSI etc but also horizontal lines and Trend lines. Ask yourself. If so many people fail to make consistent profits trading with these tools, do you really believe you can apply them to charts any better? no you cant.
Forget what you have been taught. Do this instead if you actually want to see results.
- Look at the Weekly chart. Where has price come from and where is it going?
Important note - As long as you have drawn your S@D zones correctly, price will most often follow your expected source and destination.
On this Weekly chart price left Supply. So where is it going? To demand. Is that a down? Yes. So we only want to be looking to short the market.
It is that simple. Why look at the chart in terms of fancy trends and get completely lost in higher highs, lower lows, lower highs and higher lows when we just determined we only want to sell based on two zones on the weekly chart. Keep things simple.
Price is about half way from Supply to demand. As long we we have our zones correct on the weekly, we do not expect price to turn and rally. We fully expect price to reach our demand zone. Nothing is certain in trading. There will be losses.
Look at the Daily chart.
We only ever want to enter trades when price is at supply or demand. Not in between. We know that we only want to sell from looking at the weekly chart. We see three Supply zones (Level on level). We would be looking to enter at these supply zones. But which one. Here is something you will just need to accept. It could be any of these supply zones or none at all. If you enter on the first and price goes through it, well then so be it. Enter on the next. Each time price pushes through one of these supply zones, more and more buy orders will get filled. This means that the higher level supply zones are higher probability trades however I fully encourage you to take the first one in case price does fall from it and you never had a trade open. Price might not reach any of these supply zones. This is either because price fell instead from a lower TF Supply zone that happens to have enough sell orders, or the institutions sold heavily and pushed down price before the zone was hit.
Check the Risk reward ratio. The daily chart shows us that price is just below supply and there is a long way down before we hit demand. The swing lows to the left are not demand zones. I will not fully explain why but simply put. If you drew a box around all those swing lows to the left (see chart below) and see how much trading must have been going on there… it was a lot. Any orders were likely filled so we do not expect price to turn at these swing lows. In other words these swing lows are not fresh. However we do expect some demand to temporarily halt price. Remember that the Weekly chart zones hold more weight and will overcome lower TF zones. We have analyzed the weekly and we know our destination. We have plenty of room below so this is a fine trading opportunity if price reaches daily supply.
Check trend momentum on the 4hr chart. As explained above, people use trend lines to determine which way to trade. I use them to tell me when there is weakness. We see there has been a break of trend which shows weakness. What are we looking to happen? We want price to rally up to our supply zone as it did here so seeing this break of trend is a good thing. It tells us in advance that price is about to retrace back to supply giving us an opportunity.
Enter the trade if price reaches Supply. If it does not , forget about it, there will be other opportunities. Never chase price!
Where to enter and where to place the SL and TP?
You need to keep things mechanical.
- Enter when price hits the zone. Set SL a few pips away from the zone.
A few things to point out here. With S@D trading we only want to be trading fresh levels. These are levels in which price has not be at previously. The more times price has been at a zone, the more orders were filled and the weaker the zone becomes resulting in lower probability trades.
Regarding the entry when price hits the zone. You may wish to enter a few pips before. Why? Well this is where it gets interesting. What do you think happens when you start picking good levels to trade? You have found yourself trading against the herd but more importantly, with the institutions. You are now on the right side What do the institutions have that you don’t? big money. You are now competing with the banks . You may find two things happen. Either you cannot get your order filled in the zone (unlikely but possible) or price wont reach the zone because the Institutions are heavily trading and moved price before it even reached there. So entering a few pips before might be something you wish to do.
The TP level depends on how you wish to trade. As shown in this 4 hr chart above you could just exit about 85% of the way to the previous low wish a nice 3:1 RR. However if you are more aggressive, knowing that you expect price to ultimately reach weekly demand and you cant see any daily demand getting in the way you may wish to set your TP at 80-85% the distance to this level instead. Taking partial profits at the previous low and letting the rest run is also possible.That is essentially how to trade S@D. Applying these steps religiously and mechanically with practice should yield good results.
Lets check what happens in this trade.
Its nice when confluence pops its head up. Often but not always price will move roughly the same distance as the previous swing. We can project the previous swing to this trade and it alligns with the weekly demand zone. Some nice confluence.
We see on the 4hr chart that price has begun to reach some demand from the left swing lows. I will show you this once the trade is over.
I have drawn in some 4hr supply zones. Remember that we expect pull backs on the way down to weekly demand. Its just how price moves. We are in the trade already so this is purely to observe how price moves to and from supply and demand. It’s 100% supply and demand imbalance. Price moving from filled orders to unfilled orders. Nothing more nothing less.
Price reaches the target for a 8:1 RR. We can see how price fell from the 4hr supply zone. These zones are real, they work and don’t let anyone tell you otherwise. The chart is not voodoo. It moves for a reason and you need nothing more than these candles to show everthing you need to know. Delete those MACD’s and Moving averages asap.
We see by looking on the daily TF exactly why price on the 4hr kept running into temporary demand. Look left. I don’t think anybody in their right mind can say price moves randomly once they understand and can see supply and demand in action.
Now that price has reach Weekly Demand we no longer want to look for selling opportunities.
Here are the new weekly zones in which we would would apply the same steps to in order to find further high probability trades.
One last thing to note. There are different types of trades. The one we took was where price was already in motion. It had already left supply and on its way to demand. In that situation we only needed to use the trend momentum to detect weakness and wait for price to hit supply on a lower TF. In this situation price is at demand and could actually push through and keep dropping. So we need to be more thorough with the trend momentum lines on the daily chart. Only when we see clear momentum to the upside would we look to buy on 4hr demand zones. The reason for this is that price does not tend to just hit weekly demand and shoot off. It will likely go into a range for a while before rallying so buying and expecting an instant rally is foolish. On a lower TF price may still drop further into the weekly demand zone. We do not know how far so until we see a change in momentum the power still lies with the bears. And of course there is a chance price pushes through demand and continues down. Its all probability in the end.