Supply and Demand with Compression

This describes a particular type of price action where price swings up and down absorbing supply and demand levels as it goes. It's important to understand what exactly is happening here so that when this price action develops we know how we can react to it.

Compression into Supply

As price rises creating higher highs and higher lows, each time it swings back down after a rally its absorbs demand. There is a reason why price does this.

These demand zones are standing the way of a nice big short so the buy orders at these levels need to be absorbed before price can fall freely through this area. Pro money moves price in this fashion to clear the path for a short whilst using the buy orders to build their short positions. When you see this happen below a supply level, once the last demand level is absorbed and the supply level is reached, price will often fall quite easily down through the area. This area or this type of price action is known as compression.

compression to supply image 1

Compression into Demand

The same price action can be seen going into demand zones where price absorbs supply whilst moving down. Pro money clears supply on the down move to make way for a long whilst using the sell orders to fill their long positions. Once the last supply level has been absorbed, price will often rally quite easily through the compressed area.

Identifying this PA will give you a clue as to where price will turn and how far it will move.

compression to demand image 2


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  1. GabanSama on January 21, 2016 at 08:43

    How to know the compression valid or not?

    • Joe Wright on January 26, 2016 at 22:40

      Not sure what you mean by valid. In the short example above, price compressed right up to the supply. When the last demand level was tested and price could not rally higher. It then moved lower and began to engulf the demand. The drop then followed.

      I hope that helps.

      If you have more questions, please let me know.


      • acidaber on February 6, 2016 at 07:48

        what if compression to supply but price still go rally?? is it any explanation for this..

        • Joe Wright on February 7, 2016 at 14:56

          Look at the higher time frames. See where price is coming from to know where it’s going to.

          What I would also say is that you should always wait for confirmation. There are no guarantees for any level to hold so that’s why even though I like to filter trades., I still wait for confirmation too.

          I hope that helps

          • Sugeng Bintoko on May 22, 2016 at 02:17

            Did you mean “confirmation” is HH break LH, like head and soldier pattern??

          • Joe Wright on May 28, 2016 at 22:40

            You can use that for confirmation if you wish. As long as there’s no SD in the way

  2. innocent dlamini on March 27, 2018 at 06:40

    Clear explanation tank u

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