In today's article I will attempt to explain how to find demand and supply on any given market. There are of course many more points of criteria that must be met but this will be a huge part of every trade. First it is important to understand that order flow is the reason for all movement of price. Let me elaborate on that; in order to move price there must be a willing buyer and a willing seller. If there is just one and not the other the willing buyer/seller will not be able to participate because he/she will have no one to buy from or sell to.
To go a step further, there are multiple types of entities placing trades which make up the "order flow". These include individuals such as yourself, commercial traders and most importantly institutions. Why are the institutions the most important? Simple, because they have the most money and as we all know, he who holds the most money wins! So understanding this, we know that following the institutions will add extreme probability to our trades.
Find the Supply & Demand order flow
The first step to a successful trade is being able to locate and define the location which the abundance of order flow has taken place. From these price points we are able to take part in low risk opportunities. If you have studied supply and demand trading you have probably heard the basic rules to qualify a supply or demand level. An example is: "How quickly did price leave the level". This is certainly a valid rule and should be taken into account each and every time however it is simply not enough information to understand who is controlling the market. We want to know who has the most order flow, the buyers or the sellers which can be determined by pure price. The consumption of opposing order flow is a must!
In this image you can see a level of true demand zone or a pile of buy orders which is where we look for opportunities. What is key at this level is the development of control. This tells us that the buyers are now in control from this exact price point. Previously there was a lot of selling at this area so we would be very cautious buying there because there were more willing sellers than buyers, however when that simple fact changes we know the dynamics are shifting. Refining the exact point which the order flow changed is key to our levels! Think of these levels as a rather hidden footprint left by the institutions and we can use them as a future guide for upcoming trading.
Demand Zone Trading Result
This image displays the outcome of the level which was determined to be insitutional order flow. When the level of demand was reached there were alot more buy orders with fewer willing sellers placing new orders. The supply and demand trading equation dictates that price will move higher if there are more buy orders than sell orders and the opposite holds true for more sellers than buyers. These levels offer great opportunities for upcoming trading with very low risk and high reward.
We want to locate the defined price points where extreme order flow has taken place. We also want to determine if that order flow gave any indication the dynamics of the market were changing thus displaying who is in "control".