Price Will Tell - Supply/Demand Price Action Trading

I have lately been frustrated when trying to understand the relationships between supply and demand including the hierarchy among them. Certain SD that is engulf means more than certain SD that is engulfed.... I thought I hit the brick wall and then somehow I found the relationship. I can't believe how much precision there is in the market. There is a lot of order in it. Here are 2 charts showing the relationship of SD





There are still some things I am unsure of. But this is one piece I uncover for myself.

I feel the need to clarify the previous post. There is a concept I read that a DBD drop base drop zone becomes important if it occurs after or during the engulf of another important RBR. Once we spot an important DBD or RBR we can draw boxes and then we can identify turning points, sometimes within a few pips. The importance RBR or DBD depends on how important the engulfed DBD or RBR is. CLEAR.

However I am still confused about this issue. Whenever an important area is engulfed price will form a DBD or RBR as it goes through it. Say on 1 hour chart. But when we zoom into the 1 minute chart (VLTF) we can see the RBR and DBD form at different location prior to the engulf.... So which is real? How can we resolve this confusion?

Binyamin,

I believe you're referring to what is known as a flag limit, in which case it should always be the area that forms after a high or low is broken.

Apologies for the late reply; its been a busy weekend.

What I'm about to write assumes that a trader understands the phrase, Supply and Demand and how this applies to a price chart. For brevity I wont make any further attempt to explain the phrase other than to say the following:

When there are more active buyers of a financial instrument than there are sellers, the price of that instrument will go up. When there are more active sellers of a financial instrument than there are buyers, the price of that instrument will go down.

Remember, we are traders. Although our daily routine requires us to carry out analysis, we're not analysts. We are traders. What we do is no different to what the guy on the street market buying and selling fruit and vegetables for a profit does. Moreover, if we begin to think for one minute that we are in any way different to him, or that somehow what we do is more complex or nuanced than what in essence he does instinctively every day; we've already set ourselves up for failure in my view. You, him and I all share one thing in common: we are working for a profit.

There's the potential here to talk at great length about supply and demand trading but for brevity I'm going to try as best I can to stick to three points that Chantalb (CB) made in his/her first post. For me these points are important and should be considered by all:

1. "Took this onto a line chart as this is the simplest form of price"

2. "It is also important to choose zones that have proven themselves as good potential candidates, those that have taken out previous areas of supply (or demand)"

3. CB also spoke about HHs/HLs

In order that I can frame this post in the correct context please let me share the conclusion that I reached sometime ago about how I read price on a chart. Once again, I must stress that this is my own conclusion and it may or may not concur with yours. In fact, this entire post follows on from this principle so please forgive me if I seem to be talking in absolutes. Here goes.

Everything in trading is a breakout. Sounds like a pretty vague statement doesnt it? But as is so often the case with seemingly vague statements they are the concatenation of a much broader and yet still specific view. How about we expand the statement to read:

"A bullish breakout is big buyers wrestling control of the current phase of this market from big sellers and therefore indicating to us retail traders that we should now be looking for a long entry to trade in harmony with them so that we can exploit their move for our profit." Snappy sounding phrase eh? Jokes aside, this is the essence of what we retail traders do. We look for evidence that the sort of bulls and bears that can move price are active in the market and we then look to trade in harmony with them. And we do this in as simple a way as possible.

If you're seeing complexity in your own charts but you would prefer simplicity then hopefully this post can be a starting point. Initially I was intending to address CB's points in the order that they were raised but I'm going to present them much more holistically and by doing so hopefully tie them together into a presentation that is both cogent and useful. Trying to present anything in SD/PA trading in an objective way is a total minefield, as most will know. And therefore rather than presenting a thesis-antithesis type of discussion I'm just going to go straight into some basic drawings and later on a real price chart, which should support the information here and thus allow the reader to absorb what's been said and decide for him or herself whether what's written can help. Let's take a look at some drawings.



Do these simple lines above look familiar to you? Do they look, well, simple? If you answered yes to this question then ask yourself this, why have so many traders become expert at making what these simple lines are telling us complicated? I myself have a whole bunch of theories surrounding this point but here and now isn't the time or place to discuss them. Let's carry on. But before we do let's also remind ourselves of the following phrase:

When there are more active buyers of a financial instrument than there are sellers, the price of that instrument will go up. When there are more active sellers of a financial instrument than there are buyers, the price of that instrument will go down.

Looking at the lines above we should be able to glean at least seven important pieces of information.

1. Price was going up

2. Price hit sellers

3. Sellers forced the price down

4. Price hit buyers

5. Price rose

6. Price broke out

7. Price is going up


Insofar as we know that buying pushes price up and selling pushes price down there is no need to overly label the chart, let's instead label it with traditional terminology but incorporate supply and demand in there as well.



