Supply and demand is simply sell orders and buy orders. Supply is always found above demand just as demand is always found below supply. To trade supply and demand successfully one has to have a little understanding of Elliott waves, trend lines and engulfing patterns. Typical terms one hears in SD is zones, these are usually outlined where a trader believes supply will be found or demand. Also order imbalance which again is where we suspect price left orders behind, price will return to this area. Structures, structures are the waves going up or down, they are created by profit taking and once price leaves a structure there is a high chance one can still find orders within them. Base of legs, the formation of orders that sent price higher or lower, also know as our lows or the highs. Plateaus areas where price cannot break above or below yet price moves within a defined area till it breaks out or down. Finally supply becomes demand or demand becomes supply, this is where we once had supply or demand but price breaks through flipping our orders. SD is not a topic that can be learnt in a week nor a month, it takes alot of screen time and understanding of the idea of buy and sell orders. Many traders will say this is not supply and demand how I chart, however it is following the orders in what we see in the bars and waves.
What engulfers tell us about price action is in this case price found buyers and attempted to move higher. When those buy orders started to run out and we saw more sell orders appear our nearest up bar is engulfed by a down bar - price closes lower. Simply because the buy orders were exhausted making price move lower to find the next pocket of buyers.
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kate,
Great post! TX! Sometimes a slighty different way of explaining things really clarifies it!
FR&L
Ill expand the engulfer idea alittle more to see how we create zones from the point where price engulfed to the bottom of the engulfer or to the low or high point - this becomes our zone. Stops are at the top of supply and bottom of demand plus add your spread and 5 pips. There is no need to move stops if the zone fails it means we had no orders there to begin with…but hopefully we count on the zone holding and going in the direction we want.
Bar engulfers is a fairly simple concept, now we are going to expand that concept to structures they are the same idea. As price corrects and rises in this case it means price found buyers at that level and just like our bar concept when price crosses below the level where we found buyers it means the sell orders consumed all buy orders available and is heading further down to find more buyers. In falling price action our supply is the structures. The top of the structure should hold meaning price does not cross above it and any demand formed in the corrective waves will be broken by price action as it falls out of the structure. If you try and trade against a structure you are most likely to fail. If you trade in the direction price fell out of the structure there is a high probability you will have a successful trade
Im going to change the look of the structures alittle. As structures climb they make a high and low then higher high and higher low - we do not expect price to break our higher low when moving up but when it does the result will be a lower high - this is how momentum turns. Same with falling price action, lower highs equal lower lows and we do not expect price to cross above our lower high, but when it does - momentum switches. All the structures making a higher low are bullish and all the structures making a lower low are bearish - we do not anticipate…we play what we see till it no longer meets our criteria for going down or going up.
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One more time structures, we exit a structure in the same direction we entered it. Structures give us direction and if we know direction then we know if we should play supply or demand. In this case price is falling = lower highs lower lows which tells us our structures are bearish we want to short at supply and keep shorting till price changes momentum. Now I showed a very basic way of finding supply and demand through engulfers but there are a few other places to find orders. Ill look at this next.
The smaller idea to the left is overlapping wicks - when we see overlapping wicks our first thought should be ok price found buyers in the first bar and closed higher but our second bar price closes lower showing us there is no buyers left at that level but price will return to this level to test it. Overlapping wicks can make for short term targets or entries. The second idea to the right is supply becomes demand becomes supply…why…simply because the premise of the run up from that base was we had buyers when price came down to test the buyers it fell right through - this tells us there are no buyers at this level but as we know price will test it…and to any who study supply and demand yes we cut through legs to find the failed buy level or sell level. There was not enough room on this chart to discuss plateaus…so next chart later today.
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Ill put this chart up out of interest. Yen has a demand turned supply zone above price and is trying to form a second supply, we will know at end of the hour if the second supply formed. Price has formed a lower high and a lower low. Now if price crosses above our supply areas it will flip the orders to buys and price will be bullish but right now it is bearish. The charts I placed earlier are about reading price action to determine which we want to trade supply or demand.
Hi kate, thanks for making this thread. I was lucky to find this supply and demand thread.
No worries hope it helps
Plateaus basically is where the institutes load orders, their orders are much larger and require more time to fill, so we see this sort of sideways trading - which we know to be orders being filled. They are great examples of orders being flipped. where we had buy or sell orders on the left, depending if price action is up or down, when price leaves the plateau - our orders flip now we are playing sell or buy orders on the right side of the plateau. Supply becomes demand becomes supply or demand becomes supply becomes demand…and again this is why we cut through price legs to play the appropriate level.
I use Jeffrey kennedy trend lines which basically is drawing from the low to the high in the leg and cloning the line then placing it on the lowest price action found under price. So where I am going with SD now is we need to have a few variables on our side - in this short we have price out of the trendlines, price engulfed the buy orders, and now we have price back to test that imbalance. Lastly we feel momentum is turning with the lower low. Ive read a few SD threads and the last suggested that SD was too simplistic to use by itself…as you see far from it.
If we understand that the developing price action on the left has a direct relationship to the leg on the right then we realize that our down leg was full of sell orders, and the up leg found buyers. When we see price rising after a fall we know that those buy orders are absorbing the sellers to the left. As it absorbs the sell orders it depletes its buy orders so when it reaches our bearish structure we know three things. There are no sellers in the left leg down. We have depleted our buy orders absorbing those sell orders in our right leg up. Finally we know the only orders left are in that structure and that structure is bearish - sell orders. I choose this example as so many traders confuse this structure as an inverse HS which it simply is not and we will be able to identify that immediately by the bearish structure waiting at the top; second the left structure will be higher then the highest point on our up leg on the right. So this is the theory behind why we see what we see - Ill clear this and show you something pretty cool you can do with this knowledge
If we have three points on our chart we can surmise a forth or surmise a target or entry with parallel lines. Is this SD - yes it is and it is the entry chart Im going to look at SD being not necessarily linear but more of a sliding scale as so many institutes scale into their positions it makes sense that we look at SD in terms of a sliding scale…Ill leave this here for now and pick it up later today or tomorrow
the same concept can be applied to candlestick charts, right?
It can, I prefer bars but candles are fine
So lets put some of these ideas together this is Aussie - we only have the idea that price has reached our target through sliding scale however it is not above the trend lines nor has it crossed above what we believe to be a plateau forming. The nearest three structures are compressed against each other I suspect because of the close action in the structures that there is very little orders left in them. The top structure is not tested and just like our engulfing bars where price retests the break so are our structures price will test the break below of it. So Ill let Aussie cook and see if we get a break above that plateau…I need to back track and talk about sliding scale SD where if we can see three points we can predict the forth…it is a new concept…Supply demand players will be resistive to the idea but it is effective
Ill place this idea of swiss up as well. Just as above we suspect the buy orders are depleted taking out the sell orders in the down leg - price remains below the structure at the top of the left leg however we are still above the structure in the present leg up and have not broken the trend line. Once price breaks one structure the likelihood that the rest of the structures will fall in the leg is high. Ill set demand further down were we saw the low of our bars then price advanced - we know buy orders have to exist here or the bars would have kept falling
