Trading is closely tied to economics. A trader must understand how prices move in order to make money out of trading. Prices move because of the collective perception of all the market participants regarding what price should be. In a way, trading is about the crowd’s psychology about money. This is exactly what economics is, the sociology that deals with limited resources, such as currencies, stocks and other commodities. This distribution of limited resources is based on its supply and demand, causing prices to rise or fall.
Given that economics is directly related to trading, it is just logical to use the main concept of economics in a trading strategy.
Supply and Demand is one of the more popular methods of trading that profitable traders use. It is based on the understanding that certain areas on the price chart could be identified as a demand zone or a supply zone based on how the market reacted on that area.
Supply and demand zones are identified on the price chart by the way the market reacts to a certain price point, quickly reversing the direction of price in a matter of a few candles. Those who are knowledgeable about candlestick patterns would identify these areas by looking for pin bar or momentum candles.
The theory is that the market is ready to buy once price goes low enough reaching the demand zone, and ready to sell once price goes high enough touching the supply zone. Once price revisits this area the next time, there is a high probability that the same reaction would occur.
Advanced Supply and Demand traders would prepare their charts by looking for these zones and identifying patterns which show a rising demand zone on a bullish trend, a falling supply zone on a bearish trend, or a stagnant supply and demand zone on a ranging market.
Many advanced traders who use Supply and Demand strategy take years to develop the skill of identifying these zones. With this strategy, we will simplify things by using an indicator that could help identify probable supply and demand zones.
SupDem Indicator
SupDem, short for Supply and Demand, is a technical indicator which helps traders identify supply and demand zones.
It identifies these zones based on how price reacts to certain price points considering the velocity of how price moved away from it. It then marks demand zones with blue and supply zones with red. These zones are then stretched up to the present period and remain valid until price breaks through it.
These zones are an early indication for traders that price might react at a certain area. Traders could then make their trading decision based on this information.
Trading Strategy
Many advanced supply and demand traders would use limit entry orders placed on the supply or demand zone to enter a trade. However, for most traders attempting this strategy, entries could become inaccurate. This requires honed skills in identifying high probability zones and discipline.
Other traders would wait for a reversal price action pattern as soon as price touches the zone. This would be the entry method that this strategy would be using.
As for the stop loss, some advanced traders would place the stop loss on the fractal inside the zone as soon as price reverses. This could be a good stop loss strategy. Conservative traders on the other hand would place stop losses on the opposite side of the zone. This strategy would use the conservative route and move stop losses only when price has pushed in the direction of the trade.
It is also important to identify fresh zones. This means that price still has not revisited the area or had just one prior touch before the new entry.
Indicators:
- SupDem (default setting)
Preferred Time Frames: 15-minute, 30-minute, 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The SupDem indicator should mark a demand zone on the price chart.
- Wait for price to revisit the demand zone.
- Enter a buy order as soon as a bullish price action pattern occurs on the area.
Stop Loss
- Set the stop loss below the demand zone.
Exit
- Set the take profit target at 2x the risk on the stop loss.
Sell Trade Setup
Entry
- The SupDem indicator should mark a supply zone on the price chart.
- Wait for price to revisit the supply zone.
- Enter a sell order as soon as a bearish price action pattern occurs on the area.
Stop Loss
- Set the stop loss above the supply zone.
Exit
- Set the take profit target at 2x the risk on the stop loss.
Conclusion on Supply and Demand Reversal Forex Trading Strategy
Many professional traders use Supply and Demand as the core of their trading systems. Others use it as a precise entry mechanism on the lower time frames. Many on the other hand use it as their main entry setup. This strategy uses Supply and Demand as the main entry setup.
There are many professional traders who use the same strategy without the use of this indicator. However, new traders would find it difficult to identify the correct supply and demand zones. Many professional supply and demand traders practice for several months to even more than a year prior to mastering this skill. Using this indicator gives new traders the opportunity to trade using Supply and Demand.
Recommended MT4 Brokers
XM Broker
- Free $50 To Start Trading Instantly! (Withdraw-able Profit)
- Deposit Bonus up to $5,000
- Unlimited Loyalty Program
- Award Winning Forex Broker
- Additional Exclusive Bonuses Throughout The Year
>> Sign Up for XM Broker Account here <<
FBS Broker
- Trade 100 Bonus: Free $100 to kickstart your trading journey!
- 100% Deposit Bonus: Double your deposit up to $10,000 and trade with enhanced capital.
- Leverage up to 1:3000: Maximizing potential profits with one of the highest leverage options available.
- ‘Best Customer Service Broker Asia’ Award: Recognized excellence in customer support and service.
- Seasonal Promotions: Enjoy a variety of exclusive bonuses and promotional offers all year round.
>> Sign Up for FBS Broker Account here <<
Click here below to download: