Supply and demand trading course
Trading tactics
Trading tactics example 2
Supply and demand
Trading tactics example 2
LESSON 57
MODULE 11
In the last example we have seen how to
trade a demand zone that was formed against
the trend, certainly, we will not trade all supply
and demand zones that form against the trend,
but if the zone is strong enough and there is a
high probability candlestick pattern signal with
a good risk to reward ratio, we can place our
trade, otherwise, we will leave lot of money on
the table.
To find supply and demand zones in the
market, you only have to look at your charts,
and try to spot successive large candles. Let
me show you an example below:
This is the EUR CAD H4 chart, as you can
see, by looking at the chart, we can notice a
huge move down made by sellers. When you
are analyzing your charts, you should stop by
this move, look at the beginning of the move,
the candle size, and the strength of it.
This is not a normal move, because retail
traders alone can’t move the market this way,
so it is possible that this move was made by a
bank or financial institution.to make sure we
need to evaluate the strength of the zone.
As you can see, the beginning of the move is
quick and strong, the market didn’t spend time
in the zone.so this is a good information that
shows us that the order was made by a
financial institution, otherwise it will find
resistance.
The move was very strong, look at the red
candles, they are big and strong which
indicates that there is a bank with too much
quantities behind this price action move.
The zone is fresh, and it will be tested for the
first time, this gives more strength to the area
because when the zone is tested a couple of
times it loses its power.
Now we know that we are in front of a supply
zone, don’t worry if you still have issues
identifying the zone, with time and practice,
you will spot easily supply and demand zones
just from the first look. So, Let’s draw the
supply zone. See the chart below:
To draw a supply zone, you need to identify
the basing candle, and in this example, the
basing candle is a Doji.so you draw the distal
line at the upper shadow and the proximal line
at the lower shadow this way you get a perfect
supply zone.
Now you have a supply zone, let’s evaluate
the risk to reward ratio to see if the zone is
worth trading or not. Look at the chart below:
As you can see on the chart above, the risk to
reward ratio is attractive, if you don’t know how
to calculate the risk to reward ratio let me
remind you of the formula:
The risk = The entry value -The stop loss
value
The reward: The profit target -The entry
Value
In the chart example above, I mentioned the
risk and reward in different colors, so that you
can see the potential that the trade offers.it
provides approximately 1:7 risk to reward ratio.
That means that the risked amount of money
will be doubled seven times if the market goes
in your favor. This type of trades shouldn’t be
missed because it doesn’t happen every single
day, and when it occurs you should look to
benefit from it.
Let’s suppose that you won this trade, this will
give you confidence and let you trade without
fear or stress, because you will need to lose
eight trades in a row to become a loser and
this will not happen if you use the supply and
demand strategies properly. This is the reason
why I recommend you take risk to reward ratio
into consideration because that what will make
a difference in your trading account.
Now we need to make our top down analysis
and see if the higher time frame is going to
work with or against us. As we trade the 4h
time frame, so the higher time frame is going
to be the weekly. Let’s look at what happened
on the weekly chart:
As you can see on the weekly chart above ,
the market is ranging , a false breakout
happened on the resistance level to indicate
that the market is likely to go down, but there
is another support level that will probably stop
the market from going down.
We don’t really know what is going to happen,
but what we know is that there is a
manipulation at the resistance that will move
the market down. And prices are going to test
the support level.so we will trade this distance
between the false breakout and the support
level on the H4 time frame.
To be honest with you, I will take the trade
even if the market on the weekly is against the
H4 time frame. Because the trade setup has
all the odds to go in my favor. But we do top
down analysis to look at the bigger picture and
see if there are some details that can help us
confirm our entry or warn us to pay attention.
In this example the false breakout of the
resistance level is an indication that the market
will go down at least to test the support level,
and this give us an opportunity on the H4 time
frame if we have a candlestick pattern signal.
Now we have all information in our hands, we
have a powerful supply zone, with a good risk
to reward ratio, and we have a false breakout
of a resistance on the weekly that supports our
decision, so what we need is a candlestick
pattern signal to enter the market. Check out
the chart below to see what happens next:
As you can see on the EUR CAD H4 chart
above, the market reached the supply zone
and formed a nice inside bar candlestick
pattern. So, our entry is going to be
immediately after the breakout of the inside
bar, and the profit target is the next support
level. See the chart below:
As you can see on the chart, we place the
entry after the breakout of the inside bar, and
the stop loss above the supply zone, the profit
target is the next support level.
Look at what happened after the formation of
the inside bar, another bullish pin bar formed
to indicate that the supply zone is likely to be
broken, and the zone will fail.
Imagine that you placed an entry and you kept
watching what happened, how do you feel
when you see the pin bar formation, you will
certainly be afraid because you will think that
the zone will fail. So, as a reaction you will
either move your stop loss or close the trade.
But look at what happens next? A huge news
candle formed after an economic news release
and the market went down strongly. If you
were trapped by your emotions you will miss a
lot of money on this trade, but if you adopt the
set and forget philosophy, you will not let the
market play on your nervousness, so you will
set the trade and forget it, when you come
back , you will find that the trade went in your
favor and made you money without fear and
stress.
PREVIOUS LESSON
NEXT LESSON