Introduction to Supply and Demand Trading To get the basics of supply and demand trading, you can visit this section of Ace Gazette. WHAT DO YOU HAVE TO ASK YOURSELF? 1) Where is price likely to turn? Supply and Demand areas. 2) What can tell us if price is turning? CANDLES. 3) Where is price likely to go next? The opposite areas of Supply and Demand. That’s it, you know everything there is to know. Good luck! More seriously though, if you manage to convince yourself that you DO NOT need much more to succeed in trading, you have done half the way. The other half is only discipline and a proper money management. THE SUPPLY AND DEMAND AREAS So, how to identify the good areas? If you never used pure supply and demand zones to trade, and were focusing on Harry Potter’s dragon-shaped moving averages clouds, you will probably have a hard time to identify the zones, because it would be way too simple for you to see. So you will probably need the attached indicator, based on ZigZags, which spots and draws for you the supply and demand zones of interest. It is nothing more than a small indicator that shows you where price turned in the past. Simple, yes, but the most important thing we need to know. Because those are areas where the big guys decided to buy or sell and are likely to do so again when price comes back. Then, if you want to filter your zones, watch precisely how price left the zone: big bold candle? Several small candles building a base? Etc etc etc… Then backtest and see how the best zones are created. We cannot do everything for you, take it as a gift for your future success. Only hard work will take you there, remember. SHOULD I TRADE ON WILD GUESSES? You DO NOT have to pick tops and bottoms to be successful in trading. If you are not experienced enough, trying to predict something unsure can be very painful. Experience taught me that in the end, you are less stressed with less precise entries but a better money management. Our best asset is that we know that most of the time, when price decides to turn, it will always come back to test the newly created area and pick up new orders that will help the price move faster, for good. The conclusion of this paragraph is that you do not need to enter at the perfect pixel, you need to know if the area will hold and have enough strength to make price turn. So consider yourself lucky enough that price is coming back for you. The precision does not matter for now. When you get some experience, you will be able to get better entries, but only screen time will help you, so right now we will focus on what is needed to get you to your first profitable trades. WHAT IS THE BETTER TIME FRAME? Now, we have our zones drawn on our chart. People often ask: what is the better time frame? Well, there is no answer to that. Supply and Demand is a universal law, OK? So it works on one minute and on weekly time frames. The rest depends on what type of trading you want to do. If you want to have some
free time, you go for H4 and Daily. If you like the thrill too much and have a lot of time to devote to trading, you go M5-M15. If you like taking a couple of trades every two days, you go M30-H1. Simple. In the heart of our forum, the SD trading central you will find charts analysis that suit you, from scalping to weekly swings.
Before going into Price Action or Price Analysis [PA] lets have a look at the overall process of learning how to trade successfully. What we need to study and understand? What are the learning blocks? How do we approach the learning process?
In this thread, in multiple posts, I'll try to explore various Price Action [PA] patterns.
What is price action? It's actions of the price, how prices change, analysis of current price movement in relation to it's history. Anything in free markets bought and sold has built in PA. We tend to see PA much more clearer when liquidity and price volatility are highest. Since there are none stop PA going on a price chart, what kind of PA we'd be looking for? The most important PA for us the traders, should have at least two clear characteristics. 1. PA contains recognizable pattern. By using PA in our trading, what we are trying to do is price analysis. In order to analyse price in a meaningful way we need to be able to recognize it in some form of pattern with a historical validity. 2. PA that's in or around the supply & demand zones. Never ever a loose the sight of the market we trade in. Market is a space where buying and selling takes place. Who does buying and selling. Buyers and sellers. Now, we hit heart of the matter. It's all about spotting where the buyers and sellers are in different shapes and sizes. This is where the supply & demand comes into play. Supply and Demand zones defined by sellers and buyers. Like many other markets, financial markets structured around supply & demand. I dare to say with a strict risk management using just major supply & demand zones, one can still be a profitable trader. What do I mean by major supply & demand zones? Zones that established on higher time frames, fresh and clean ones. There are additional methods I use for judging the possible strength of any good zone but these things for future. 