Supply and demand in a nutshell by Alfonso Moreno

Any comment in the community?

Starting at the monthly supply is removing demand - down
weekly supply is removing demand - down
daily supply is removing demand - down

my personal view is if you are using h4 you need to go in the direction of the higher timeframes until something changes there

Hello Lakis, if i may please,

I think this could help,

Instead of looking for the basing first when trying to identify zones, try this 3 step process out
To identify a Demand zone:
1. start with current price, go down and left without cutting through any candles
2. Identify a strong rally in price
3. Trace this strong rally in price down to its origin and you have your base

To identify a Supply zone:
1. start with current price, go up and left without cutting through any candles
2. Identify a strong drop in price
3. Trace this strong drop in price up to its origin and you have your base

I know this is basic for most people but it is clearly the most important thing in applying this method.

I learned not to identify the base first but to look for the strong rallies and strong drops first and it has helped me.
Yes, ideally you want basing candles in a base but it does not mean there is no base if there are no basing candles
Remember also, all you need to do is change the time frame and that base will look very different and you may find basing candles in the base then

Finally, please keep in mind the most important part of the patterns we trade (DBR, RBR, RBD, DBD)

I have emphasized the last alphabet in all 4 patterns to make a point. The point is that the last alphabet is the most important determining factor for a demand zone (the first 2) and a supply zone (the last 2).

I hope this helps you a bit

best wishes

[quote]
On this flow chart you will see how to:

1. Mechanically draw supply and demand zones
2. What bases are good and which ones are not by locating the 50% candles, first and second legs that every single supply and demand level is composed of
3. Which ones are not high odds, like long tailed/spikes at the bases and too much trading in at the base
4. Marubozu candles on CP patterns, proximal and distal lines. Marubozu candles are very common on CP patterns. Not all zones have to have a 50% candle on it, there are great CPs with non 50% marubozu candles. Also those CPs with no basing candle that caused the break of an important zone are high odds.
5. Etcetera

[quote]

I dont realy understand, becoue of my english, but i think this is the answer lakis!
This is inte first post

Bullish engulfing patterns and piercing patterns with no 50% basing candles are the most important formations for the bases on supply and demand formations. Cheers, Alfonso

Thanks for your reply.
As you have drew we measure for the proximal line. That was my question

Many thanks

I thank you very much projectaha

I thank you very much for your suggestions Akt
Wish also the best

usdcad looks like it has created further daily supply, but since it is now into monthly demand and weekly demand i assume shorts are not allowed am i correct or do i have this wrong?

GBPAUD Monthly demand zone taken out, short bias on brand new Daily and H4 supply zones. Weekly chart attached

Hello everyone.
Seeing how quiet it has been here recently, I thought it would be a good opportunity to discuss the approach of doing Top down analysis, especially for those of us that are relatively new to this methodology or are struggling to get it.

Bear in mind, I have taken the last several years to learn from numerous sources the information in this post, including dear Alfonso.
I was and still am a learner. I lay no claim to having invented this methodology.

As Alfonso always reminds us, don't trust anything in this post. Test it for yourself.

Also, please forgive the length of this post, it has to be this long.
I will also need more posts to completely do justice to this crucial topic.
This is the first one.
Comments, feedback all welcome.

best wishes.

HOW TO DO A TOP-DOWN ANALYSIS USING THE SUPPLY-DEMAND METHODOLOGY

THE STEP BY STEP PROCESS

Doing a T-D analysis is critical for making decisions about taking a speculative position in the financial markets. It is no more than looking at the same market from different perspectives. It is exactly the same thing a doctor does when he/she asks for a Chest X-ray for a patient. The doctor has to actually stipulate on the request form, what view of the chest they are asking for, is it a view from front to back (known as anterior-posterior view) or from back to front (known as posterior-anterior view).

Looking at the activities of traders in the worlds many financial markets through charts has allowed traders from everywhere and anywhere to be able to make more informed decisions about how they speculate in the financial markets.

For a detailed T-D analysis I use 3 timeframes. You will see why as you read further.

Although I do similar analysis on each chart, each one of them has its own purpose.

Each timeframe has its own purpose.

Each timeframe used should be seen as a view of the markets from whatever perspective that particular timeframe represents. This approach immediately makes it clear that using one timeframe will not be enough to make a well- rounded judgement about what a market is doing, at least not enough to put hard earned money at stake.
Each timeframe gives information that should be taken and put into a decision matrix to come out with the most appropriate action that should be taken given the available information.

Notice I did not say the right action or most profitable action the use of the most appropriate action is deliberate and implies that the decision is based on fact as obtained from reading the chart.

As SUPPLY AND DEMAND traders (SAD traders!), we use the economic concepts of supply and demand in interpreting market action.

THE STEPS
The first and most crucial step in doing a T-D analysis does not actually involve looking at charts.

The first step is making a personal decision about what type of trader you are.

By this I mean, deciding how you choose to look at the markets - are you a trader looking to make a monthly income from trading?, a weekly income?, a daily income?, or maybe even a high frequency trader looking to be in and out of the markets numerous times a day or hour even.
This decision is critical because it is what determines what timeframes (i.e. what view) will be your Top and down timeframes in your Top-down analysis.
For a trader looking to make a monthly salary from trading for example, you are going to have to use the monthly chart as your top. A weekly income trader will have to use the weekly chart as the top whilst a trader looking to make an income daily must use the daily chart.


So STEP 1: WHAT TYPE OF TRADER ARE YOU?

Once you decide what type of trader you are then and only then can you go to work doing a T-D analysis.
Notice at this stage you have thus far only decided on one timeframe, your top timeframe.
This top timeframe in the S&D methodology is called THE CURVE TIMEFRAME.
The full name is THE SUPPLY- DEMAND CURVE TIMEFRAME.

