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Understanding Supply and Demand Zone Trading

May 23, 2025

Supply and Demand Zone Trading Strategy

Introduction

  • The supply and demand zone trading strategy is effective across various markets: stocks, forex, futures.
  • Suitable for any timeframe, whether day trading or swing trading.
  • The strategy has been personally used by the speaker for 5 years with great success.

What is and What is Not a Supply and Demand Zone

  • Common misconceptions:
    • Not just the highs and lows of price.
    • Requires a strong imbalance in price movements.
  • True zones:
    • Demand: Strong move up preceded by basing.
    • Supply: Strong move down preceded by basing.

Logic Behind Supply and Demand Zones

  • Zones are created by large market players (banks, institutions) leaving "footprints."
  • Two parts of a demand zone:
    • Basing: Equilibrium where buyers and sellers balance.
    • Breakout: Overpowering of sellers, leading to a strong upward move.
  • Return to the zone taps into unfilled orders, aligning retail trades with institutional movements.

Types of Zones

  • Peak and Valley Zones:
    • Typically found at tops and bottoms of price movements.
    • Demand: Drop-base-rally pattern.
    • Supply: Rally-base-drop pattern.
  • Continuation Patterns (CPs):
    • Found in the middle of trends.
    • Demand: Rally-base-rally.
    • Supply: Drop-base-drop.

Structure of a Zone

  • Key Levels:
    • Proximal Line: Closest to current price.
    • Distal Line: Farthest from current price.
  • Best zones: Tight, well-structured basing with significant move away.

Entering a Trade

  • Entry Methods:
    • Place a pending limit order at the proximal line.
    • Manual market order if price has already entered the zone (less advised).
  • Stop-Loss Placement:
    • Standard: Below the distal line.
    • Wider for conservative approach.
  • Take Profit Strategies:
    • Fixed risk-reward ratio.
    • Target opposing zones or structural highs/lows.
    • Trail stop-loss without fixed take profit.

Multiple Time Frame Analysis

  • Aligning entry timeframes with higher timeframes to increase trade success.
  • Example sequences:
    • Day Trading: 1-min entry with 15-min higher timeframe.
    • Swing Trading: 1-hour entry with daily higher timeframe.

Qualifying a Zone

  • Must break an opposing zone or remove a trend line.
  • Fresh zones (not previously tested) are preferred.

Trading Strategies

  • Confirmation Entry:
    • Wait for confirmation on a lower timeframe before entering.
    • Look for zones that remove opposing zones or trendlines.
  • Set and Forget Entry:
    • Entry based on trend alignment.
    • Relies on fresh zones.

Odds Boosters

  • Strength of move away from zone.
  • Marubozu candles indicate strong momentum.
  • Liquidity trap setup: Support/resistance before a zone increases reaction strength.

Trading Psychology

  • Losses are part of the trade; manage them while staying disciplined.
  • Use data and backtesting to prepare for and understand drawdowns.
  • Be wary of unrealistic expectations and social media myths about trading.

Conclusion

  • Supply and demand trading offers a structured approach to trading with high potential for success if applied correctly.
  • Emphasizes the importance of psychology and realistic expectations in trading.

These notes summarize the key points from the lecture on supply and demand zone trading, providing a reference to aid in understanding and applying the strategy in real trading scenarios.

Full transcript