Here's the rub. Until price breaks out/takes out sellers/engulfs sellers (call it what you will) we have no idea whatsoever whether or not this bullish move will continue. On the other hand, however, if price takes out and closes above the sellers then from my perspective in this very simple example, the True Demand (big buying) begins at the Higher-Low (HL), and coupled with price closing above the sellers I personally would be watching PA in all timeframes for the first opportunity to buy this pair. (I must point out that some experienced traders would be looking to buy into what they would anticipate is the HL but that kind of setup is beyond the scope of this post in my view).

By now hopefully you will begin to understand why CB's statement about a line chart being the simplest form of price is such an important one. You should also hopefully begin to see why his (?? Still don't whether CB's a boy or a girl) statement of, "It is also important to choose zones that have proven themselves as good potential candidates, those that have taken out previous areas of supply (or demand)", is an extremely salient one.

Apologies if the above diagrams are stating the obvious to some traders but in my experience these basic principles have been so often misinterpreted or even worse complicated to the point of nausea that I sometimes wondered during my own learning whether or not it was going to be possible to trade these markets at all.

Let's talk briefly about the HH/HL question and what is in my view its overall usefulness to us as supply/demand traders. In certain circumstances I've found use for this terminology in my own trading, however, the main issue I have with HH/HL terminology in its broader context is that so often we will see harmonic i.e. smaller swings (HHs/HLs) coming into price in between the major swing points on a chart. And while a seasoned trader may still scalp some of these minor harmonic swings for a profit, my experience with these PAs is that they could often blindside me into believing that a major so-called trend change was underway. I have found that sticking to a much more simplistic view of supply and demand has helped.

However you view the charts, the final decision on the terminology etc must be up to you, as must your entry criteria and all of the other business of trading. But please try to consider everything at first until such time as specifics begin to make proper sense. Mentally this can be tough but adopting this approach on my own journey enabled me to reach a point where I confidently began to dispense with that which seemed redundant - quite frankly most of it.

In closing let's quickly revisit last week's GBPAUD chart onto which I've made a couple of adjustments with the labelling. What we can see here is in fact the opposite (i.e. a selling setup) to what's discussed in this post but remember that in Forex trading we have the opportunity to play both sides of the market and therefore we must exercise our minds to think long as well as short. I'm not going to point out where I would have taken an entry. But I've marked up the supply zone and prevailing PA that for me illustrates with a real world example all of the points raised today.



Trade safe,

Simon

One option, is to mark important areas of SD in higher TF. After observing the PA in such areas as you know and you described in lower TF. As you know the best trades are in favor of the trend in higher TF. (Example chart: D1 higher TF, H1 lower TF) Excuse my language.

Hey, I just added a few things to you chart. Personally I also use OBV, to confirm strength or weakness, looking for divergence and or convergence.
Right now, not sure if Triangle will hold, break up or down or channel. But looks to have strength, to reset prior resistance at 1.39300, looks like 1.39150 SUPPORT ?

Hi fonline, good to have you along

excelent post, great and clear explanation, this thread is certainly helping me a lot. hope you all have a great incoming trading week

I also read back your post Chantalb, after simon give it weight, The first time i could not entirely follow it, but i could after drawing some lines with a pen, hope this below picture helps others to understand it better too.

Here's a 4hr chart which show's the peril's of trying to trade every S & D area, flag limit or whatever you want to call them, price moves into and out of it quickly which is ideal, but you've got to check what's below it, on the second picture, the 1hr chart, there is another area which becomes more obvious. Price can react to either level (or neither) so you've got to be careful. Note the compression down into the lower level!

GJ Daily, two areas close together again and this time price takes off from the top one, any ideas why?

Binyamin,

You are beginning to see what is there, you will have moments of frustration followed by clarity. This is what i mean by seeing for yourself, no trickery or keeping things back. You, alone in front of your pc , where ever you live need to see it for yourself.

Simon has a great thread growing here, with subjects focused around S and D, there are going to be many questions uncovered.

You guys raise a smile on a Sunday evening.

Warren

Vlad,

For price to move from an area, be it continuation,reverse or news there must be engulf. If you have 1 hr supply and price reaches it on 5 min chart, what does it show you that will tell if supply will hold or not. Think about the structure as price is on route to the supply on its final leg.

There is only one time i would touch trade and that is the master of all set-ups. When price has engulfed a decision point and pulled back, this pull back area is a great place to touch trade when price revisits.

I consider QM's and whipsaws, but they are all types of engulf. To use s and d on its own is like using moving averages, sometimes you might get lucky!

I am shattered from a day at airsoft in a disused shopping mall. I will answer questions and pm's tomorrow sometime.

Warren

You just took your first steps

EURAUD tech.

For me it's never ever about what I think price is going to to do. It's about marking up what price has done, and then watch and wait.

Hi Simon, This has to be one of the best, down to earth, common sense posts, I have ever had the pleasure of reading. Many thanks. This is a really great thread. Happy trading

Today's first attempt at a trade. I didn't get the fill, but it's worth having in here for educational purposes.

With EJ compressing very heavily, I'd like to see a move into one of those two boxes, followed by a nice push down into the compression. If all goes well, I would sell the retrace.

You're welcome, reldas