Supply and Demand Swap Zones

Conventional technical analysis teaches how support turns into resistance and resistance turns into support (you can find more on that here). What is also true, and more significant for me as supply and demand trader, is that supply can turn into demand and demand can turn into supply. Where this occurs we have a swap zone or flip zone as it’s sometimes known, so called because of the transition that takes place.

Learning how to identify this when it happens on a price chart can lead to increased probability for trading opportunities. These levels are important because they can indicate a change in direction, a shift in control from buyers to sellers or vice versa.

Short

Price makes a significant rally from a demand level. When price returns the level a base is formed before price drops in a big fashion. This clearly shows that although buyers were previously in control at that level, sellers have now changed the direction which is now down. The decision to take price down was made around the same place where the previous decision was made to take price up. An example of this can be seen in the image below:

Image 1 UJ 30 Swap Zone

 Long

Price drops sharply from a supply level. When price returns to the level, a base is formed before price rallies in a strong fashion. This clearly indicates that although sellers were previously in control, buyers have now changed the direction to head north. The decision to move price up will often be made around the same place where the previous decision was made to take price down. An example of this can be seen in the image below:Image 3 Eu 5m Swap Zone

S upply and demand swap zones can be traded in different ways. In the first image above the swap zone was a sell zone on a 30m chart which could be traded as a swing trade. When these appear on a higher timeframe it can be a great indication of a trend reversal.

The second image was of a swap zone on the 5m minute chart which represented a buying opportunity. When small timeframe swap zones appear at or around higher timeframe supply and demand levels, they can be taken as short term trades or they can be used as small timeframe entries for longer term swing trades (my preferred style). The formation of these swap zones on the smaller timeframes adds confluence to the higher timeframe trade direction, increasing the probability of the trade.

I hope you found this article useful.

Happy Trading.

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6 Comments

  1. Junior Maia on September 3, 2014 at 16:13

    I hope more and more and more articles for all of us…. keep excelent work!!!

    Best Regards

    • Joe Wright on September 8, 2014 at 18:58

      I’ll keep them coming, I’m glad you find them beneficial

  2. BasilB on August 27, 2015 at 01:54

    Very nice and helpful!

  3. James on May 1, 2016 at 13:00

    Hi Joe long time fan. We do see swap levels frequently. Can you perhaps offer a “why” this event occurs? As example when supply seems to become demand what do you think is going on at the exchanges behind the scenes? Could it simply be that a fresh stack of buy orders are being placed at that level capitalizing on the remaining sell orders and then we are witnessing the traditional SD effect of price returning to the now new demand? Not intending to answer my own question but rather explain the sort of answer I’m hoping for. This is a subject another trader and I are frequently discussing. Thanks for your time.
    James

    • Joe Wright on May 3, 2016 at 21:41

      Hi James,

      Hate to tell you but, yes I think you have answered your own question here. It seems that wherever we see SD swap zones levels form, it’s a stack of sell/buy orders before one stack is overwhelmed by the other. One provides liquidity till it’s used up then price continues.

  4. Piotr on December 14, 2016 at 01:02

    I think is because big money like brokers or bank selling from that position and price goes in the other way so they push price to the entry point to exit on B/E positions because like all reach ppl they dont like to lose !! 🙂

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