Forex trading with supply and demand zones

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Forex trading with supply and demand zonesHow to properly draw forex supply anddemand zones

Unfortunately, there are no hard rules in how to draw forex demand and supply zones. Think of drawing these zones as more of an art rather than science. A couple things you should keep in mind though:

Make sure the zone is significant: The smaller and short-lived the zone, the less significant or strong it becomes. You want to look for zones that held price for an extended period of time. What determines a period of time to be sufficient also changes based on the time-frame in which youre trading. For example, a demand zone on a 1-minute chart would not need to hold price as long as a demand zone on a 1-hour chart. Also understand that the higher the timeframe, the more significant the demand or supply zone becomes. In our EUR/USD example above, I would consider the third zone (the demand zone) to be more significant than the other two. Price was rejected by this zone several times over the course of many hours

Be careful of wicks: Wicks are a big part of the art over science when drawing your forex demand zones. I prefer to always stay conservative. That means, if Im holding a short position and looking for a demand zone as my price target, I would probably include wicks and target the upper boundary of the demand zone. However, if I was looking to initiate a position I probably would not encompass the wick in the supply or demand zone to ensure Im not entering too early.

The best way to become familiar with forex support and demand zones is to start recognizing them, drawing them out, and noticing how price reacts in real-time.

Forex supply and demand zones at work

Today provided a phenomenal opportunity for those versed and confident in trading support and demand zones. I currently spend most of my time trading GBP/JPY and had drawn the following three zones on the 4-hour chart. Youll notice there are two demand zones and one supply zone:

Last night, GBP/JPY fell through its consolidation range (through the blue line) allowing us to complete the future supply zone. As it fell, the pair tested (and was supported) by the first supply zone on two different attempts. Had I been at the computer, I would have been buying in this zone and targeting the supply zone, expecting to get short once we got there.

Sure enough, price ran up to a bit above 185.00 — just slightly into our supply zone — before reversing back lower again. At this point two things may happen: We may head lower and back into the first demand zone and potentially trade between the supply and demand zones as we consolidate. GBP/JPY may end up going higher, eventually breaking through the supply zone. However, we could also drive back down right through the bottom boundary of the demand zone. In this case our target would be the upper boundary of the second demand zone.

At this point Im favoring at least a retest of the first demand zone and a potential break down to the second demand zone. Markets are precarious right now and GBP/JPY tends to follow them. Overall, however, I expect the uptrend to continue. When that happens is anyones guess, but until then Ill be playing all the support and demand zones I find along the way.

I hope this was helpful. Please let me know if youd like to see more posts like this.