Zigzag Supply and Demand Forex Trading Strategy

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Zigzag Supply and Demand Forex Trading Strategy

Supply and Demand trading is a type of technical trading technique in which traders would try to identify supply and demand zones based on how price reacted to certain price point on the price chart.

Demand Zones are identified based on price action quickly reversing from a price level creating a swing low. It assumes that there are many bullish traders willing to make a trade at that price level. Supply Zones on the other hand are identified based on price action quickly reversing back down creating a swing high. It assumes that there are many bearish traders who are willing to make a bearish trade on that price level.

In a way, Supply and Demand is closely related to Market Flow trading which identifies horizontal supports and resistances based on swing highs and swing lows.

Supply and Demand trading is a very effective trading technique. In fact, there are many professional traders who trade exclusively based on Supply and Demand setups. These traders can consistently profit from the market on a month to month basis.

Although Supply and Demand trading is very effective, it could also be very difficult for new traders. This is because identifying supply and demand zones require a lot of skill.

In this strategy however, we will be looking into how a Zigzag indicator can be used to aid us in identifying supply and demand zones effectively.

Zigzag Indicator

The Zigzag indicator is a technical indicator which was developed to aid traders in identifying swing highs and swing lows.

It plots points on the chart whenever its underlying calculations detect price reversing by a percentage greater than the preset percentage threshold. It then connects these points creating a zigzag like pattern as swing highs and swing lows are connected.

The Zigzag indicator is mainly used as a tool to help traders identify swing highs and swing lows. As such, price action traders can use this to objectively identify swing highs and swing lows. It could also help traders identify trending markets based on market swings. The market is considered bullish if the swing highs and swing lows are constantly plotted higher, and bearish if they are constantly plotted lower.

Stochastic Cross Alert

The Stochastic Cross Alert indicator is a custom signal indicator which is based on the Stochastic Oscillator.

The Stochastic Oscillator is a popular momentum oscillator which plots two lines that oscillate within the range of 0 to 100. Momentum direction is identified based on how the two oscillator lines are stacked, and as such momentum reversals are identified based on the crossing over of the two lines. It also typically has markers on level 20 and 80. Stochastic lines below 20 are indicative of an oversold market, while lines above 80 are indicative of an overbought market. Crossovers occurring on these levels are indicative of a mean reversal condition. Mean reversal signals tend to have a high win probability because it combines both momentum and mean reversal.

The Stochastic Cross Alert indicator is based on this concept. However, it simplifies the process for the traders by automatically plotting an arrow whenever the indicator detects a momentum reversal signal. The arrows conveniently point the candle and the direction of the reversal.

Trading Strategy

This trading strategy is a basic trend following supply and demand strategy based on the Zigzag indicator.

First, we must identify if the market is trending and in which direction based on the swing highs and swing lows being identified by the Zigzag indicator.

If the market is bullish, then we identify demand zones based on the most recent swing low. If the market is bearish, we identify supply zones based on swing highs. These zones are marked based on the wick of the candles forming the swing points.

We could then set our pending limit entry orders on the edge of these zones closer to the current price action, while the stop loss is set outside the zone opposite price action.

The Stochastic Cross Alert indicator is used as an exit signal based on an arrow pointing the opposite direction of our trade.

Indicators:

  • ZigZag
  • Stochastic_Cross_Alert

Preferred Time Frames: 1-hour and 4-hour charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • Price action should be plotting higher swing highs and swing lows indicating a bullish trend.
  • Identify the demand zone based on the wick of the candle forming the most recent swing low.
  • Set the buy limit order on the top edge of the demand zone.

Stop Loss

  • Set the stop loss below the bottom edge of the demand zone.

Exit

  • Close the trade as soon as the Stochastic Cross Alert indicator plots an arrow pointing down.

Zigzag Supply and Demand Forex Trading Strategy

Zigzag Supply and Demand Forex Trading Strategy 2

Sell Trade Setup

Entry

  • Price action should be plotting lower swing highs and swing lows indicating a bearish trend.
  • Identify the supply zone based on the wick of the candle forming the most recent swing high.
  • Set the sell limit order on the bottom edge of the supply zone.

Stop Loss

  • Set the stop loss above the top edge of the supply zone.

Exit

  • Close the trade as soon as the Stochastic Cross Alert indicator plots an arrow pointing up.

Zigzag Supply and Demand Forex Trading Strategy 3

Zigzag Supply and Demand Forex Trading Strategy 4

Conclusion

Supply and demand trading based on trend direction is a high probability trading strategy which can help traders consistently profit from the forex market quite easily. However, identifying the supply and demand zones is the hard part.

This trading strategy simplified the process of identifying the supply and demand zones through the use of the Zigzag indicator.

Exit strategies may vary. In this setup, we are using the Stochastic Cross Alert to allow the market to tell us how much it is willing to give use before it reverses. However, there some Supply and Demand traders who would rather place a take profit target on the prior swing point. The advantage of this is that it gives traders a fixed target to compute their risk-reward ratios on. However, it also limits the earning potential of each trade, as price does tend to breach above the prior swing point in a trending market, unless the market would start to range.

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