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How to identify the basic Supply and Demand zones
Identify the Supply zone
The Supply zone has 2 common patterns: (1) RP – Reversal and (2) CP – Continuation. (1) Reversal pattern (RP): Rally – Base – Drop [caption id="attachment_16529" align="aligncenter" width="1280"]
Reversal Supply pattern[/caption]
The price moves sideways after an uptrend and creates a sideways candlestick zone called the Base. Then it falls dramatically with a long body candlestick. This Base is the reversal Supply zone (RP).
For example:
[caption id="attachment_16530" align="aligncenter" width="1920"]
An example of the reversal Supply pattern[/caption]
The 6 candlesticks moving sideways in the image above are the Base. When the gold price falls sharply and creates a red candlestick with a long body, this Base becomes the reversal Supply zone.
(2) Continuation pattern (CP): Drop – Base – Drop
[caption id="attachment_16531" align="aligncenter" width="1280"]
Continuation Supply zone[/caption]
The price stops decreasing and creates sideways candlesticks. Then it continues to fall significantly. The sideways zone (Base) in this process will be the Supply zone.
Detailed example:
[caption id="attachment_16532" align="aligncenter" width="1920"]
An example of the continuation Supply pattern[/caption]
Identify the Demand zone
The Demand zone is similar to the Supply but we will focus on the strong bullish candlesticks. (1) Reversal Demand pattern (RP): Drop – Base - Rally [caption id="attachment_16533" align="aligncenter" width="1280"]
Reversal Demand pattern[/caption]
For example:
[caption id="attachment_16534" align="aligncenter" width="1920"]
An example of the reversal Demand pattern[/caption]
When the market bounces back, it creates a long green candlestick. Then the Base will be the Demand zone (RP).
(2) Continuation Demand pattern (CP): Rally - Base - Rally
[caption id="attachment_16535" align="aligncenter" width="1280"]
Continuation Demand pattern[/caption]
Detailed example:
[caption id="attachment_16536" align="aligncenter" width="1920"]
An example of the continuation Demand pattern[/caption]
How to trade with the Supply and Demand zones
All we need to do is to watch for the strong bullish or bearish candlesticks. This is a sign of cash flow from large organizations. When the signal appears, it's time to look for entry points.How to trade with the Supply zone
After identifying the Supply zone, the main job is to wait for SELL opportunities. When the price returns to retest the Supply zone, find an appropriate entry point and place a SELL order. For example, the yellow zone is the Supply zone of gold (XAU/USD). (1) When the price returns to this zone and creates a small body candlestick, this could be a signal that it will stop increasing. [caption id="attachment_16537" align="aligncenter" width="1280"]
Trading with the Supply zone[/caption]
(2) Place 1 SELL order (Risk/Reward = 1:2)
+ Set the stop loss a few pips above the Supply zone to avoid being swept by the market.
+ Set the take profit to overlap the below Demand zone.
Result: The price drops sharply and touches TP.
[caption id="attachment_16538" align="aligncenter" width="1920"]
Trading result with the Supply zone[/caption]
I have another example about the gold price.
(1) The price increases and enters the Supply zone. Then it begins to show a slow increase signal with a small green candlestick.
[caption id="attachment_16539" align="aligncenter" width="1280"]
Sell Gold at the Supply zone[/caption]
(2) Place 1 SELL order (Risk/Reward = 1:3)
+ Set the stop loss a few pips above the Supply zone.
+ Set the take profit to overlap the below Demand zone (as the picture shown).
Result: The price falls sharply and hits TP.
[caption id="attachment_16540" align="aligncenter" width="1920"]
Trading result with the Sell order[/caption]
How to trade with the Demand zone
The first thing to do is to identify the Demand zone. The next is to wait for the BUY signal. When the price retests the Demand zone and creates a bullish reversal signal => Place a BUY order. We have an example of the Gold BUY order (XAU/USD). The price falls back to the Demand zone and creates a reversal signal. [caption id="attachment_16541" align="aligncenter" width="1920"]
How to trade with the Demand zone[/caption]
Place the BUY order:
+ Set Stop Loss below the Demand zone.
+ Set Take Profit in 2 Supply zones.
As a result, the price increases and hits both TP1 and TP2.
[caption id="attachment_16542" align="aligncenter" width="1920"]
Result of the BUY order[/caption]
It is already quite long so I'll save the real trading experiences for the next article. We’ll also learn the reason why you should use a daily chart and when the Supply and Demand zones are no longer make sense.
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