Supply and Demand Trading What is Supply and Demand? What are the laws of o f Supply and Demand? What is Supply and Demand trading? How do we use Supply and Demand trading in forex and other financial markets? Supply and Demand is the heart of a market economy [Capitalism]. Since market economy is ased on exchange of goods and ser!ices for a !alue" for it to function there has to e some goods and ser!ices on offer [supply] and people who are willing and ale uy them [demand]. Supply and Demand in textooks look as two separate things for study purposes ut in reality they are strongly interconnected. #ne cannot exist without the other. $n an ideal open market" prices are defined y supply and demand" creating a ase framework for allocating resources in the most efficient way possile. Howe!er" in reality this is not always the case. %onopolies and regulators in certain sectors or systems can define prices as they like regardless of uyers. &rices may also e manipulated y speculators unnaturally thus o!erriding asics laws of supply and demand.
'igure ( )s it can e seen on the ao!e illustrations" suppliers will produce more when prices going up while uyers will increase their demand when prices are going down. ) clear conflict of interest supposes to create a healthy and efficient market. *hat+s in theory" ut in reality we know that there are situations when prices are going up ut suppliers will not increase their output unless there are healthy competition. #r uyers will not increase their uying e!en if prices are going down when they don+t ha!e a uying power. The Textbook Law of Supply
(. $n order to maximi,e their profits" suppliers [producers] will e offering more products and ser!ices for sale at higher prices. -. *he supply increases as prices increase and decreases as prices decrease. . )t certain price le!els" when there is a good enough profit margin" suppliers will increase their productions without demanding higher prices in order to increase profits. The Textbook Law of Demand
(. $n order to sa!e some money" people will uy more products at lower prices. -. )t a lower price" more people can afford to uy more goods and ser!ices more fre/uently" than they can at a higher price. . )t lower prices" people tend to uy some goods and ser!ices as a sustitute for more expensi!e ones. &utting Supply and Demand together
'igure 'or the purposes of simplicity" Supply and Demand lines are drawn as straight lines. $n reality they are cur!ed. 0/uilirium represent the ideal /uantity and price match. $t+s the intersection point where market reached optimum efficiency. 'or example we ha!e -1 products for sale and -1 people willing to uy. 2o wastage whatsoe!er. Howe!er" in reality e/uilirium cannot e sustained. $t+s 3ust a temporary point that may e reached from time to time for a rief period. 'or the life and e!erything else in this uni!erse to continue we need minus and plus. When all things are e/ual nothing will happen.
Sellers and uyers needs to keep fighting for the price to sell and uy. Sellers will want maximum possile high price while uyers will e looking maximum possile lowest price for the goods and ser!ices. Welcome to the markets. Depending on the economic climate supply and demand cur!es can mo!e or shift either way" thus altering price and /uantity structure. *he ao!e is asolute asics of Supply and Demand in open markets. %y intention is to utili,e them on ways to apply Supply and Demand in trading rather than detailed study of Supply and Demand itself. What is Supply and Demand trading?
*rading in financial instruments" whether it+s 'orex" 'utures or 0/uities takes place in markets. We already know that for markets to function it needs sellers and uyers. Supply and Demand is all aout spotting where uyers and sellers are sitting on our trading charts. Howe!er" we as a retail traders do not ha!e access to current order flow. We cannot spot them within their current position. )ll we can do is loo king ack [left of our charts] to history and define pre!ious Supply and Demand ,ones with the expectation that in those ,ones will still exist some serious uyers and sellers. 4sing lagging Supply and Demand information" we are making our trading decision ased on historical data" not the current definiti!e data. We also know that what has happened in the past will w ill not necessarily repeat at present time. We ha!e proailities to deal with. We use price action chart and candle patterns to impro!e proailities in our fa!or. *here is one important difference etween classic Supply and Demand theory and Supply and Demand that applies to traders. While on classic approach suppliers generally stays as suppliers in the process of exchange" howe!er in trading we can not identify certain participants as sellers or uyers. )ll participants in trading can e uyers or sellers at any one time" e!en at the same time. 5ememer" trading means uying and selling. 6uyers doesn+t turn into sellers and !ise !erse. *hey already are oth. When applying Supply and Demand in trading keep this in mind. 'oreign7exchange 'oreign7exchange market has many participants in !arious class and si,e.
