Are you interested in learning how to trade supply and demand? Have you perhaps been trying to do so for some time but find yourself picking areas of supply and demand, which are not respected? I know how this feels, as it has also happened to me, many times. In this article we will have a closer look at how you can better qualify areas of supply and demand to help improve your entries.
How to pick good supply and demand: 3 tips for improving the quality of your entries
Tip 1: The move away from the area of accumulation
Not all supply and demand is created equal, which is why understanding how good supply and demand is formed is so important. If you look at the source of a price move and study the way price left the area of accumulation (the area of sideways price movement prior to the release), you will be focusing on something very important. When price is moving sideways during periods of accumulation, supply and demand are in agreement – and until price either moves higher or lower, you don’t know if there is a surplus of supply or high demand. Only when price moves away from an area of balance are you able to make this decision. This is why the best thing to do is to wait until price chooses a side before you decide whether to buy or sell.
Did price leave gradually from the area of accumulation or did it move away quickly and forcefully? If it left the area gradually then you can safely say that there is only a slight imbalance in supply and demand. If, however, price moves away strong enough strength and force to consume opposing supply and demand and/or break a properly drawn trend-line then the move is showing you that there is a high degree of imbalance in supply and demand. This is what you want to see – and typically, when/if price returns to the area of accumulation prior to the release, price will typically continue in the same direction as the imbalance.
The following chart presents a great example of a high degree if imbalance, which is visible due to the break of the upward sloping trend-line (red line). The area of accumulation, agreement in supply and demand, is marked off with the blue box:
As you can see, price showed some muscle, as it had the strength to move through and close below the downward sloping trend-line, which is one of the two rules we use when qualifying supply and demand.
Tip 2: The structure of accumulation
The structure of accumulation, the period of agreement before a release, is also very important to get right. The structure of accumulation must be well-formed and show certain characteristics for us to want to trade it. If the area of accumulation is extended, this tells us that supply and demand are in agreement, which is not at all what we want to see. As can clearly be seen in the example above, price was able to accumulate for one period before price left the area. Additionally, if you have a closer look at the accumulation bar, it has a good size body, which, while difficult to assess on detail FX platforms, tells us something about volume.
If you’re not familiar with the term accumulation, the following video will enable you to better understand what I mean when I refer to accumulation:
Here is another example of an area of accumulation that is well-formed, similar to the example above:
In the example above, similar to the first example, the period of accumulation was again short. Price reacted to a monthly area of supply (the purple box), drawn by the Pipnotic supply and demand software, and left very quickly, after only one day of accumulation. This tells us that price simply couldn’t hold off the selling pressure. When price came back, it reacted at the low of the accumulation candle and then continued to move lower, and, break a trend-line, giving us another area of supply to consider.
Tip 3: What is the currently driving price
Do we simply sell nicely formed supply and demand in the direction they show us? No, absolutely not. Before you can do anything you need to know what the current price driver is. As you can see in the example above, price is reacting to a monthly level of supply, which tells us that monthly supply is currently driving price. In the first example, you can clearly see that price is reacting at daily supply, which tells us that daily supply is the current price driver. This piece of information is paramount; if price is simply retracing at no visible area of opposing supply or demand, then there is no reason to sell or buy. Price must be reacting to something significant for us to consider a trade.
If we consider the following example below, we can see that price is reacting to weekly supply (the orange box), drawn by the Pipnotic supply and demand software. This is our clue to start selling. Do we sell if the area if supply is not qualified? No, we do not. We want to see opposing areas of supply or demand being consumed and/or trend-lines being broken, which we have a good example of below:
In all of the examples above, you can see all three of these rules being respected, and the result is clear. You have to be patient and wait for price to reach well formed areas of supply and demand, watch how price accumulates and leaves the area. If things look like the examples presented above, then you have a very good edge and high-odds trade.
If supply and demand interests you, please send me an email and I will send you some videos on the topic, which may be of interest you.