The Purpose of the Curve:
To identify the location of current price in relation to the location of the larger timeframe supply and the larger timeframe demand.
Let us discuss how to identify the Curve on the Top timeframe.

You are seeking to identify the nearest FRESH Demand zone below current price and the nearest Supply zone above current price. This represents the CURRENT S/D curve

The term FRESH in the supply-demand methodology implies a zone of demand or supply that price has not returned to at all since the zone was created. A zone that has even one retracement however minimal the retracement, is no longer considered FRESH

Steps to identify zones: As I put in my discussion last time about this, this is the method I learned to identify demand and supply zones, regardless of what timeframe I am looking at.

To identify a Demand zone:
1. go down and left without cutting through any candles
2. Identify a strong rally in price
3. Trace this strong rally in price down to its origin and you have your base

To identify a Supply zone:
1. go up and left without cutting through any candles
2. Identify a strong drop in price
3. Trace this strong drop in price up to its origin and you have your base

Once you have finished identifying the nearest fresh SZ above current price and the nearest fresh demand zone below current price you have pretty much completed your assessment of this timeframes view of that market.
There are other nuances for the curve timeframe that I cant go into in detail in this post such as the trend on the curve timeframe and how it ties into the zones and the appropriate action to take, depending on where price is on the curve.

However, regardless of these nuances, by identifying the nearest fresh SZ above current price and the nearest fresh demand zone below current price, what you have done is identify an area above current price that you do not want to be a buyer at and an area below current price that you do not want to be a seller at. That is critical information.

The second chart is my TREND CHART.
I know you are probably thinking, what is AKT talking about, I thought we look at trend on all timeframes?
We do.

However, trend analysis on each timeframe has different purpose and provides different pieces of information. I will explain as we go along.

I will post pictures of examples soon everyone.
Sorry, that was my mistake
Best wishes

Hello everyone.
I have added a picture to my post above, showing the Curve.
The timeframe as stated, must be the "top" timeframe, depending on the type of trader you are.

The Curve

Hello Akt & fellow traders,
Akt I would like to thank you for the post (http://www.forexfactory.com/showthread.php?p=8822865#post8822865) regarding the approach to analysing the market. I am a beginner myself, and this post have help me improve how I look at charts. Well Done! Best regards

thanks for the post Akt!

If i could make a request it would be on trade entry, do most trade 1 postition .. or do they build positions with multiple entries ?

thanks

Hello aftab.

It doesn't really matter.
I could give you the usual cliche answer that most give which is "do what suits your personality".
I never found that advice useful for me personally because as a beginner trader, I had no clue what my trading personality was (i didn't even know i had a trading personality )

So I will tell you what I do.

I look to put all my position in at the lowest price possible for buys and the highest price possible for sells, meaning I enter all my position together.
The reason is, if price is going to go my way I want to be in at the best possible price.

The only time I consider splitting my positions into two is when I have a level on top of level. I enter half at level 1 and the other half at level 2.
So, maximum I enter twice, all in and around the same zone.

I hope that helps you

Best wishes

Hello everyone,

continuing on Top down analysis....

Continuing on the Curve for a little bit longer.

Once you have identified the nearest fresh demand below price and the nearest fresh supply above price the next step is to decide what the most appropriate action is for you as a trader to take.

To be able to make this judgement, you need 2 things

First where is price relative to the SZ above and demand zone below on this curve chart?

Close to or at Supply most appropriate action (which will be taken on the lower timeframes) is to exit longs and start looking for opportunities to sell. Notice I did not say sell straight away because you are near supply. I said start looking for opportunities to sell. You may get these opportunities if they arise. They may not. For example, in cases where the S-D curve is shifting.

Close to or at Demand most appropriate action is to exit shorts and start looking for opportunities to buy. These opportunities may or may not arise. What you must not do is to buy blindly just because price is at higher timeframe demand.

Please notice that I have not mentioned anything yet about the trend on the curve timeframe.

That is deliberate.

The reason is that although we must look at trend on this timeframe, trend is not the primary function of this chart.

I will tell you why using an example.

Say you have done your curve analysis, identified supply above and demand below current price.
You find that price is close to or at the curve timeframe demand zone.

Next you ask the question, what is the trend on the curve timeframe?

You do your analysis of what zones are being respected and what zones are being violated and you conclude it is a downtrend.

What now?

Are you going to sell because it is a downtrend?
If you do, the odds are the trade will not work.

The reason is because you are at a larger timeframe demand zone, an area where the chart objectively has told us that demand exceeds supply.

What then is the most appropriate action to take?

If you were short from above and are now close to or at curve timeframe demand, exit your shorts
If you were not in any trade, now is not the time to be looking for a short because of where you are on the curve.

Either wait for price to rally to the curve timeframe supply AND THEN join the downtrend
Or
Start looking for opportunities to buy, knowing that your buys will be counter trend (counter to the trend on the curve timeframe).

So, trend is important in the curve timeframe but it is secondary to the location of price which is the most important purpose of the curve timeframe chart.
(I know this point will be a controversial one for many but I hope I have explained things clearly enough. My intention is not to confuse anyone

What about when price is neither close to demand nor close to supply?
This is called Equilibrium.

Supply and Demand are considered to be IN balance in this area (notice I did not say IM-balance but rather IN balance, it was not a typo J)

In this area where S&D are in balance you have 2 choices.

Either stay totally out of that market because S&D is IN balance
Or
Join the trend on your middle timeframe, not the trend on the curve timeframe please (more on this later)
If you decide to go with option 2 be prepared to take your profits off the table quickly whether you buy or sell because remember, this is a region where both supply and demand zones are likely to work.




l will discuss the Trend chart soon

I hope this helps someone.

Best wishes