Mastering Supply And Demand Zones In Forex Trading: A Step-by-Step Guide

The Investor Diary Entry #65: November 16, 2024

So you are curious about the world of supply and demand zones in Forex trading. Let me tell you, understanding these zones is like having superpowers in your trading toolbox. They’re a game-changer when it comes to spotting those magic moments when prices might just take a sharp turn.

Why are these zones so important, you ask? Well, when traders figure out these levels, they’re essentially tuning in to the market’s pulse. A well-placed supply or demand zone can be the difference between a successful trade and just another missed opportunity. It’s like knowing the best fishing spots while others are just casting at random.

This article isn’t just about scratching the surface. I’m here to guide you through a detailed, step-by-step journey on how I mark and use these zones effectively. You’re going to see how I spot potential reversal points – the kind that can boost trading outcomes. Always remember that I don’t use one indicator or tool on its own.

In the first blog of this series, I explained all the tools and indicators that I use, and I use them all together. Furthermore, at the end of the series, I will create a blog that explains how I use them all together to decide on opening a position.

With the insights gained from this blog post, the trading strategy used can level up. It’s all about seeing what others might not and knowing precisely when to jump into the action or hold back, all thanks to mastering these crucial zones in Forex trading.

Identifying and Drawing Supply and Demand Zones

Alright, let’s talk shop: identifying supply and demand zones is an art you want to master. The best starting point? The fascinating world of engulfing candles. These aren’t just any candles; they’re like neon signs flashing, “Hey, look here!” For example, when a price is climbing and hits a bearish engulfing candle, it usually points to a supply zone—where sellers are stepping in to push the price down.

On the flip side, if prices have been dropping and suddenly there’s a bullish engulfing candle, that’s often the birth of a demand zone, hinting buyers are ready to rally. Spotting these patterns isn’t just exciting, it’s your stepping stone to sharpening your market instincts.

When it comes down to physically marking these zones on your charts, there’s a bit of an art to it. The first thing you need to decide is the number of previous candles that the engulfing candle has engulfed.

There are two famous schools of thought here; one says to take the previous candle, while the other says to take all the engulfed previous candles.

I use a combination of the two and decide on the previous candles that would create the demand or supply zone.

The next decision a trader needs to make is whether to draw the zone using candle wicks or candle bodies. Some traders go for the Wick to Wick method, capturing the highs and lows, while others are fans of the Body to Body method, focusing on the core price moves. Let me show you how to do this step by step.

First, identify that crucial engulfing candle. Next, decide which range of previous candles you want to include that would create your demand or supply zone. Remember to use what fits your trading style.

Then decide if you are a Wick to Wick trader or Body to Body. Then, draw a rectangle marking your zone’s boundaries. Think of this as laying down the law on your charts, with these zones visually guiding your trading decisions.

Just imagine you spot a bearish engulfing candle while the price is on the rise. Draw your rectangle from the highest point of the first candle of the series of engulfed candles to the lowest point of the last candle before the engulfing one. That’s your new supply zone. It’s like bookmarking a page for future reference, keeping it handy when prices drift back to touch that area again.

Getting these zones down is like setting up your map before a trek—it all goes smoother when you’ve got your landmarks marked.

Validating and Confirming Supply and Demand Zones

Once you’ve got your supply and demand zones mapped out, it’s time to see if they hold water. You don’t want to bet on shaky ground, right? That’s why confirming these zones is super important for making solid trading moves.

One trick is to check if the zone pushes past previous peaks or dips. This test adds a layer of credibility. It’s like getting a second opinion in a tough decision. If a demand zone breaks above an old peak, it strengthens that zone’s reliability. If it doesn’t, I don’t consider the zone.

Taking your analysis over multiple time frames is another power move in your arsenal. Ever start with a wide-angle lens on your camera, then zoom in for detail? Same idea here. Check out those zones on larger scales like a monthly or weekly chart. Once you spot something intriguing, narrow your focus down to tighter frames—4-hour or 1-hour views can give you precision insight into how prices react in these areas.

Let’s say you’ve earmarked a supply zone on a daily chart. Zoom into the 4-hour chart and see how prices behave. If it looks like sellers have the upper hand as prices revisit, you’ve got a strong signal for shorting.

Fresh zones are like a newly unlocked level in a game. Once a zone is reused, it might lose steam. Prices revisiting often don’t pack the same punch. It’s not about flipping assumptions but staying sharp and adapting your strategy as the game progresses.

Maximizing Supply and Demand Zones with Complementary Indicators

You’ve mapped out your zones and given them a strong check for validity. Now, how about cranking up accuracy a notch? Pair these zones with other indicators for serious trading swagger.

Pivot points, Volume Zones, Fibonacci retracement levels, and Support and Resistance levels really amp up your supply and demand game. Imagine catching a supply zone that syncs up with a major pivot or nails it at a key Fibonacci level. That, my friend, isn’t just luck – it’s strategy with muscle.

Let’s say your supply zone coincides with a 61.8% Fibonacci retracement. This confluence could mean the market’s ready for a pivot. Tracing these indicators is like having the wind at your back – they bring extra force to your trading decisions.

Getting this blend right means you’re not just rolling the dice each trade. It’s calculating moves with precision and finesse. Streamlining your indicators into one cohesive view gives you a roadmap that’s as thrilling as it is understandable.

Keep tinkering and fine-tuning. These strategies aren’t set in stone. Modify, combine, take notes, and adjust as the market whispers its quirky tales. Remember, practice is what welds these techniques into second-nature trading habits.

The above combinations mentioned are examples only. Personally, I take trades from areas that have at least three confluences, and I prefer that they are more.

For sure, there are instances where two confluences can seem enough, but I put a 50% chance on such a trade if I am going to take it which will affect the exposure and capital risk percentage that I am willing to take on this trade.

Conclusion

Mastering supply and demand zones is a powerful tool in Forex trading. By understanding how to identify, draw, and confirm these zones, you can improve your trading strategy and make more informed decisions. Remember, practice and consistency are key. In our next post, we’ll explore how to use the Fibonacci retracement indicator to further enhance our trading analysis and strengthen our trading strategy with more confluences.

The Investor

Saturday 16 November 2024

About The Author

I started to look into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second, as a place where I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links, I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.

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Furthermore, this site is in no way or form giving any financial or investing advice, nor it is encouraging or discouraging people to buy or sell any financial instrument. This is a personal diary in which I track my own progress and share it for informational, educational, and entertainment purposes.