Supply / Demand Levels Strategy
One of the biggest challenges traders struggle with is to identify the good opportunity for a trade.
What’s the key to low risk, high reward and high probability trade?
How to know where the market is going to turn, before it turns?
These are the questions that many of us ask themselves. There is only one solution. One has to recognize the price level, where supply and demand are out-of balance. It is important because that’s’ the point where price makes the change of direction.
In other words, when price is declining and reaches a level where demand exceeds supply, we can expect a change of direction. We can expect the same behavior on a level where supply exceeds demand.
The similar behavior can be noticed in a real-life situation. Let’s take a look at the Real Estate market – if the supply of the houses put on the market exceeds the demand, we will notice the price to drop – supply exceed demand.
Buying at or near the price level allows us to benefit from minimum risk and maximum reward for a position.
How can you recognize such levels using charts?
First of all you have to identify the places where the price changes the direction, usually these are the former price pivot points.
When you identify such places, you need make the judgment on how strong the level is and whether there are still a significant amount of buyers/sellers.
To help you with your judgment here are some guidelines:
1. The less time spent in level by price the better
2. Price never revisits level
3. To increase your reward and limit the risk, you need to have enough room to the nearest opposite level
e.g. if you are considering demand level then you have to measure the distance to the nearest supply level.
The distance between levels should be at least 3 times more than the range of demand level.
4. Make sure you are trading with trend e.g. if you are in downtrend, it is better is to look for the entry opportunity in the supply level
Usually your entry supposed to be either inside the level or when the price leaves the level.
When the level is very strong, you can expect that the price will barely touch the level or will change direction few ticks before it reaches the level. In such case, the solution would be to setup a limit order, a tick or few ticks before level.
Your stop always should go above (if Supply) or below (if Demand) level.
You can also use our RR SD Levels indicator that will recognize and score all supply/demand levels
Below is an example where you can see how revisited supply level price makes a big drop.
Here another example where demand exceeds supply. Just notice like after barley touch of the Demand level price shoot up.