Core principles

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Core principlesCore Principles

My strategy is based on pure supply and demand trading. After a long journey of searching for the holy grail, i realised, that it does not exists. Price action was the way to go and i studied different patterns for reversals and continuation of trends. Fortunately i found material from Sam Seiden from Online Trading Academy. He opened the door for learning supply and demand on a price chart. Why is it so interesting (i would rather say enlightening)? Because its real, undelayed and clear. You will see, how clean your charts are, when using this trading approach.

What is supply and demand?

Demand is, if you want something to buy. Supply is, when you are selling something. When supply and demand meet, price is in equilibrium. Nothing magical here.

How to apply supply and demand to trading?

Wen know, that price is in equilibrium when demand meets supply (or vice versa). What happens to price, if its in equilibrium? Guess what, nothing! If there is enough demand for the available supply, then we speak of a balance. Price stays the same. But it gets more interesting for us traders, when supply and demand are not in balance. In that case, either demand exceeds supply or supply exceeds demand. We speak of an imbalance. Lets see, how it looks on a picture you find in most economy books:

[picture supply demand price change]

As you can see, price changes when imbalance occurs. Not only it changes, it has to change. Why? Best example: ebay auction: You bid on something that you want to have by any means. Problem: competition. If someone other wants that item equally, he will also bid. You both are in a competitive fight, because there is only one item to sell. Demand exceeds supply. What happens to price? Right, it will raise until someone of you will stop bidding.

The other side of this illustration: if there are plenty of the items on ebay, you wont have the feel to miss the opportunity. So you dont bid, if someone else has bidden too much for your taste. You wait until you can get the item for your desired price. In this case, supply exceeds demand. Price drops or stays low, if nobody bids.

We as traders can only profit from imbalances. How do we do that? By identifying spots of price imbalances.

How to find imbalances on a price chart?

Basically we just need to look for big moves. If prices moves away in a strong fashion, like some big engulfing bars, we have an imbalance. If the price rallied up, demand exceeded supply at that level. If price dropped down, supply exceeded demand. Here are a few pictures of marked imbalances.

[pictures supply demand spots]

By the time you will notice, that not all supply and demand spots are tradeable, at least they are not very likely to result in a profit. Thats why you should use some common sense criteria to filter out bad spots. Sam Seiden calls them probability enhancers, which i will summerize now.

How to quantify supply and demand zones?

how strong was the imbalance (how far price went away from the zone)? this is the initial profit margin, should be multiple times the zone (like 3R+)

how much time did price spend in the zone before moving away? good zones have 2-6 candles

is the zone high/low on the curve or is it inside (continuation pattern)? extremes over CPs

how often did price retraced to the zone? best, if first time on entry

how did price approach the zone (how it is retracing to the zone)? fast arrival = fast departure

did price gapped into the zone? best form of arrival

did price gapped away from the zone (creating imbalance)? yes = zone is very strong

did the zone take out any other zones? good for trending markets

does the zone have the potential to be a trap? look for support/resistance levels, trendline breaks, double bottoms/tops, etc. where novice trades might have their stops

how much time passed since retrace? usually more is better

was the zone created in a time of high activity trading? be aware of currency related sessions, especially when trading lower timeframes

how are the candle wicks in the zone? smaller = better (according to trade direction)

Do other correlated currencies have also zones formed? Also check US Index if trading USD pairs