SNOWFLAKE COMPENDIUM
Supply and Demand & Liquidity Concepts
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Introduction to Forex Trading
Forex Trading is basically the short form of Foreign Exchange, often called “FX“ and focuses on
the exchange of currencies. This is the most liquid market in the world with over 6 Trillion
Dollars traded daily. The Forex exchange market is run and controlled by algorithms with no
emotion thus as a trader you must trade with no emotions and have an Edge in the market to be
consistent and profitable. BFI (Banks and Financial Institutions ) make up nearly 95% of the Forex
Exchange market and retail traders cover the remaining 5%. The Snowflake Compendium is a
Handbook by Snowflake Capital, with detailed points on how we trade, which is beneficial both to
beginners and advanced traders, who may be struggling to find their edge or looking forward to
start trading Supply and Demand & liquidity concepts.
BASICS
1.
News.
I.
The first thing you are supposed to do before hopping on the charts is check for high impact
news which might cause volatility in the market. To check for news, here are some links to
some famous sites used to check for upcoming news events:
https://www.forexfactory.com/calendar
https://www.investing.com/economic-calendar/
(Always make sure the time is set to your local time to avoid any form of confusion)
II. Always check for red folders which indicate High-impact news.i.e.
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It’s not recommended for any trader to trade within 30 min before or after these news events, for
the purpose of capital preservation and partially risk management.If you have an open position ,
you should Take some part of your position off, manage position with a Stop loss or put stop loss
at Break-even.
2.
Sessions
The Main sessions that we trade are London and New York Sessions as these are the sessions
with the largest volume traded, giving enough opportunities for trades to be caught. We
recommend trading one pair ,one session
to get the best out of this strategy and when you are
profitable enough you can move on to trading maybe two or three pairs . We recommend getting
a paid Version of Tradingview so that you can play back price on any time-frame and also go back
to any date and time in the past.
3.
Brokers
With our strategy we recommend getting a broker with low spreads as our strategy entails
mostly using or making the use of tight stop-loss.We recommend mainly IC markets, Fusion
Markets
or any other broker with low commissions and low-spreads.
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MARKET STRUCTURE
The market basically moves up (Bullish trend) or down (Bearish trend), creating highs and lows. .
This will simply help you know what trend the market is in and know which type of position to
take. Either buys or sells. (Market structure is key.)
Market Structure(mapping)
.As we said earlier, the market moves either in a bullish or bearish trend. Creating highs and
lows.In a bearish trend the market moves creating. Lower Lows and Lower Highs. For markets
to be considered bearish, the previous law must be broken. Below is a simple map out of what a
bearish market looks like: Textbook example.
In a bullish trend, the market moves, creating higher highs and higher lows. For market to be
considered bullish. The previous high must be broken.
Below is a simple mapping of what a bullish trend looks like. Textbook example.
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For a trend reversal to be confirmed,two new highs in a bearish trend or two lows in a bullish
trend must be created.
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Market Structure(Application)
Sadly, the market isn’t as perfect as the examples shown above. Below is a realistic Mapping of
What a bearish trend looks like.
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Notice how in the trends above. E.g a bullish trend, We are moving bullish or bearish on the
higher time-frame, but on the lower time-frame, it would be possible to land short positions, on
the same bullish market(pullback) on lower Time-frames .This also applies to a bearish market
where you can participate in longs on the pullbacks on a lower Time-frame.
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Highs and Lows
For a high or low to be considered weak or strong. There are certain conditions that need to be
met. In an instance where we have a strong high. That strong high must have created a low that
is lower than the previous low. The same thing applies to a strong Low, It must have created a
high that broke the previous highs.
Don’t overthink structure. This is our way of seeing structure and you are entitled and free to see
structure however you see fit, but it’s crucial to understand what is minor and what is major.
Practice as much as possible at as it’s not easy to master this and will take time to train your
eyes to see it, but it will pay off. Remember that.
Supply and Demand
In every market there is supply and demand.Supply is simply the amount available and demand is
simply the amount wanted in simple terms. As price increases sellers willingness to sell
products will also increase and as price increases we see demand reduce as buyers will more
likely want to buy at low prices . (Buy low Sell high).
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This is a simple mapping of what supply on looks like ,thus we can see why we would sell at high
prices(Premium).
This is a simple mapping of what demand on looks like ,thus we can see why we would buy at
low prices(Discount).
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Price moves from zone to zone (Supply and demand zones ), Hence why we buy from demand
zones to supply zones .Below is a simple mapping of what this looks like.
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He’s a realistic example of what this looks like in the live Forex market
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Order blocks
The market moves In orders,when playing in a prolonged range price is kept between two levels
where Bank and Financial Institution (BFI) accumulates orders both from sell side and buy side
their aim here is to accumulate enough orders to support their next big move which is their
initiation stacking these orders is the cost for order flow .In Forex This order blocks are used by
the banks and institutions to split their large orders into smaller chunks which are field at the
right prices so So as to not cause an imbalance in the market .Below is a simple mapping of how
another block is created.
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Here is an example on the live Forex market of how an order block is created :
Sometimes this zones can be a little bit large hence we take the last chunk of orders that was
sent out before the initiation.i.e In a range where price expanded to the downside we take the last
buys before the bearish expansion.The same happens when we have arrange that expands
upwards,We take the last sells before the bullish expansion.This is important in finding the last
chunk of orders that were placed before an expansion happened, this is advantageous to a Forex
trader in the sense that we get much smaller stop losses meaning better risk to reward.
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Live market example:
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Premium and Discount
Price moves between Highs and lows(Ranges), Where buying is more efficient on the Range
low(Discounted prices) and Selling is more suitable in the range high(Premium prices). The
market moves, creating ranges on every time frame, moving from range to range. On a range, the
Middle(Equilibrium) is Where there are equal amounts of buying and selling on a specific range.
For a beginner, try to focus on buying from a discounted range on a bullish market and selling
from a premium range on a bearish market. Once you become a little more advanced, you can
now start to take counter-trend buys on a bearish market and also counter-trend sells on a
bullish market. Though It’s always important to remember to never chase the market, let the
market bring itself to you, or show you its intent.
Here’s a simple mapping of what a range looks like:
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Below is an example of what a range on the live market looks like:
As we said earlier, Selling is more suitable at a premium price, hence would be more preferable
on the range high. Below are examples of how you can utilize ranges, in both bullish and bearish
markets, using the fib with 0%, 50%, and 100% levels only, to identify these key levels by pulling
the fib from the range high to the range low..
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Selling from premium range on a bearish market
Buying from discounted range on a bullish market
Efficiency and Inefficiency
As we discussed earlier, BFI places small chunks of orders to move the market In the desired
direction, but sometimes these series of orders are small where the market moves while
creating multiple order blocks and mitigating them almost immediately, creating enough/equal
opportunities of buying and selling in the market. This is called an Efficient market.
Sometimes large orders are placed, moving the market rapidly in one direction, creating an
imbalance in selling and buying opportunities, this is known as Inefficiency. This is where are
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more instances of buying than selling or vice versa. Sometimes the market might move to fill
these areas of inefficiency, either immediately or later on.
Imbalance- This is a form of Inefficiency created when there’s an unequal amount of buying and
selling, making the market move rapidly in one direction. Since these areas have unequal buying
and selling, the price comes back to them to create the same equal buying and selling
opportunities to bring the market back to a balanced nature.
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Mitigation
When BFI(Banks and Financial Institutions) create a range where there is equal buying and
selling opportunity in the market, this is used to generate liquidity both on the buy-side and sellside, where before an expansion to the upside/ downside, we’ll see the last series of orders
placed in the opposite direction of where the expansion moves towards. .i.e small series of sell
orders stacked before the large buy as seen
below:
Here’s how orders are stacked towards the buy-side to move price to premium before a sell
expansion takes
place:
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As you might have noted, after the large order is placed, the small series of orders will be in
draw-down. The process of bringing the price back to these levels to close the series of orders
that are in draw-down(trades in loss) is known as mitigation and again another larger order is
placed here to continue the price in the desired direction..
Why is this important? We can use this to see where BFI(Banks and Financial Institutions) are
placing their large orders so as to “follow their footprint” and maybe get an idea of where price
might move to mitigate orders next.
.Return to zone(application)
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Liquidity Inducement Theory
Liquidity is basically what drives the market where, for the Forex market to run, large amounts
of money need to be injected/introduced to the market in the form of orders. Stop losses and
pending orders are resting above or on double bottoms and double tops. An established level in
the market where multiple orders and stops have been placed is called a liquidity pool, which are
the areas targeted by BFI(Banks and Financial Institutions), to hunt for more liquidity to support
their large orders. Common “chart patterns” are created within the Forex market, hence
becoming rather unsafe to trade using them as these are places most traders would want to
trade off of, thus creating pools of liquidity. Multiple instances of these chart patterns are formed
within the market hence becoming easy to spot and trade on the first or second try. This is the
reason why we don’t trade chart patterns as for us they are inconsistent and can be rather
difficult to understand.
What double tops and Double bottoms look like(mappings)
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Inducement.
This is the creation of these multiple instances where liquidity is generated into the market. This
is necessary as the market runs on liquidity and therefore is attracted to areas of liquidity. How
is this helpful? In the instance of market structure, when a High fails to break a low, it’s therefore
tagged a weak high and becomes Induced and the likelihood of this getting ran through by price
is high, the same also goes for Lows. This is how we conclude that a high or low is either weak
(Induced) or strong. Strong Lows and highs are also known as protected Highs and Lows and
weak ones are also known as Targeted Highs and Lows. Series of highs and lows that are not
formed on Order-blocks during zone creation or mitigation, these lows and highs become
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induced as they are not part of the mitigation process. This helps us in POI selection and in
building probabilities of which zones might hold and which might not.
Expectation Order-flow
This is the building of multiple probabilities in liquidity, market structure, Order flow, to conclude
where price might go next. This can be essential in understanding Intra-day price direction,
which might help you Identify key zones and take the best trades for that day. eg in a bullish
trend, we continue buying till the bull run is exhausted.
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Entries
Here we’ll go through basic entry models that are mainly used in our trading style to take
advantage of moves in the market. We’ll mainly focus on Bos, CHoCH, and flips in terms of how to
spot them and how to use them.
CHoCH
CHoCH (Change of Character)-This is the first indication of trend reversal, that mainly happens
on a HTF Demand or Supply zone.We can use this to get in on a new trend on the very first
indication of trend reversal, giving a larger move with better risk to reward.
CHoCH mapping
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CHoCH application
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FLIPS
Flips -These are simple schematics where price reacts to a demand/supply zones, reacts, and
then breaks it almost immediately, leaving a supply, demand zone that is responsible for
breaking the demand/supply zone. Flips are easy to spot but like other key chart elements, they
require a keen eye to spot them hence putting them into practice is essential..
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Basic Entry models.
Below are some simple entry models that can be used in any time frame to capitalize on moves
in the market. The market is fractal (whatever happens on the lower Time-frames happens on
the higher Time-frames) and this is why these models are flexible with the time frame of your
choice.
On the higher time frames, we use bodies close to identify strong BOS and CHoCH as on these
time frames, Manipulation is very minimal while on the lower time frames it's important to factor
in wicks as keenness to detail is important on these time frames.Which taking entries, it's
important to place stops below areas or inefficiency which present themselves in the form of
wicks as they are more likely to get ran through or even wicked out.
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