'igure )s we can see from the ao!e graph 6anksters are firmly in control of 'orex. $n spite of healthy growth of retailers market share" anksters will remain in control. 0!en if market share of retailers hit similar le!els of anksters" they will still e in control.
a. 6anksters generally acts in sync like one ig cartel . %any funds and insurance i nsurance companies are extensions extensions of anksters c. 5etailers are extremely fractured and can not act in sync. )ccording to the graph ao!e" retailers represent (89 of :; trillion a day forex market as of -1((. *hat represents hundreds of illions of dollars up for gra on daily asis. 4nfortunately" it+s mainly graed y anksters. #ur task here clearly is to spot anksters and follow them. 'orget aout no!ice trader talk. We don+t care who is on the other side of our trade as long as we are at the winning side. $ ha!e seen many non7no!ice so called pro traders and institutions loosing large sums to markets. We don+t care aout losers" our task is to identify winners and follow them. 5ememer" we do not anticipate ut with guidance of the price we try to participate. *hat+s all. 2othing more" nothing less. How to identify and draw Supply and Demand zones on a trading chart?
Well" you don+t ha!e to. *here is an freely a!ailale indicator does it for you automatically. $nstead of spending time on drawing and updating your ,ones manually" it may e more eneficial for your trading to watch &) and check out historical his torical price le!els. 'or those" who like to understand how ,ones are defined on a trading chart lets try to demystify it. *here are three types of price mo!es in i n markets. (.
eep in mind complicated things ound fail sooner or later.
Chart ( Here we ha!e a chart without any markings other than ask and id price lines. Where are supply and demand ,ones? Supply and Demand ,ones indicates price turning areas" where price reaches a point that alance will change in fa!or of other participants. $t+s the tipping point where imalance etween uyers and sellers is at peak. When imalance is at its peak" change in direction is ound to follow. 'or instance" when alance is on uyers+ side we see price is going up. Simply" there are more uyers then sellers at those prices. Howe!er" once the price reaches to certain le!els" participants start thinking price ecome too expensi!e" they start selling at new highs to maximi,e their profit. )dditionally" certain participants would ha!e exhausted their resources during their uying acti!ity and there will e certain participants waiting on certain le!els to sell too" which helps to cement a decent supply ,one. 2ow" we ha!e new sellers entering to the market plus some of those uyers closing their uys and 3oining in as sellers. &rice will e tra!elling down until it finds the demand [where uying interests supersede selling ones]. So" supply and demand ,ones don+t represent magical decision points as some may e stating" ut rather ,ones representing imalance at its peak. ou can pour so much of water into a glass. @ust like in classical supply and demand theory. Suppliers can increase their prices so much" perhaps until there is not enough people willing to uy their products or ser!ices at those prices. 4nless the supplier is a one headed with a gigantic ego then he has to reduce his prices to get uyers interested once again. Howe!er" we also know that hea!y manipulation is going on in markets. We simply couldn+t say natural laws of supply and demand. 5ememer fake7outsA
Bets use good old ,ig,ag indicator as a !isual helper to see peeks and drops clearly rather than polluting our heads with D6D75657D65756D stuff.
Chart With the help of ,ig,ag indicator we can identify ma3or and minor price turning ,ones including older ones with ease. 2ow lets add supply and demand ,ones to the chart ignoring minorweak ,ones.
Chart
2otice where ,ones are drawn in relation to ,ig,ag highs and lows. $t+s not a ig deal to recogni,e possile supply and demand ,ones" is it? $ used default settings of the ,ig,ag indicator. $t+s fine looking at history and talking on hindsight ut how do we know current higher high [hh] is the actual hh?
Chart ; How to draw ,ones? *here may e different approaches on this ut $ like how supply and demand indicator draws them.
Chart *he key point to watch when drawing a supply or demand ,one are HH [higher high] or BB[lower low] as they are starting points of a ,one. (. 6ull candle at opening starts printing a ear candle [wick] then retraces making new HH. We take HH and the opening point of the ull candle draw the supply ,one as shown on the chart . 6efore drawing the ,one at least we ha!e to wait for the close of following candle. Without it we wouldn+t know our HH is HH as next candle easily can make new HH. -. $n situation like this" where BB is made y an engulfing candle we start drawing our demand ,one from BB [which is ull engulf candle] to close of pre!ious ear candle instead of close of ull engulf candle. 4nlike most other ,ones with cases like this we use two candles to draw a ,one instead of one. Similar situation applies when drawing a supply ,one with HH engulfing ear candle. We take HH of the ear engulf candle and opening of the pre!ious candle [please see -] . We see a usual one candle demand ,one drawn. Howe!er" if you are using supply and demand indicator you will not see the demand ,one printed until after candle c closed. Eone is not !alid until a candle closed and not touching to ,one. So it+s always etter to wait for confirmation efore drawing a ,one. How to trade supply and demand zones?
