Supply and Demand Trade Management: How To Let Your Winners Run

I’m sure everyone involved in trading has heard the mantra “Cut your losses short and let your winners run” but what many get confused with is how to actually do that. In this article I’m going to share one way to maximise trade potential whilst minimising losses, using supply and demand levels.

I took two trades last week, one on GBPAUD and the other on GBPJPY. I’ll run through the reasons why I took the trades as usual but this time I’ll share more about where I exit and why. I’ve also got some before and after screenshots for each trade.

GBPAUD

Daily

This was a short setup which I identified on the daily chart. Price dropped far from the level falling hundreds of pips. An attempt was already made to get back up to the supply in early May 2014 and price dropped away nicely. On this occasion price rallied strong back to the level with pure green candles on the way. This is exactly what I like to see for profit potential.

2014-05-28 GA Short D1

H1

When price arrived at the daily supply level I began to look at the H1 chart to see if I would get a signal to enter which will usually be a QM. In the image below you will see that I have a number of demand levels marked up in blue. After the first two were engulfed I noted the supply levels which may turn price lower. I have only marked up one as not to clutter the chart too much.

2014-05-28 GA Short H1 v02

Price turned at the first level with the PA that I like to see so I entered. I’ll talk more about the entry soon but first I’ll go into more detail about why the levels are marked up.

In a down trend we would expect supply levels to hold and demand levels to fail. In effect we are anticipating the start of a down trend from the daily supply level. If a demand level holds then this could signal the end of the down trend and we would no longer want to be in the short trade. If a demand level fails then we might reasonably expect that price might continue to drop to the next level. This is why multiple demand levels have been marked up, so I can see what action to take and where.

Some SD traders advice you to take profit at the first opposing level but when you have higher time frame confluence behind your trades, price can go further. If you exit at the first level then you could miss out on a lot of pips. Instead of getting out as soon as price hits an opposing you could wait for price action to indicate that price may indeed reverse.

If you use a 5m engulf to get into a trade and you see the same thing at an opposing level, that’s a good reason to exit the trade. If not then you can hold.

This only works if you are able to watch PA when price hits those levels. In a previous article I mentioned using a limit to exit and that’s fine if you know that you may not be around to monitor the trade as was the case.

You’ll notice I marked in a weekly level which you can see in the image below. Price may have turned here so I would be watching PA at this point when price hit it. As it happens price didn’t turn so there was no action to take there.

2014-05-28 GA Short W1 v02

5m

A nice QM formed on the 5m chart right at the H1 supply level I had marked up. Once it did. I set a limit for the supply level. There was hardly any drawdown in this trade at all. Price turned from the level immediately and never looked back.

2014-05-28 GA Short 5m v01

Result

This trade was a winner with 168 pips profit. Looking again at the H1 chart you can see that price broke through the next demand level without and trouble but then bounced from the following one. When price hit that level I dropped to the 5m chart to look for the nearest supply level there. It was soon engulfed so I exit the trade. Had I set a limit for the previous level I would missed out on some pips.

2014-05-28 GA Short H1 v03

I used a 5m engulf to enter and the same to exit.

2014-05-28 GA Short 5m v02

2014-05-28 GA Short Dukas H1 v01

GBPJPY

Daily

I entered a long trade after identifying demand on the daily chart. This was the second touch to the demand level but the first bounce did break the high of the initial rally which was a good sign. Price did not retrace too deep into the level on the first touch either so I anticipated that there might still be some demand there.

The return to the level also increased the odds for me. A sharp drop with a big red candle showing the profit potential.

2014-05-30 GJ Long D1

H1

In the image below you’ll see I marked up the nearest H1 supply level along with other potential turning points to plan the trade. When the first supply level was engulfed I looked for demand to trade from which you can also see on the chart. The next supply level was a good distance away with no trouble areas in between so chances are price would at least make it to that one.

2014-05-30 GJ Long H1 v01

5m

When price hit the H1 demand (also visible on the 30m chart) I observed the 5m PA. The nearest 5m supply was quickly engulfed by a demand level that formed so I entered from there.

2014-05-30 GJ Long 5m

Result

Price rallied quite strong after my entry and soon hit the next H1 supply. It did stall for a bit but it did not engulf the nearest 5m demand level so I held the trade.

2014-05-30 GJ Long 5m v03

I took this trade going into the weekend which I know some people don’t like to do. I was confident with my analysis and price was a good distance from my entry so I wasn’t worried.

Price soon engulfed that level so I anticipated a continuation to at least the next one which did indeed happen. I exit after a 5m engulf for over 100 pips. Another good trade.

2014-05-30 GJ Long H1 v02

2014-05-30 GJ Long 5m v02

2014-05-30 GJ Long Dukas H1 v01

Price has since moved on for some more but I followed my plan so I’m happy with that.

I hope you found this useful

Happy Trading

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