Supply and Demand Trading

Supply and demand in forex refers to specific price levels where institutional traders place their orders, including pending orders in the market. These price levels act as zones of significant interest to the big pockets or smart money traders, who possess substantial funds capable of exerting significant influence on the market’s direction.

Institutional traders are well-funded and sophisticated market participants who strategically position their orders at key price levels based on their analysis and market outlook. These price levels represent areas where demand and supply imbalances are expected to occur, leading to potential market reversals or significant price movements.

The big pockets or smart money traders have the capacity to create substantial market shifts by executing large buy or sell orders at these supply and demand zones. Due to their substantial financial resources, they can effectively absorb liquidity and move the market in a direction that aligns with their trading strategies and objectives.

Retail traders and smaller participants in the forex market often try to identify these supply and demand levels to gain insights into potential market turning points and to make more informed trading decisions. Understanding where institutional traders are likely to have placed their orders can provide valuable information for anticipating price movements and identifying trading opportunities.

It’s important for retail traders to be aware of these supply and demand zones and to incorporate them into their technical analysis and trading strategies. However, it’s essential to remember that the forex market is complex and influenced by various factors, including geopolitical events, economic indicators, and overall market sentiment. Therefore, while supply and demand zones can be valuable tools, traders should use them in conjunction with other analysis methods and risk management techniques to enhance their trading success

ELEMENTS OF A TRADE SETUP WITH SUPPLY AND DEMAND:

Identify the Trend:
The first step in a trade setup involving supply and demand is to determine the overall trend in the market. This can be either an uptrend or a downtrend. Identifying the trend is crucial as it provides the context for understanding the potential direction of price movements.
In an Uptrend, Look for Demand Zones Only: In an uptrend, the market seeks liquidity on previous highs based on order flow, leading it to take out previous highs. As a result, supply levels are more likely to fail in an uptrend. Therefore, avoid looking for supply levels in an uptrend; instead, focus on identifying demand levels. Demand zones are price levels where institutional traders have likely placed significant buy orders, anticipating a potential price increase. These zones represent areas of support and are expected to halt or reverse temporary downward movements.
In a Downtrend, Look for Supply Zones Only: In a downtrend, the price seeks liquidity on previous lows based on order flow, resulting in the likelihood of taking out the previous low. Consequently, demand levels are less effective in a downtrend. To navigate this market condition more effectively, avoid looking for demand levels; instead, concentrate on identifying supply levels. Supply zones are price levels where institutional traders have likely positioned substantial sell orders, expecting a possible price decline. These zones serve as resistance areas and are anticipated to halt or reverse temporary upward movements.
Look for Price Imbalance: Look for sharp runs or areas with more minor trading activity, where price forms long candles, as these represent price imbalance areas. These imbalances are potential supply and demand zones where institutional traders may have left pending orders. Expect the price to trade to these levels later and potentially change direction after filling the gap. The main goal is to identify areas where price may use as a point of reference to change direction.
Note How Price Approaches and Reacts When It Reaches Your Supply or Demand Zone: Price should move away quickly instead of consolidating when it reaches your identified supply or demand zone. The supply and demand concept is based on identifying potential areas where institutional traders have left their pending orders. When the price approaches and moves away rapidly from your supply or demand zone, it indicates institutional sponsorship and a higher probability of a successful trade. However, if the price consolidates after reaching the zone, it suggests a lack of support from smart money or institutional traders. In such cases, consider closing the trade, as there is a higher chance that the price might violate your supply or demand zone.

By incorporating these elements into your trade setup involving supply and demand, you can enhance your ability to identify high-probability trading opportunities and make more informed trading decisions. However, it’s essential to remember that no trading strategy is foolproof, and risk management should always be a fundamental aspect of your trading plan. Always use proper risk management techniques to protect your capital and trade responsibly.

This is one of the reasons why most of our entries are zero float entries; refer to this video about institutional trading taken from our private session with one of our students.