The Supply and Demand Fake Out
When identifying levels from which to trade, we usually consider a level to be strong if price has not been able to break through it. Once it is broken we ignore it and wait for the next setup. This is generally good practice. There are occasions however, where price will break through your pre identified level and then reverse as expected. This is known as a fake out (FO) and is the focus of this piece.
Price action is a big piece of the puzzle when it comes to trading and this is why we use it in conjunction with supply and demand.
What follows is a recent example of a fake out at a supply level so we’ll look at what happened and how these opportunities can be traded.
The daily chart below, you’ll see both a supply and a demand level. These are the same levels we looked at in the last article on profit potential. There are also clear green candles going up towards the level which is what we like to see to ensure a reasonable amount of profit potential on the trade.
The H1 chart shows the same supply level I identified in the last article only this time you see the reaction. You will notice that price broke up through the supply level but this was just a fake out to trick you into either going long on break, or avoiding the trade altogether. Those who entered short with limit order may have stopped out of this depending the stop placed but waiting for PA to get you in as I often like to do would have led to a perfect opportunity.
The 5m chart tells the rest of the story.
As always, I mark up the nearest opposing level (demand) and wait to see what happens next. The lower demand line appeared first and held on the first test. Later that night another demand level formed further up into the H1 supply level. Price broke both of the 5m demand levels and formed new supply around the same area place as the top 5m demand. This is also a swap zone. After price reached the supply it fell right down to the last turn in price on the daily chart, the open of the green momentum candle that rallied into the level.
The great clue here that price would indeed reverse, was in the price action on the 5m chart. If price was looking to continue heading up through the supply and beyond then the price action would have let you know by:
- Breaking straight through without looking back
- Breaking through the level with a confident close above before a retest and continuation.
Instead price broke the first two demand levels in quick succession and created supply. It was pretty clear that sellers were now in control and that price was heading down.
This is another reason why it’s great to wait for PA to get you into a trade.
I hope you found this useful.
Happy Trading
Great article and explanation!
Thanks Gokeplus
Professional approach Joe! I definitely like it! Much more safer and less stressful relatively to Limit order Enty on proximal of H4 level 40 pips width + stop loss of 5-10 pips))) However I am curious, how do you trade when price just slightly touch D1/H4 or H1 level and bounce like a hand from a super hot oven? Do you usualy miss the trade in such cases? Thank you for the answer and thank you very much for sharing.
Hi Basil. Thanks for your feedback. Sometimes I do miss trades especially on occasions like the one you mentioned. That’s the price paid for confirmation. You can’t get them all.
Hi Joe,
This is great information, keep it up. Wanted to pick your brain a little bit. I have found that when I go down a timeframe to look for a zone to take out the opposing level I am sometimes faced with multiple levels. For example on the 5 min chart you posted you have highlighted the swap zone as the level which broke the two demand levels. Just above that level at around 0.91300 could we also consider that a supply zone as we have a big red candle dropping from there too. Do you experience the same thing at times when you go down timeframes too?
Hi Keiran. Thanks for stopping by. There are often multiple levels on all time frames so it’s about picking the best one or the closest one to you if there are more than one which meet your criteria. In this particular case, the swap zone looked like the better opportunity and it was closer to current price. Also my stop was behind the high not the 5m supply so even if it did go to the next supply my trade would have been fine.
Joe
This is exactly how I would like to trade. HTF SD + LTF pa.
Some prefer the limit orders style, which look great when they catch that 50 or 100 pip spike up to a level, in and out in a flash, to carry on in the opposite direction, which we miss as there is literally no pa development; just a trail of hot smoke, lol…
On the other hand limit orders are vulnerable to P splashing over the zone, triggering the SL only for P to turn and go in one’s direction. If P at least were to cut through like butter that would be some consolation, although a loss regardless.
Here is an example of indecision and a potential trade I didn’t take, because I didn’t know whether it was a FO or genuine break of supply and didn’t trust the ensuing PA:
http://i.imgur.com/rt2u6jZ.png
PA confirmation works best for me. I know that you miss some trades as you don’t always get a PA signal but that’s fine. You get them all. With your example it’s the same. You won’t get them all. You can use the fakeouts in your trading or not trade them at all. It depends on how you want to trade and what you’re comfortable with.
Joe
This is a super Genius trader Joe keep it up av been following u and am really successful.