Con!entional recommendation is that we wait for price to come ack to the ,one [preferaly untested fresh ,one] to take a trade. (. 0nter when price deep in the ,one with a small stop7loss. -. Wait for &) confirmation then enter with igger stop7loss.
Chart F #!iously on hindsight entry ( would ha!e een the est one ut on li!e charts at this point we don+t know if price is going to e contained in the ,one or not. We could simply take the trade and hope for the est or look for something to indicate possiilities of price turning" ,one holding. $n my case first thing $ see is signs of 5S$ di!ergence" and that would most likely e enough for me to take the trade [entry (] as the risk is minimal" rather than del!ing into deep chart analysis. #n the other hand when we check left we don+t ha!e clean clear arri!al" ,one has een tested efore twice which means it+s not a fresh ,one. )re there still decent uyers? Some negati!e !ies against taking trade. $f we add a hori,ontal in the ,one and check farther left we see some positi!e history.
Chart G
$f we opted for entry type -" which says wait for &) confirmation once the price hits the ,one" then we get two opportunities of entries on this occasion as highlighted on the chart F ao!e. 2otice" stop7loss si,e of entry -a and - is igger than e ntry (. $n my trading" $ use additional SD ,one entry in addition to ao!e entries. $ tend to take trades as or when a new ,one estalished too. Sometimes efore ,one in sight. $ will not go in details for this type of entries as it in!ol!es a few things to e taken into account such as reading left &)" spotting !iale historical price lines and the way a new ,one is created. *his type of entries [some calls it Iahead of time tradingI] re/uires a lot of experience and aility to keep in sync with o!erall market sentiment. 2eedless to say it+s more riskier than con!entional entries. How do we workout ! "onfig #rice action confirmation$ in supply and demand zones?
*his is where chart and candlestick patterns come in. 5ememer" we use &) reading in and around the ,ones to try to determine if the ,one will hold or not. $ already ha!e written few articles aout &) patterns and their use in I$ntroduction to &rice )ctionI )< forum category and under 0ducation menu ICandle n Chart &atternsI. $ need to add few more &) patterns yet ut what is a!ailale so far is more than enough to make a good start. ou don+t need to learn all &) patterns to e profitale trader. $mportant ones are more than enough in my opinion. $ ha!e started with important ones and most are done. $ would recommend you to check them out so that you can fill the &) confirmation pu,,le piece in place within the concept of SD trading. What time frames are est for supply and demand ,ones? Supply and demand ,ones are applicale to any timeframes" in other words supply and demand ,ones can e drawn and traded on any timeframes. #nly thing to keep in mind" supply and demand ,ones in lower timeframes can e taken out more often and easily than higher time frames. Seasoned SD traders tend to trade in the direction of higher time frame ,ones. What does this mean?
'or instance" we ha!e price 3ust tested H; supply ,one" ,one is holding and price started to mo!e away [down] the ,one. $n this situation if we are trading on say % we+d e looking to sell on decent supply ,ones of % rather than uying at demand ,ones. $s this means we shouldn+t enter any uy orders in such circumstances? #f course not. ou can always enefit from decent % demand ,ones too as price rarely mo!es in one straight line ut using supply gi!es us additional proaility in our fa!or. *here are no need to e greedy. We cannot get all the pips. *hat+s until price comes close to possile reaction le!els or closing on H; demand ,one. 5egardless your trading chart time frame" it+s always wise to keep an eye on higher timeframes. Why some zones doesn%t hold?
$f $ knew the answer to this /uestion" $+d say $ ha!e the ultimate crystal all. $ could trade with ,ero losses. 4nfortunately" $ don+t possess such crystal all. )ll we can do is check the history" especially historical price lines to see possiilities for the ,one may to e taken out or not. *he only place to look for possile hints is left of your trading chart. )lso keep in mind" during ma3or e!ents such as 2'&" 0C6 press conference" '#%C minutes etc... most ,ones may e taken out easily. $ may comeack and expand this article further as and when needed.
