What is Supply & Demand

What are Supply/Demand zones reveal potential areas of institutional price action.
These areas where institutions (big/bank money) are likely trading. Identifying these
zones creates opportunities to follow big/bank money trades.
To identify these zones you need to look for areas of consolidation (grayed for the
purposes of this video) which is a tight range with minimal movement. These areas are
also called balance which is separated by imbalance. Imbalance is indicated by strong
moves in either direction.
Demand Zones Supply Zones

Drop Base Rally Rally Base Rally Rally Base Drop Drop Base Drop
(DBR) (RBR) (RBD) (DBD)

Strong Drop in Strong Rally up in Strong Rally up in Strong Drop down

price into a price into price into a in price into
consolidation consolidation which consolidation consolidation which
period which is is then followed by period which is is then followed by
then followed by a another strong then followed by a another strong
strong Rally up in Rally up in price. strong Drop down Drop down in price.
price. in price.
To identify supply and demand zones look for the areas of consolidation described in
the four scenarios above.
Once you’ve identified a particular zone you can then make an entry if/when it returns
to your identified zone (area of consolidation).

Key Reminder: The speed in the moves between the consolidation is crucial in
identifying supply and demand zones

Drawing Zones on Charts

When you’re drawing zones keep in mind that this approach can be applied to any time
frame.
On your chosen time frame, which is up to you since this approach can be applied to
any time zone, you should first identify the “base” before the explosive move which can
be either a red or green candle.
For demand zones - be sure the top of the zone starts somewhere at the top of the
wick or body but it must go down to at least the bottom of the wick. It could go lower if
there is a strong rally after your zone that has a wick that goes lower.
For supply zones the opposite is true - be sure that the top of the zone starts at the top
of the wick and goes down to at least the bottom of the body.
When drawing these zones keep in mind that they may be as low as one candle. The
real indicator here is the strength of the move after the zone/consolidation.

Key Reminder: A zone can be defined by one candle prior to a strong move in either
direction and is applicable in any time frame (Month, Week, Day, Hour, 30 Min, 15 Min,
5 Min, 1 Min, etc.)

Where to Put Entries and Stop Losses

When trading supply and demand there is a clear and simple way to determine your
entry and exit prices. More specifically:
To determine your entry:
Enter at the top of the demand zone if you’re going long on a stock or enter at the
bottom of the supply zone if you’re going short on a stock.
To determine your stop:
Place your stop loss price just below the bottom of your demand zone and conversely
place your stop loss price just above the top of your supply zone.
To determine your target:
Though there are varied ways to identify your target, one approach can be done by
identifying the supply zone above (if you’re going long) or the demand zone below (if
you’re going short).
Key Reminder: The simplicity of identifying your entry and stop prices is a benefit of
this strategy and thus increases the odds that you can approach it consistently. With
this in mind, remember that there is a bit more flexibility in how you choose your target
(price action, patterns, supply/demand zones, etc.) and therefore it is important to pay
close attention to what is working and what isn’t as you develop your abilities to
effectively identify your target.

High Quality vs. Low Quality Zones

Developing the ability to identify high quality zones will help you increase your rate of
success if you are able and willing to avoid low quality zones.
The main factor when assessing the quality of a particular zone is SPEED. The faster
the move the higher the quality.
Therefore when assessing the quality of a zone consider the following criteria:
 Your identified zone is followed by a strong move within a minimum
amount of solid candles. For example, 1 candlestick that moves 10%
indicates higher quality when compared to three different candlesticks
that total to a 10% move.
 Choppy candlesticks with significant wicks bring the quality level down.
Key Reminder: The speed in the moves between the consolidation indicates quality of
zones. Fast movement (less, full candles) indicates higher quality. Slow movement
(more, choppy candles) indicates lower quality.

Why Zones Fail (Part 1)

To best assess the quality of a zone it is important to understand why they might fail.
The first step to consider when assessing the likelihood of success/failure for a zone is
to:
 Only buy demand zones that have taken out supply.
 Only sell supply zones that have taken out demand.
Key Reminder: The overall market structure is very important. If a stock is in an
upward trend (higher highs/higher lows) this increases the odds of success when
buying in a demand zone. Similarly, if a stock is in a downward trend (lower highs/lower
lows) this increases the odds of success when selling from a supply
zone.

Why Zones Fail (Part 2)

Beyond the market structure discussed in Part 1, there are two additional items to
consider when determining why a zone might fail:
1. Time - the longer the price spends in a zone, the higher
chance the zone will
fail.

2. Depth - the deeper the price goes into a zone, the

higher the chance the zone will
 fail.

Key Reminder: When looking at price action the time (amount of candles) and depth
into the zone can both help indicate the potential of stopping out. These two items
combined with market structure awareness can help a trader understand why a zone
might fail.