In this article, we continue to study the trading methodology from the demand/supply zones of Sam Seyden and his followers. You can familiarize yourself with the first article at the link – “Forex Trading from Supply and Demand Zones“.
The trading strategy in supply / demand zones is quite simple and methodologically fundamentally not particularly different from trading at support / resistance levels.
The most difficult moment in Sam Seyden’s entire methodology is the correct identification of the supply and demand zones themselves. There are no clear rules and this greatly complicates their finding. In addition, there are no volumes and book of orders on the Forex market and, we cannot use them as an additional criterion for analysis. Therefore, in determining the areas of interest of large players in the foreign exchange market, one will have to rely only on charts and their analysis.
On the 4-hour chart of the USDJPY currency pair, supply zones (blue and pink) and demand zone (green) are highlighted at the top.
This concept has many followers and critics. The following reviews can be found on the Internet: “Pending orders cannot move the price of an exchange rate, the fact that supply and demand trading is primarily based off this assumption means either Sam Seiden doesn’t know much about trading forex or he purposely gives out incorrect information in order to get people to buy his trading courses.”
We know perfectly well that the “golden grail” on forex does not exist. The market is highly unpredictable and individual traders lack a large amount of information about the market. And the concept of supply/demand zones is no exception. Its use cannot give 100% profitable trades. And here it is important to be able to distinguish the essential provisions of the theory from its shortcomings. Of course, the example about a pack of pending orders at the levels in the previous article is just a figurative example. And it is unlikely that in these zones the orders of large players stand and wait for the price to return to this zone and execute them. Modern trading is much faster, more dynamic and robotic.
And the key concept from Seyden’s theory, in my opinion, is the IMBALANCE of supply and demand arising in these zones. And the reasons for its appearance can be very different. These are market orders and pending orders and profit taking or traders closing opposite positions. But against the backdrop of all the disagreements in the theory of supply and demand zones, we see with persistent constancy how price returns to these zones and unfolds in them (or does not unfold, but passes through them).
So let’s try to learn how to define these zones on currency charts. And for starters, we need to formulate the basic requirements for these “magic” zones. Let’s get back to Seyden’s theory.
- At a certain point in the market, an imbalance of supply and demand arises, which leads to a strong exit of prices from the consolidation zone or base. This level will be the zone of supply or demand, depending on whether the buyers (demand) or sellers (supply) were stronger. This imbalance is visible on the charts as a rapid rise/fall in prices. So, the first is the rapid rise (fall) in prices after consolidation. On the charts, we can see it as large absorbing candles in the direction opposite to the previous movement and price consolidation on the chart.
- “The source of the price movement is an equation in which one of the two competing forces (buyers or sellers) disappears at a certain price”. The second – in my opinion, is the removal of the nearest stop orders or the closure of one’s position by one of the parties. What we can see on the charts is the reversal candle patterns and the breakdown of the nearest support / resistance levels.
- The price should not immediately return to the zone. The initial impulse must be continued in the form of translational motion. This rule confirms the strength of the zone.
- It is advisable that before leaving the zone the price be in balance for some time. Indeed, for an imbalance to arise between supply and demand, there must first be a balance. Or in other words, consolidation. It is not difficult to determine on the chart. This balance in Sam’s theory is called the base.
- Timeframe for determining supply and demand zones. Many materials say that this concept works on any timeframes. But in my personal experience, the most suitable timeframes are hourly and 4-hour charts. On days and weeks, the zones are very wide and make trading decisions difficult. Below an hour a lot of price noise. But it can be very useful to specify the zones obtained on hourly or 4-hour charts on smaller timeframes, up to the minute. For example, a base or consolidation can take the form of a single candle on an hourly or 4-hour chart, and at 5 minutes a clear consolidation or base is visible.
So, how do I define supply or demand zones on price charts. I find a big candle or a strong price movement. This movement should break through the last level of support or resistance, which means at least the removal of the nearest stops. Next, I look for the last opposite candle on the hourly or 4-hour chart, along the borders of which I build a zone of supply or demand. Then I check whether the base (consolidation) was formed before the candlestick that formed the level. After the level is determined, I study the schedule before the formation of this zone.
I am looking for an answer to the question why activity or price imbalance arose in this particular zone. Typically, clues are found. It can be a mirror level of support / resistance in the past or a round level, a past peak or a minimum price on an older chart (day, week), or something else. After that, if necessary, I adjust the level. You should always think and look for the answer to the question why traders began to actively buy or sell in this particular zone.