Supply and Demand
6ack *o 6asics. $ wanted to make a simple document aout JHow to identify a Supply Demand ,one le!elK. *his will e my contriution to the &$0 )ce
>.$.S.S. 0!ery possile market" whether it is a financial market or not" is eing mo!ed y the ongoing supply and demand that is present in this particular market. Supply Lsellers M represents the /uantity of products that is a!ailale in the market and Demand LuyersM represents the /uantity of products that is wanted in the market. When there is more demand than supply" the price of any product is going to rise Ldemand exceeds supplyM and when there is more supply than demand Lsupply exceeds demandM" the price of the product is going to drop. Selling at Supply or 6uying at Demand offers you the est price possile. So why would you want to pay more for a product" ser!ice or currency if you can get it at a etter and cheaper price? The 'dge
$n trading" knowing where a SupplyDemand le!el is" is knowing and understanding what type of trader or trading account is on the other side of your trade. >nowing that there are two different types of market participant= *he no!ice trader that elongs to the N9 and the 6anks" institutions and 6ig %oney that elongs to the 9 O ) small retail trader isn+t ale to mo!e price in the market" only institutions and anks are ale to do so. *he good news is that it is possile to trade in the right direction and to follow the 6ig %oney y simply uying at Demand and Selling at Supply. $n other words it is up to you to choose which market participants you want to 3oinA How to recognize a no(ice trader?
%ost of the retail traders aren+t trading profitaly" it is a fact. *hey are losing ecause they uy after a period of uying and they sell after a period of selling while institutionsanks are doing 3ust the oppositeA )dentifying a Supply and Demand Le(el&*one
'inding a good Supply or Demand le!el on a price chart isn+t that difficult. *he first thing we want to do is= (M Book for an area on your charts where you see that price shot up Lfor demandM from a certain point in a strong fashion or dropped Lfor supplyM from a certain point in a strong fashion. We look for a specific point where price has to left" where it simply couldn+t stay there. We can tell this ecause of the strong mo!e up or down. See chart below for an example:
-M #nce we found an area on the charts where price shot up or dropped down in a strong fashion" we then want to see if we can find the ase of the mo!e. *he ase is asically a cluster of trading" where the candle+s odies are trading sideways" next to each other" creating a ,one. $f you can find that kind of ,one and then see price dropping or rising in a strong way from that ,one" then you ha!e a Supply or Demand area. Let's look at the charts from point 1 to see if we can find a zone.
#n oth of the examples we clearly see the ,ones we were looking for" preceding the strong mo!es. *his is a Demand le!el on the left and a Supply le!el on the rightA "oncretely defining a Supply&Demand zone
#nce we found a ,onearea like explained ao!e we want to define the ase as well as possile y drawing a line on the upper and lower part of the trading cluster. *here are two possile ways to define the ase Ldepending on the traders+ preferenceM. (M Draw the upper line at the high of the cluster" draw the lower line at t he low of the cluster.
-M 'or Supply= Draw a line at the high of the cluster for the upper part and draw a line at the candlesP odies LopencloseM for the lower part.
'or Demand= Draw a line at the low of the cluster for the lower part and draw a line at the candlesP odies LopencloseM for the upper part. D+D,-+-,D+-,-+D
)nother way to identify a ,one is also to look at D6D75657D65756D
D6D means Drop 6ase Drop 565 means 5ally 6ase 5ally D65 means Drop 6ase 5ally 56D means 5ally 6ase Drop Bet+s look at some chart and find an example of each.
+alance .S )mbalance
2ow that we know how to identify a SupplyDemand le!el" we should ask oursel!es what the le!el represents... When the le!el,one is eing formed" we consider price to e 6alanced. *here are as many sellers as uyers present in the market. Howe!er a decision to push price lower or higher has to e made. So sooner or later" the alanced cluster that we saw will ecome imalanced as there would e more seller then uyers. *his will cause a rise or drop in price and therefore price will reak the cluster. *he est possile scenario is price reaking the cluster in a strong" !iolent way ecause if that happens then we would know for sure that there were more uyerssellers at this precise point.
*herefore we can expect price to ounce from there when the Be!elEone will e re!isited. How to trade a Supply&Demand Le(el&*one? Le( el&*one?
*hey are different ways to trade a SupplyDemand le!el,one ut the highest proaility trade is to trade the first !isit of the ,one ecause since it+s the first !isit" the le!el,one will still e freshuntested. 'urthermore" it is up to the trader to decide whether they want to take a J*ouch *radeK" trading the touch of the le!el,one or wait for confirmation &) when price arri!es at the le!el,one. When a le!el,one is getting tested for the first time" we know that this JfreshnessK gi!es us the highest proaility trade" howe!er this doesn+t mean that you ha!e a (119 guarantee that it will ounce there as nothing is (119 in trading. )lso" it is possile that price will ounce at the -nd or rd !isit... We don+t know how many times it will e tested until the le!el,one reaks. 0!ery time a le!el is tested" it gets weaker and weaker" this is why the first !isit gi!es the highest proaility trade... +roken Supply&Demand
When a SupplyDemand gets tested different times we know that soon or later the le!el,one will e!entually reak. When we see a strong reak from a supply ,one" we know that ulls did uy there" therefore" we don+t consider this ,one as Supply anymore ut instead we consider it to e a Demand ,one now and !ice !ersa for a roken Demand ,one. Supply ecame Demand or Demand ecame Supply" this is also called a swap le!el. $f the le!el was roken in a strong fashion" then we would look to uysell from a swap le!el when price will come to !isit the le!el. )mportant /ote0
We also look at swap le!els for targets" those are important decision points too.
The rofit 1argin
Ha!ing a good SupplyDemand le!el,one isn+t 3ust enough to take a trade lindly O ou ha!e to make sure that the potential profit on the trade will e high enough. %ake sure that the 5=5 is good enough y identifying where a pre!ious decision point " SupplyDemand point was.
)s a final word" $ would like to mention that supply and demand opportunities can e found in e!ery timeframe and in any trading t rading market. 2ow that you know what to look for" $ suggest that you go and find some examples for yourself on your charts. *ry to master this as $ elie!e this is what will take your trading to some new le!els... )t least it was the case for me...
Trading Supply 2 Demand 34&56 Bet+s first agree that at one point" when you start trading" you feel like a lind one7legged man on a highway. #ur goal as traders is then to make our task easy" en3oyale and why not e!en relaxing. )s a wise man recently said on the )ce
What is it? "Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much !uantity of a product or ser#ice is desired by buyers. $he !uantity demanded is the amount of a product people are willin% to buy at a certain price& the relationship between price and !uantity demanded is known as the demand relationship. Supply represents how much the market can offer. $he !uantity supplied refers to the amount of a certain %ood producers are willin% to supply when recei#in% a certain price. $he correlation between price and how much of a %ood or ser#ice is supplied to the market is known as the supply relationship. rice( therefore( is a reflection of supply and demand.
$he relationship between demand and supply underlie the forces behind the allocation of resources. )n market economy theories( demand and supply theory will allocate resources in the most efficient way possible. *ow+ Let us take a closer look at the law of demand and the law of supply." L$n!estopedia.comM L$n!estopedia.comM
'or the mathematics and economics geeks who want to read more aout the technical side of it" it is possile to do so here.
6ut to put it simple= D'1!/D S'/DS -)"' <
)t the #lympic ? S<L=
2ow" imagine that a strawerries producer enefits from outstanding weather conditions and produces a lot more strawerries this year than last year. 6ut he is selling to the exact same amount of people in the same customer catchment area. Bet+s say he is selling at the same price as last year. When all customers are ser!ed Ldemand satisfiedM" there is none left. 6ut still a lot of strawerries in the stocks Lhigh supplyM. So what will the producer do in order to sell his strawerries? He will set the price lower to attract new uyers. So the price of his fruits will decline until it finds some people willing to uy them. #>? 5ings a ell? $t should" ecause this is exactly what happens to the prices on your charts. )lthough it is easy to understand if you are trading commodities" it can e trickier for currencies pairs. 6ut 3ust forget they are pairs for a moment" and call them instruments.
Sam Seiden" who is considered as a supply and demand guru in the tradosphere" wrote= "$he forei%n currency ,orex market is where %lobal exchan%e rates are deri#ed for e#eryone includin% market speculators and end users of currency. eople and companies buy and sell currency much like you would buy and sell anythin% else. Stron% economies ha#e stron% currencies. -hen we trade the ,orex markets( we are tradin% economies. $herefore( supply and demand for currency depends on the current and expected percei#ed health of a country's economy. .../" =ou can basically trade any instrument as long as its (alue can be represented by a chart: 6ecause you will always find some le!els of supply and some le!els of demand clearly
identified. $t means= opportunities of uying or o r selling. "0nderstand that there are always two competin% forces at work in the market( buyers and sellers. ur %oal is to !uantify those forces and identify price le#els where the imbalance is %reatest as this creates chan%e( or mo#ement in price." LSam Seiden" Besson from the pros"
)ugust -118M
So" why do we like the principle of S<L= !/D D'1!/D so much? 6ecause on a chart" le!els of S<L= !/D D'1!/D Lwhere strong decisions are taken y the ig moneyM are represented y hori,ontal lines. )nd hori,ontal lines are simple enough for the dummies we are Lrememer" we want our 3o to e relaxingM. So" hori,ontal lines. Ha!e you e!er heard of S<9-T !/D -'S)ST!/"'? *hey are wonderful tools for trading that re/uires only patience8 logic8 obser(ation and common sense. We will co!er this su3ect with charts in the next post. 4ntil then" take care and e safe out there.
