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.
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!