Mastering Supply and Demand in Trading

Overview

• Goal: Understand supply and demand to trade with smart money.
• Five Pillars:
  1. Understanding what supply and demand are.
  2. Identifying and drawing supply and demand zones.
  3. Knowing where to enter and exit trades.
  4. Differentiating high quality zones from low quality zones.
  5. Understanding why some zones work while others do not.

What are Supply and Demand Zones?

• Areas where big banks or "smart money" trade.
• Key to trading with liquidity from big players.
• Markets cycle between balance (consolidation) and imbalance (strong moves).

Identifying Supply and Demand Zones

• Balance: Areas of slow, choppy price movement and consolidation.
• Imbalance: Strong moves after consolidation indicate zones.
• Momentum: Zones are stronger with greater momentum.
• Types of Zones:
  • Reversal zones (e.g., rally-base-drop for supply zones).
  • Continuation zones (e.g., drop-base-drop for supply zones).

Drawing Supply and Demand Zones

• Look for strong momentum moves (large candles).
• Identify the candle before the strong move.
• Use a box to draw from the highest to the lowest point of that candle.
• Wait for price to return to the zone before entering a trade.

Trading Strategy

• Enter Trades: When price returns to the zone after a move away.
• Stop Loss: Place above/below the zone.
• Take Profit: At the opposite zone (demand for supply trades and vice versa).

Importance of Practice

• Practice drawing zones to build competence.

High-quality Zones

• Determined by momentum and size of candlesticks.
• Greater momentum = higher quality zone.

Key Factors for Zone Effectiveness

1. Market Structure: Align trades with market direction.
2. Depth: The deeper the price enters the zone, the higher the chance of failure.
3. Time Spent: Longer time in a zone indicates potential failure.

Conclusion

• Combine supply and demand with market structure for successful trading.
• Be patient and selective with trades to maximize profit and minimize risk.