Trading Supply 2 Demand 3>&56 $n the first article of the serie I*rading Supply and DemandI" we studied the definition of Supply and Demand as a principle. $n this second article" we will see how we can illustrate it on a chart and what lies ehind the notions of support and resistance. What is a support?
) support le!el is a price le!el located elow the current !alue of price" where there were pre!iously more uyers than sellers Ldemand was pre!iously more important than supplyM" and which sent the price upwards after pre!enting it from falling any lower. $t is a le!el that the ig players consider a good price to uy. ) support le!el" as stated earlier" is represented y a hori,ontal line" which makes it simple enough for us to trade as there is nothing simpler than a hori,ontal line. $n!estopedia explains ISupportI = )f the price of a stock falls towards a support le#el it is a test for the stock: the support will either be reconfirmed or o r wiped out. )t will be reconfirmed if a lot of buyers mo#e into the stock( causin% it to rise and mo#e away from the support le#el. )t will be wiped out if buyers will not enter the stock and the stock falls below the support. What is a resistance?
) resistance le!el is a price le!el located ao!e the current !alue of price" where there were pre!iously more sellers than uyers Lsupply was more important than demandM" and which sent the price downwards after pre!enting it from raising higher. $t is a le!el that institutions consider a good price to sell. ) resistance le!el is also represented represented y a hori,ontal line. What do support and resistance le(els look like on a chart?
*o sum7up" you can rememer that support represents demand and resistance represents supply. 6ulls LuyersM put uying pressure at support le!els and ears LsellersM put selling pressure at resistance le!els. *o find your support and resistance le!els" oser!e where price respecti!ely stalled and started to raise or stalled s talled and started to drop.
$s a line enough or should you rather consider a ,one? )s supply and demand traders" we like to approach the support and resistance principle as ,onesareas more than one uni/ue line. 6ut in the end" a ,one is made of two lines" so let us say that we like to use two lines instead of one. *his is ecause you will see that although price can respect a single line !ery nicely" it can also turn a it ao!e or a it elow the initial price line. $n!estopedia explains IEone of supportI= 2 price zone in which a stock finds support and be%ins to trade upward once a%ain. )n technical analysis( support occurs not at a finite point( but in a zone. $he "density" of the zone of support how far the price can mo#e down throu%h it depends on the #olume of tradin% as the price approaches and enters the zone. $he hi%her the #olume of tradin% in the zone of support( the hi%her the point at which actual support will most likely occur. p rice zone zon e in which a stock finds resistance and $n!estopedia explains IEone of resistanceI= 2 price be%ins to trade downward. )n technical analysis( that support occurs not at a finite point( but in a zone. $he "density" of the zone of resistance how far up the price can mo#e throu%h it( depends on the #olume of tradin% as the price approaches and enters the zone. $he hi%her the #olume of tradin% in the zone of resistance( the lower the point at which the actual resistance will most likely occur.
Why does it work?
Support and resistance le!els are the simplest yet the most effecti!e tools to trade profitaly. 6ut why? Well" there are two answers to that. *he first one is mechanical and results from the human psyche.
(111usd now" there plenty of other uyers who unfortunately missed the first train in the morning. Conse/uently" a massi!e demand for the diamond at (111usd will result in a lot of uyers purchasing the diamond" reducing the supply and sending the price up again. #n a chart" you could draw a hori,ontal line at (111usd at 8.11am and wait for the price to come ack to it. $n this example" the support le!el for the diamond was at (111usd. *he second reason is not as rational as the first one. 6ecause the market considered the ao!e story to e true" it acted conse/uently again and again" for years and years. So now" it is 3ust working y itself. Some call it a self7fulfilling prophecy. *hese le!els are so widely accepted in the trading community that they are closely monitored and are likely to e significant and to ha!e a serious effect on the price. 2ow try to think aout it when looking at the two charts elow. Support & Demand
$n the
-esistance & Supply
$n the C)C;1 futures L'rench stocksM chart elow" you can see that price clims to a !ery clear le!el of resistance" where supply was o!iously stronger than demand in the past. *his imalance etween supply and demand sent the price down !iolently. When resistance is reached" sellers who ha!e een waiting to sell again at this nice opportunity do so and price drops. 6ut you also need to reali,e that ecause it is a self fulfilling prophecy" uyers know that sellers are waiting at this le!el. )nd ecause they do not want to see their profits !anish
if price goes down" they close their position" going from uyers to sellers Lto li/uidate a position means to in!ert the action you initially did to enter the market. *hey are mechanically sellers when they close their positions ecause if they were uyers" they need to sell it to someone. %ost of the time" to retailers.M So new sellers Q uyers closing their orders R massi!e drop. $n this case it is not a resistance" it is an iron wall.
