With more and more individual traders around the world, we are seeing many interested in trading supply and demand levels or zones. Many of them have seen a webinar or event or even a YouTube video discussing the importance of institutional order flow. I will certainly agree with the importance and add to it. There is much more to trading supply and demand zones than simply looking at a chart and picking out levels that price increased or decreased quickly away from.
When looking for these levels on any given price chart it is important to note they are excellent trading opportunities only if all criteria is met, not just the level itself. Institutions and other large money traders use these levels not only for trading opportunities, also for manipulation. If they see a level that most retail traders will assume is supply or demand, this may be a great time to use it against the mass public. A great example of this would be "pivot" lows and/or highs. Most often when you see a pivot point it is simply formed due to a previous area of supply or demand. An institution may now use this "pivot" to manipulate traders allowing them to think price will turn there by forming a small base or pause, only to continue pushing price in the same direction.
As seen in the left image, price has rallied up to an area which many may mistake for a quality supply zone when in fact it is a retest of a previous level. Because this level is so obvious or apparent on the price chart it is quite easy for the large money traders to form manipulation here. As price rallies many sellers will step in forming a pause or even a small bounce away from the level (known as basing). For other traders waiting for a confirmation, they will then step in as well due to what appears to be price dropping away from the area. Just as these traders step in the large money will purchase enough contracts to consume all selling order flow and push price in the continued up direction faking out all traders selling from this location.
So as important as trading supply and demand levels or zones will always be, it is simply not enough to create a winning strategy. There are many other conditions that should also be applied to your analysis to determine if the level is in fact tradable. An example of this would be multiple time frames.
Using mtf analysis you can determine if the level is against a larger time frame and if so this level would not qualify regardless of how great the level appears to be. Another example would be, how long price has been traveling in one direction. If price has over extended itself in one direction there is a higher probability of a turn or correction as opposed to when price is starting to form a direction. Learning these additional filters is just as important as the levels in themselves and help to build the overall foundation for your entire trading strategy!
CFTC RULE 4.41 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one's financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. All Software provided or purchased is strictly for educational purposes only. Any presentation (live or recorded) is for educational purposes only and the opinions expressed are those of the presenter only. Testimonials may not be representative of the experience of other clients or customers and is not a guarantee of future performance or success.
Comments