Identifying High Quality Supply and Demand Levels

Supply and demand levels can be found on any and all price charts, on every time frame for any instrument, but not all SD levels are created equal. Whilst we can never know for sure which levels will hold and which ones won’t, some carry a much higher probability of success than others.

I have already mentioned one of the ways I use multiple time frame analysis starting with the higher time frames to find great SD levels to trade from in previous articles, and in this article I am going to share another one.

A brief summary of what to look for is below:

  • Identify Supply and Demand on the Weekly chart
  • Wait for a big move on the Daily chart away from a Weekly SD level
  • Drop down to the lower time frames to find an SD level within the Daily PA caused the move
  • Wait for a retrace and enter using small time frame PA

The above is by no means a trade plan but it shows what you can look for at a very basic level.

Higher time frames are king in trading. Levels on these charts carry a lot more weight than those on the smaller time frames so it always makes sense to know where we are in relation to the higher time frames. Although I will sometimes look at the monthly chart, my trading decisions are not based on it too much. The weekly chart is the highest chart that I’ll look at as a guide for my trading decisions on a regular basis. This gives me an idea of which direction to trade in. If we are at a supply level on the weekly chart then I will be looking for an indication that price will lower until price reaches weekly demand.

The daily chart is still the main analysis time frame. This is where I look for trading opportunities. Using the example above, if we are at a weekly supply level then I will be looking for a significant move visible on the daily chart that makes a move lower. By significant I mean price must break previous levels. This could be a demand level, a prior low or another decision point on the daily chart. This can be displayed by one daily candle which might be a momo (momentum) candle, or a series of candles. When I see that happen on a daily, this is the signal to drop down to the lower time frames to try and find a supply level from which to trade.

The idea behind this is the fact that for price to drop in such a fashion to create a momo candle on the daily chart and/or break a decision point on the daily chart, there must have been a big supply/demand imbalance i.e. supply overwhelmed demand. These levels of imbalance are not always visible on the daily so this is why I drop down the time frames to see if I can find a nice looking level to trade from within the daily move. This also means that I don’t have to trade with a large stop loss either.

Some recent examples are below:

GU

2014-05-12 GU Short W1

2014-05-12 GU Short D1

2014-05-12 GU Short H1

2014-05-12 GU Short 30m

2014-05-12 GU Short 5m

2014-05-12 GU Short 3m

AJ

2014-05-14 AJ Short W1

2014-05-14 AJ Short D1

2014-05-14 AJ Short h4

2014-05-14 AJ Short 5m

 

The process for finding high quality demand levels is similar to the above for supply but in reverse:

  • Identify demand on the weekly chart
  • Wait for demand on the daily chart away from the weekly demand level
  • Drop down to the lower timeframes to find the demand level that caused the move
  • Wait for a retrace and enter

There are a few things to consider when adopting the methodology above.

Less Trade Setups

There will most likely be fewer trading opportunities to take depending on your current trading style. This however was not a problem for me. As traders the goal is to make money not make a certain number of trades. If you can achieve your goals by trading less then that’s a good thing as far as I’m concerned.

Small Risk

Looking for entry levels on the smaller time frames means that we can limit the risk on each trade. We are trading big time charts from small time frames.

Longer waiting period

The overall waiting time can be quite long. Long to wait for setups to appear, long to wait for the entry and long to wait for the exit, whether that be at profit or a loss. Whatever method you adopt for trading, a substantial amount of time will be spend waiting. This is inevitable. Each individual will need to decide which trading style they will adopt and for me the waiting period between trades is fine. All it means is that I have more time to do other things whilst I let my trades run their course which could be anywhere from a couple of hours, days or even weeks.

Greater Profit Potential

This method is based on big moves on the daily chart. The benefit of this is that the profit targets are often quite large and trades often run for over a hundred pips.

Identifying supply and demand levels based on daily price action helps to filter out lower quality levels so that action is only taken when the conditions are highly in your favour.

I hope you found this article.

Happy Trading

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6 Comments

  1. Lamar on May 23, 2014 at 02:46

    Hey Joe, good article. What’s your take on time of day zones are created?
    Thanks

    • Joe Wright on May 29, 2014 at 07:20

      Thanks Lamar. I don’t pay too much attention to what time the zones are created to be honest. You may notice that price returns to some of the zones during certain times of the day though. That depends on the pair but it can often be around the London or US opens. I just wait for my alerts to sound whatever time that happens to be then I will watch for PA

  2. Prits187 on August 30, 2014 at 15:39

    Hi,

    Iv been very fortunate to make a friend who teach me Supply & Demand one2one.

    His always trying to teach me about stop loss, but the issue im coming across is that when ever iv put a stop loss on, its always spike up and take me out 80% of the time and then it would go back into my favour.

    but when iv left my position free from stop loss, iv seen better performance but I do understand that when it does continue against me, then it could take me to the cleaners.

    is any tactics i could take away to make me more secure in my trading and also have a stop loss but, making sure it don’t go back in my favour after taking me out.

    thank you

    • Joe Wright on August 31, 2014 at 16:07

      Hello,

      Thanks for your question. For me I always use a stop loss in my trading. Price will always do what it wants to do so no matter good a level looks or how many odds are in my favour, price can still do the opposite of what I would like so if it does. I’d rather a small loss than a big one or an empty trading account. Loses are part of trading so you can always expect some. If you are unhappy with the % of losses or how price takes you out before going in your intended direction, then maybe you need to look at where you are actually placing your stops or entering your trades. Perhaps widening the stops a little would help or there might be a different issue that needs resolving. Is your stop always behind an SD level.

      If you show me some examples of your trades or where you enter an place stops then I can have a better idea of what you’re looking at.

      Joe

  3. Gary Larson on May 9, 2016 at 18:39

    Joe, trying to study Supply and Demand in a responsible manner, fairly new to it, fascinated. I like this article, but not understand some points. Am I allowed to ask you questions? Very serious here. Thank you.

    • Joe Wright on May 10, 2016 at 21:13

      Hi Gary

      Thanks for contacting me. Ask away. Drop me an email or something.

      Joe

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