*o finish with these general principles" it is also good to know that when price mo!es sideways" uyers and sellers are /uite happy with the le!el the price is at. Supply and Demand are fairly e/ual. 6ulls and 6ears 3ust send each other the all until ulls !iolently throw the all at the ears+ face or !ice7!ersa. Summary
6uyers and sellers create two opposing forces that mo!e prices. 6uyers want to uy cheap and then sell more expensi!e. *hey use support lines areas to know where price is cheap. Sellers" in the contrary" are always looking to sell expensi!e to uy cheaper afterwards. *hey use resistance lines areas to know where price is expensi!e. When e!eryody is happy" prices mo!es sideways. *he fact that some precise price le!els ha!e een significant in the past is telling us that they may ha!e sufficient impact on price mo!ements in the future. Sometimes" le!els of support and resistance are !ery clear on the charts and remain !alid for a long time. &rice has a good memory" write it down and ne!er forget it. $f you keep this in mind" you ha!e a great ad!antage on other traders. )s it that simple?
es and no Lut more yes than noM. ou see" if price was only tra!elling from one line of support to one line of resistance and !ice7!ersa" e!ery trader would e rich and retiredA So although support and resistance lines Ldemand and supply areasM can work for a long time" they e!entually ecome in!alid. How do we know they ecome in!alid? *hey 3ust get rokenA *his is the moment when you go long at support and price gets elow it and you scream I
$n reality" what was a good price to uy La supportM may weaken until the price finally reaks down and what was a good price to sell La resistanceM may weaken until the price finally reaks up. $n the 0454SD chart elow" resistance held for a time and re3ected price ; times efore e!entually getting roken. $t simply means that supply was exhausted and demand was stronger. $t does not mean to e a terrific amount of demand" it can 3ust e that there a !ery small amount of sellers willing to sell again at this price. )lways think aout the imalance etween uyers and sellers.
$n this one" no uyers were left at the le!el. Support got roken. Here" price action showed in ad!ance that there was some selling pressure on the le!el ecause of the gap down preceding the reakout. $n this case we can imagine that supply was stronger than demand.
So now what?
2ow you must ha!e understood that price raises until sellers 3udge it is a good enough price to sell" and price drops until uyers 3udge it is a good enough price to uy. When price reaks a resistance le!el and reaches new peaks" this means that uyers ha!e increased their expectations and are now willing to uy at higher prices. Sellers" in the contrary" will wait for a etter price to sell and will let the uyers control the market. When price reaks a support le!el and makes new lows" this means that sellers are now willing to sell at lower prices. 6uyers will step out and wait etter le!el to uy" hence lea!ing the markets at the ears+ mercy. =our mission is (ery simple. #ser!e price action in the areas of interest" around support
and resistance" and train your eyes to see if there are any signs of reaction that could end up in a re!ersal or in a reakout. $n order to do that" $ ad!ise you to read the other articles a!ailale in )ce
Why? )nswer in the next article. 4ntil then" keep safe and en3oy your trading.
"ompression , art 4 *his great article y a great teacher )fmyante is etter suited under &) L&rice )ctionM category ut for it+s in7depth approach to the su3ect of compression and length deser!ed it+s own category. $fmyante is fun of are!iations. *here are some are!iations used in this document. ou can find the full list of $fmyante+s are!iations are!iations here. Bets get started... *o understand exactly a scenario" or indeed to read any situation at all on the charts" past present or future"you should look for a certain set of clues. eneral0 H*' [Higher *ime 'rames]. >now where price is coming from and going to" and the
&) [&rice )ction] past and present in all the *'s [*ime 'rames]" from the %onthly down. Specific0 )t the ,ones you want to trade" look to. ast0 study the ,one in all *'s" down to %( % ( ask yourself. o
o o
Where were the decisions made? Clean SD? %ark these lines. 2o clean SD? 7 compressed ,one. Did price really shoot away form the ,one" or did it C&away? Did the ,one itself react at the right place? Book eyond the ,one further into the past. See what it reacted to. Was there a etter SD neary that price wants to !isit? *his explains many fakeouts.
o
resent0 )pproach. How is price returning to the ,one?
