Trading supply and demand is very powerful, if you’re able to qualify these areas effectively. You can consider a supply and demand area as qualified if they are able to show some muscle and commitment by breaking the structure of the market, either in the form of consuming opposing supply and demand or, breaking respected trend-lines.
How to assess supply and demand strength
In order to best assess the strength of a given area supply or demand, you need to see it within the context of the rest of the market, as not doing so will often leave you in the dark. When these areas are brought to your attention, either using the Pipnotic supply and demand indicator or by performing the process manually, you need to view them in relation of historical areas of supply and demand to assess their strength and validity.
Here are a few good tips for identifying good levels of supply and demand:
- The move away from supply or demand must be strong
- Price must commit to the move away from the area of supply or demand, and hold away
- The levels must be clear and have, preferably, full bodied candles (smaller wicks)
- The area of supply or demand must not have been tested since it was established
The structure of accumulation and distribution
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 and distribution, 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.
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.
What is 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.
Supply and demand strength and commitment
There are a few rules that can be used to help identify these price sensitive areas, and in this video I will discuss two of them. For an area of supply or demand to be valid, it must show some force/commitment, which can be evaluated by looking at what price was able to do once an area of supply or demand has been established. If price moves slowly away from an established area, then the area can be considered to be weak and should not be traded. If on the other hand, price manages to break the structure of price either in the form of a trend-line or opposing supply or demand, this is a clear sign of strength.
Let’s have a closer look in this video below.