3. PA that forms in overall market direction. Like in supply & demand zones giving more attention to PA in or around supply & demand zones in the direction of overall trend will yield better results more often than not. It's much more safer to follow banksters [big money - the establishment] then trade against them. So, first thing we try to identify where the serious buyers and sellers are sitting [supply & demand] then we look at overall direction, getting in sync with market sentiment [Trend] finally when price approaching or in the zone we look to see what price is doing, how it's behaving [PA - Prices Analysis] in order to weigh up probabilities of zone holding or not. Are there still serious buyers or sellers? In another word we check to see if price is building certain recognizable pattern which may suggest zone is still good to take on. Some calls it price configuration. As you can see PA is just a part of the bigger picture in the realms of executing entries and exits. Price is everything, but Price Action is not, keeping this distinction in mind may save you a lot of time and even money. However, this doesn't mean PA is not important at all. We need all parts to paint the whole picture. I will mainly stick with main candle stick and chart patterns. I'd definitely include volume too but we don't have overall volume in Forex market due to their non centralized Over The Counter structure. Some reversal and continuation candlestick patterns I'll be exploring: Engulfing candle pattern Morning / Evening Star candle patterns Abandoned Baby Candle Pattern Three White Soldiers & Three Black Crows Candle Patterns Three Inside - Outside Up and Down Candle Patterns
Raising and Falling Three Methods Candle Patterns Three Line Strike Candle Patterns Bearish In-Neck On-Neck & Thrusting Continuation Candle Patterns and perhaps more. Some reversal and continuation chart patterns I'll be exploring: Compression Flags Head and Shoulders Double - Triple Tops & Bottoms Wedges Pennants Triangles Cup and Handle Bump and Run Reversal Tops & Bottoms Rounding Bottom Diamond Tops & Bottoms Quasimodo Tops & Bottoms and perhaps more. As you can see PA is not just about Compression, Quasimodo, 3Drive, Rise-Base-Drop [RBD], DropBase- Rise [DBR], Rise-Base-Rise [RBR], Drop-Base-Drop [DBD], which you may have impression from previous topics. Beside, I have my reservations about 3Drive and all that RBD, DBR, RBR, DBD stuff. You don't need to learn all the above PA patterns to be a profitable trader. You don't need to over analyze your charts. Certainly we don't need to open a thread for each pattern and discuss it days in days out if the aim is trade and at least earn a living out of the market. On the other hand if the aim is different other than trading sure, there are many people love to chit-chat about anything. It's bit like we decide to start a business but we just keep talking about it rather than doing something to make it reality. As I and many others keep saying, best approach is to keep it simple. Learning just a few basic PA patterns + where to use them is more than enough for any beginner and it's enough to become profitable trader as long as you fully understand and apply the basics such as risk management and supply & demand.
I already have started series of articles about candlestick and chart patterns under "Education" menu. In order to serve those who may have miss the articles or prefer to see them in forums better, I'll repeat certain ones here. Perhaps expanding or summarizing them as appropriate. Forum format offers additional benefit when it comes to interactivity and further improvement via questions and answers. I or anybody else offers worthwhile additional knowledge through answers, will be added in this first post so that everybody can read it in one post rather than going through many different posts. If an answer to a question is already in this post, I will humbly decline to answer by way of staying silent.
Reversal Candle Patterns - Bullish / Bearish Engulfing Candle Patterns
I like to start with big bad mamma of all candlestick patterns: Engulfing. If you are not much enthusiastic of learning price action patterns, you should at least learn and understand well engulfing pattern. You owe it to yourself as a trader. Ironically, engulfing candlestick pattern one of the easiest to learn. Why is such an important pattern? Because it's the main pattern we can see gangstas, sorry I meant banksters [Big money, pro money, the establishment etc] intention. It signals the turning point [trend change] at given time frame. Handling and managing a turning point requires a lot of resources. It's virtually impossible to hide such large resources in market, on a price chart. It's not the only PA pattern suggest reversal but it's the best and clearest one. As it's a reversal pattern, Engulfing candlestick pattern is most beneficial when there is a up or down trend. It's for identifying the turning/reversal point. It's kind of recognizing top or bottom of given up or down trend move. Trends we are talking here is Time Frame specific. You may have many mini trends withing the scheme of larger trends and therefore as you breakdown larger trend there will be many more turning points of mini trends in a smaller time frames. Naturally, higher time frames patterns will be more reliable and give better returns than lower time frames ones. Keep in mind, most patterns themselves to requires a confirmation. For example, just because we see an engulfing pattern on a uptrend that doesn't mean an auto sell assuming it'll turn there. In order the move to reverse, we need to see convincingly buyers or sellers overcomes one another in quantitative terms. High probability trades develops when these patterns occurs in supply/demand zones.
Engulfing patterns are made of two candlestick, one down and one up. Bull/Bear or Bear Bull/candles. The image above uses red for price going down [bear candle] and green for price going up [bull candle]. Different traders may use different colors which is not important. The important aspect that second candle totally engulfs the first one. It's even better if the body of the
second candle even covers the first candles wicks too.However, it's not necessary. Wicks are allowed, they are usually small or non exist intent. The size of the first candle is not important but it shouldn't be a doji as it would be very easy to cover therefore force of the opposite move will suggest it's a weak one. However, the size of the second candle does matter. Bigger is better [within reason] How do we pick an engulf pattern? » Look for the existing trend up or down » See if the engulfing patterns occurs within supply and demand zones. Remember, engulfing patterns occurring in new highs or ranging markets cannot be considered bearish or bullish reversal.. It'd more likely be a continuation. How do we determine the existing of down or up trend? Some of the followings may be used for this purpose but my favorite one is to identify decent supply and demand levels and work from there. » Peak and dip reactions are lower or higher than previous. » Price has been below or above it's trend line and so on. Best time to enter after engulfing pattern established and price broke the trend line.
Some chart examples with engulfing candle pattern - Bullish
Chart 1
Chart 2
Some chart examples with engulfing candle pattern - Bearish
Chart 3
Chart 4 You may also consider using indicators as an additional helpers to see possible reversal points:
Chart 5
Chart 6
Caution: Different brokers feed may display different candles due to their data feed server time and to certain degree their liquidity providers, which will effect the display of engulf and other candle and even chart patterns. Please see the below charts dotted rectangle area taken from two different brokers and notice the different shape and size candles
Differences will be more and more as we go to lower time frames. In markets, nothing is clear cut, black and white. There are no rules in markets written on stone that will apply at all times to all. Everything is relative and relativity itself is kind of moving target. There cannot be a manual or static teaching will make everybody profitable trader.
Why not this engulf than other one? In hind-side we can spot entries and exits plus read charts almost without any flaws. However, when looking at live charts we tend to miss many PA patterns, even screaming bold supply and demand zones due to mainly fear and greed. When we let our emotions kicks in we almost become blind to things are happening in front of our eyes. Even when we notice all, sometimes fear of loosing takes over and end up missing perfectly valid opportunity. How many times you hit your head to wall saying yourself something like, "I saw that.. I knew it... why didn't I take it... Why?" Don't think of this kind of situation as incurable psychological disorder. It's common to most of us. It originates our very own self preservation instinct. In fact it's very useful instinct, we just have to adjust it to our trading with the help of clear risk management, keeping things simple and screen time [experience]. Lets take chart 3 above. Assume we are looking it at live as shown below. We have a valid bear engulf. We have an uptrend. Should we sell it in third or fourth candle?
Not so fast. We need to check left first to see if there are any significant level or historically rich price line. Always remember, we look at left and trade right.
We draw a line using current highs to locate a meaningful reference level. First reference area we see goes back to Dec 2009. What a sweet reference area indeed. However, it doesn't suggest clear sell at current bear engulf. Price can possibly move between the current level up to 1.50+ towards 1.51. For those who may be thinking demand turned into supply in history and it may still act as a supply would be a valid sell entry. In my case, I may take the sell not on the basis of demand turned into supply but as lower probability trade on the basis of engulf and price is being historically strong sellers zone. Depending my entry price and type I may have ended with BE hit or few pips.
Now, would I take second bear engulf on sell again. Sure, I would. Why sure, history line still didn't hit any significant supply zone? 1. Price is still in historically strong sellers zone. 2. Established new supply zone, tested and rejected with bear engulf.
Not all Engulfing patterns are same
1. Newly established supply zone. A weak test and rejection with bear engulf. If we did take this sell after
engulf, it offered 50+ pips or break-even at the worst if we were swinging. 2. Better re-test and much cleaner bear engulf. It offered 150+ to 225+ pips but reasonable stop would have been 42 to 87 pips depending on the entry point. If we've checked the left history most likely we'd have ended up with 225+ pips. 3. New supply zone established with bear engulf, not so clean but still good enough to consider. It offered about 75+ pips 4. This is not a engulf pattern. New demand zone established and we had abandoned baby then a gap. Nice little scalp opportunity in the direction of gap after first bull candle. Scalp target is clear. Why wait for bull candle. Sometimes gaps get filled quickly. Eventually gap gets filled with a retest of demand then rejection. Another nice scalp opportunity. 5. Supply test once more and rejection with bear engulf. Not an ideal clean one but it creates new stacked supply then after 6th nicer engulf we know that we may be onto something good here. 7. We have a nice looking bull engulf here. However, it's middle of nowhere, between zones and we have lower highs. Best to ignore such engulfs.
There are another type of little engulfs in our charts between the moves. On the way back these little engulf patterns usually acts as quick reaction zones. It's Emene's favorite. I'll leave this one to Emene. I'm sure he can do much better job than me explaining it.
How to read simple charts? Your mission is very simple: 1) Wait for a new zone to be created (imbalance of supply and demand) 2) Watch price action to see if the professionals (with all their big money) will read the new zone as a signal to take the trade or not. What you want to do is to catch the first retest of the zone that has just been created. The zone is a fresh one, meaning it has not been tested yet. The candle patterns become the most important thing at this point (read Ken’s articles about candle patterns and our forum price action section). 3) A zone already tested is good too, but the more visit it gets, the more orders it triggers and in the end, the higher the chances for it to give in. 4) Enter with confirmation of price action (bear candle(s) at supply / bull candle(s) at demand) 5) Exit the trade when happy with gains or wait for the opposite zone of supply/demand and trail your stop (a risk/reward ratio of 3:1 minimum is highly recommended). Have a look at all the charts in this section. They are supposed to be as simple as possible. What we
want is to observe price in a supply or demand zone shown by our indicator and see if a zone is likely to hold and reverse price or not. The areas of interest will be circled in color. This is what you will be doing for the following weeks or months, so you’d better used to it! Remember to keep it simple by all means. It exists some “helpers” that can give you some more confidence to trigger a trade, like the semafor indicator, the RSI, etc… Those helpers will are already available on Ace Gazette. A small and very simple trading plan to get you started will be available soon. In the future you will be able to put some new tools in your bag to help you improve the winning trades / losing trades ratio. Like: - learn to watch higher time frames to see what are the best zones to consider on lower time frames. Ie, if price is coming from a daily demand area and going toward a daily supply area, you will pay more attention to the demand zones on H4 and H1 than to the supply areas. Makes sense? - spend some time observing live which zones hold and which don’t. - study the importance of the different sessions (Asia, London, New York) - learn how to use the dollar index as an indicator - if you want, you can add one or two ingredients to fine tune your edge: fibonacci retracements / projections, trendlines, etc… Just make sure to not overload your charts so that you can still see what matters most: PRICE ACTION. After studying the many charts posted hereafter in this room you will have a clear picture of what you need to look for. We will be posting some more examples on a regular basis to persuade you that it works, day in day out. Keep watching them until it becomes completely natural for you. Now what do you need to do? Well, just visit the SD Trading Central on our forum.
Will post some trades here as I find it more convenient than the blog to engage discussion. Trade: EUR/USD Method: S/R, supply turned demand. Time frame: H1
I wish stupidity could be painful.
Trade: EUR/JPY Method: AG trading plan. Engulfing in zone, semafor level 3, oscillator in oversold territory. Time frame: M15
Trade: GBP/USD Method: Daily horizontal level very important, check reaction on the left, green line is drawn from daily. Semafor level 3, oscillator in oversold territory. Accumulation pattern. Time frame: H1
Trade: EUR/JPY Method: H1 Supply, first visit to fresh zone, oscillator overbought, semafor 3. Time frame: H1
Trade: EUR/NZD Method: H1 Supply, first visit to fresh zone, oscillator overbought, semafor 3, divergence. Time frame: H1
Trade: Silver Method: triangle consolidation break. Time frame: H1
Trade: EUR/USD Method: EURO INDEX at daily supply. Time frame: H4.
Trade: AUD/USD Method: H1 Demand reaction, late entry. aiming at close supply. Time frame: H1 / entry M5.
Trade: GBP/CAD Method: Touch entry on H4 demand. Not quite the best entry in the world. Time frame: H4.