Where+s the nearest flag in the *' you want to trade? *his is your tg( in this *'. 'lags in the B*'s? What does &) tell you? Has price tested the last flag on approach? Lgood signM Has price compressed into the ,one in this *' or B*'s? Lgood signM $s there ig news on the way? Has there 3ust een ig news? -eaction0 $n B*'" does price react !iolently to the first decision point? Does it /uickly engulf
the nearest SD? Lgood signM Does price simply C&away? %aye it wants to go to the next decision point. $f the first decision point reaks" watch the signs on approach to the next" and" of course" reaction. Compression Definition y $fmyante We talk aout compression when price taking out last decision point and the orders that where left there.
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"ompression , art > Bets put an end to whatPs compression Lotherwise known as a finishing triangleM and what not compression. 2oticed some confusing comments and charts lately with regards to compression. So" elow is an entry from the past to clearly identify the &). 'irstly" we look left and notice a supply ,one 7 supply ,one identified simply y noticing prices fell hard from there efore" therefore sellers exceed uyers. 2ow we wait for &5$C0 )55$)B
Chart ( 2s i know( 3edwas the first who ha#e talked about 4( so all the credits %oes to him. $hen( why don5t put his charts firstly + 6ecause his audience on )7 was %enerally skilled( he was talkin% to expert traders( that don5t need so much explanations. n the other hands( the charts of )fmyante and the charts presented here are more 8noob9 proof( so study on them before all. )n detail( seems that the 8spikin%9 is the most complicated part of the story for inexperienced trader. 8-here the hell are the spikes + ) don5t see any spikes on your chart9 was my first !uestion to )fmyante& well( remember that you ha#e to understand the dynamics of price in L$, that produces the spikes on the *$,( and ne#er e#er for%et that candles are ust a repre; sentation of what happened to price o#er a %i#en time ; your broker time( not the 2 itself( so always looks at the dynamics of the 2( and remember what 4 represent: 8price takin% out last decision point and the orders that where left there9.
.......... ok" now price arri!al to ,one. 6ut notice the manner in which it approaches 7 its spiking south WH$BS* 5$S$2< .......... what does this mean? 5ising to find supply" spiking south is doing se!eral things T the same time. &rices are finding small pockets of demand and testing them to rise to supply. So" as its spiking south its also consuming those small pockets of demand therefore the path south is egin cleared of demand T the same timeA
Chart ( &) watch and entry" ok now look T the result. 2otice how the ears that dropped through the compressed ,one are large and clean suggesting no demand or resistance" reason? 7 the demand was already consumed y the S&$>$2< S#4*H #2 )&&5#)CH *# S4&&B E#20 ............. this is why l ha!e stated often 7 &5$C0S *H$2> )H0)D #' *$%0" prices already decided to turn ecause prices cleared the ,one of demand y spiking south efore they reached supply clearing the path south for the ears........... so there it is
Chart (; another example 7 some of you ha!e een confusing flags for compression. Why does a 64BB'B)< D$&? $ts dipping to consume sellers T a gi!en le!el" once the sellers ha!e een consumed" the flag is complete and prices can ad!ance 7 no mystery. *hen prices lea!e the flag to ad!ance" then once prices reached supply" the approach to the ,one there was compression" so l sold it.
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"ompression , art @ ) /uick !ideo on C& and the importance of finding the Drop 6ase 5ally that creates an S5 flip. &rice compresses updown then pulls ack from hitting a resistancesupposeUsupdem and alances out efore an ad!ance in the compressed direction. *he ressupUsupdem usually comes from a higher *'... this would normally make me iased for a re!ersal.. ut when you watch the &) unfold you see that actually price wants to carry on.. also keeping in mind of where price came from. 'or example" if price has only 3ust left a ;H demand ,one and it hits 1% resistance.. the likely scenario here is that the ;H demand is more powerful and will reak the 1% resistance. *hese are some structures that $ ha!e found to ha!e happened in example of this scenario.
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) note of $fmyante= $f price flags atop a cp ,one" nothing is !alid +til the flag reaks" one way or the other.
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