We look at an example on the 4-hour chart of the EURUSD currency pair.
In area 1 (blue oval), a base is formed from which a strong bearish candle comes out. The supply zone (pink) is highlighted exactly along the borders of the last bullish candle. In the chart above, the candles that form the level are indicated by a blue arrow. As we see the first few rebounds, prices do not reach this zone.
The next supply zone formed in area 2 and is also indicated along the borders of the last bullish candle. The price continued to decline and a demand zone is forming in 3 regions. It is highlighted by the border of the doji candles. As you can see on the chart, each movement from the demand or supply zones breaks through the last levels of support or resistance, which are indicated by green or red horizontal lines on the chart, respectively.
The price rebound from the demand zone comes exactly to the second supply zone, returns to demand and tests the offer again. After that, buyers in area 4 break through the second offer zone, actively trading on it, but rest against the first offer zone.
In area 5, buyers were unable to gain a foothold above the supply zone and the price is again falling. In region 6, a new demand zone is being formed, from which the price begins to grow rapidly. Pay attention to how the zones turn into mirror zones and the price tests them with each breakdown. After growth from zone 6, the price does not interact with the second supply zone. This zone has ceased to exist.
In area 7, after reaching a new maximum, the price forms a new supply zone and another one in area 8. From area 8, the price returns to the demand zone from which it bounces twice to supply. And only with the third attempt, traders break through the demand zone and it begins to work as a mirror zone. Carefully looking at price charts, you can find similar zones on almost the chart of any currency pair. Somewhere, the price will better respect these areas, somewhere less.
The great advantage of technical analysis of schedules using demand-offer zones is that the zones are directed to the future. You know in advance that when the price approaches one of the zones, you can expect a breakdown of this zone and, accordingly, the continuation of the price movement. Or price rebound from this zone. You can use the Alerter level indicator to get a remote signal that the price is approaching the zone.
Demand / supply zones very often act as mirror zones or swing zones. Look at the 4-hour chart of the Japanese yen at the beginning of the article. The supply zone highlighted in blue has become a swing zone. Price interacted with it six times using either support or resistance. Moreover, almost always the price after the breakdown of the zone tests it. And these tests become excellent market entries with minimal risk. The demand zone (green zone) after the breakdown at point 4 also became a mirror zone of supply (resistance).
The approach or entry of a price into a zone is not a trigger in itself for opening deals. It is necessary to find additional factors confirming the price rebound from the level. And it’s very useful at the same time to switch to a smaller timeframe. See how the price fights in area 3 on the USDJPY chart (beginning of the article) on the 5 minute chart.
The price twice tests the upper limit of the demand zone, after which the powerful impulses rush up, breaking through the nearest resistance level (red horizontal line). The retest of this resistance is an excellent entry point into the market. To confirm the likely price reversal from the zones, you can additionally use any other methods of technical analysis. Candles of absorption, divergence of oscillators, trend lines, support and resistance levels and more of your choice. Your task is to find a confirmation signal of a likely price reversal in accordance with your trading system.
Using supply and demand zones for technical analysis in the Forex market in addition to traditional support / resistance levels very often helps to find an answer to the question – why the price does not reach the level or does not interact with the levels in any way. Look for nearby supply / demand areas. As in the example above. In area 3 (USDJPY chart), the price reversal occurs in the demand zone, and not at the support level (green horizontal line). The price just does not reach the level.
Supply / demand zones do not exist forever. The more often the price interacts with these zones, the faster they are depleted. It is necessary to constantly adjust these zones in accordance with the current situations on the chart. If the price does not interact with the zone – safely remove it, it is useless for technical analysis. The most relevant are the most recent zones, use them for analysis.
And of course, when using supply and demand zones, it is imperative to use the principles of price movement in a trend. If there is an uptrend, the price will be more likely to turn around in demand zones and break through supply levels, using them as mirror levels. Accordingly, with a downtrend, it is exactly the opposite.
The correct definition of supply / demand zones using only charts is not an easy task, but mastering this art will significantly increase the profitability of any Forex trading system for you.
Analyze charts, look for an imbalance in supply and demand on them and get good opportunities for opening deals with low risk.
Be prudent, observe risk management and trade in a plus.