Discipline and Patience I hope Emene, doesn't mind me posting this in his Journal. Anyways, I just wanted to rumble on few old trading cliches after looking at some posts... Bias... One of the worst enemy of a trader. Like many other traders, I always say "we do not anticipate but participate". Sure, it's great to be able to anticipate forthcoming events in advance but especially in trading anticipation is extremely harmful for our bottom line. Granted, I sometimes use terms such as "being in sync with market" and "trading ahead of time", however, they are not meant to be anticipations. It's a reflexsive understanding of what's happened and happening in the market at past/present, not future. It comes with years of experience. In my case such understanding doesn't happen everyday. Majority of days I rely on my trading plan. So, I'd say forget about this woodoo sounding stuff and concentrate on realities. When you have that kind of understanding you will know it yourself. Nobody can teach or tell you. What do u see on your chart, not what we think it may or not. Market is careless what we think, what's right what's wrong and so on. We do not trade possibilities but we trade probabilities. These two word may sound same to some but there is a difference between the two. In trading, possibility is price may hit our target but we don't know how likely. On the other hand probability is price may likely hit our our target as we have some pointers telling us so. The trick is to identify probabilities in our favor, more of them is better but at the same time we do not complicate things with over analysis. We do not want to fall in "Analysis paralysis" trap. Where do we look for probabilities? Which are good or not so worthwhile? This is where Supply and Demand comes in. We know that S&D doesn't work as described in academic text books but we know that it's still the basis of open market economies with all it's manipulative aspects of it. If we want to understand price dynamics we truly need to understand S&D. The base is S&D and our probabilities are PA (Price action). My humble advice is that you don't need to learn all PA patterns. Certain tested and tried few old ones are good enough. Especially, stay away from those new jargons. We know what wheel is and it's function. No need to learn renamed and repainted version called perhaps "Wheelo" Unless, you have extremely ambitious goals, solutions are in front of you. All in this site in shape of articles, charts and so on. The rest is depends on you. Are you able to take what's freely available and make it your own - make it work for you or are you going to keep searching for that new magic system, PA pattern or crystal ball? I don't know how many of you really understand the importance of having trading plan and sound risk management built within your trading plan? Anybody can write a trading plan. Do you really understand what is trading plan for? If you are new to planning, please learn it first. There is an article on this site and you'll find many on the web, but word of caution, keep your plan simple.. as much as possible simple. There is a simple plan put together by Emene on this forum. How many of you tested it with discipline and consistency?
Assuming you understand and able to define / produce sound trading plan, did you test your plan properly to see how it performs in real world. In now days testing your trading plan in real world doesn't need to cost you a dime other than time. You need to test with not just few trades but hundreds of trades under different circumstances to have usable output. Most importantly, are you able to stick to your plan no matter what? There are no shortcuts or magic formulas to make you a successful trader overnight. Trading for living is not an easy task but not an impossible one at the same time. It all depends on you. Some of us makes it some of us not. Sometimes some traders ask me... What's the most important qualities of a successful trader over mid to long term period in your view? My answer has always been two words: discipline and patience.
A few trades from friday / today. Pretty much self-explanatory. If questions, do not hesitate.
I wish stupidity could be painful.
Here is a morning gift I just got from Germany. Entered a tiny bit late after the engulfing you can see in demand, and exited at fixed TG right below supply not to be screwed.
The two answers to your questions are in my text and on the chart. 1) The zones are all from the indy posted on Ace Gazette. The fractals one, not the inital supdem indy. It helps me spot previous supply turned demand and previous demand turned supply. I do not draw zones myself. I still cannot figure why so many members think they can spot zones better than a computer but I gave up trying to understand that, it is beyond my intellectual abilities. And it makes me upset. The indy does not miss zones, or at least, there are way enough zones you can trade. If traders here focused on trading the zones the indy shows instead of thinking they can spot secret hidden zones themselves, they would be profitable by now... 2) "Entered a tiny bit late after the engulfing you can see in demand". Now, you see the demand zone right? I am sure you do. And you see my entry. So logically, if you go a bit below my entry, you will see the engulfing that got me into the trade. Strong bull candle in demand. This is what we teach here, keep it simple. What could have happened to me? Price could have pierced demand and my trade could have been a loser. Big deal! Please do not mind the tone of my message, I have absolutely nothing against you, in the contrary, your are one of the people contributing to the community. I just would like members to go into second gear now, it has been months and everything you need to be profitable is on the website. We keep repeating the same things over and over. The rest is inside you. How much work you put into your learning, how simple you keep your approach, and how you manage your emotions. For all this, you are on your own. So come on Hornet, leave your brain at the door, put the indy up, wait for price to go into the zone, watch PA, chose a position size that will not make you freak out, and take the damn trade Have a great day. I wish stupidity could be painful.
Here is a GU trade, same principle as always. A bit of drawdown because of the news yesterday but as often, news were heplful to go deeper in demand and get new orders before messing with retailers.
