Supply and demand in a nutshell by Alfonso Moreno

Hi, I do not want to say that Alfonso trades flip zones or not, that is not the question. The question was about if this is a flip zone or not. I hope Alfonso will answer.
Thanks.

Hello everyone

Continuing on with our discussion...

I don't think I have mentioned this, but I just wanted to say that the information contained from this discussion I have been having with my fellow traders comes directly from my trade plan.

I am in the process of updating the pictorials in the plan. So I thought I would share some of the plan with you all.
I could give out my trade plan but no-one else would be able to use it.
It has been individualized to me over the last 5 and a half years.
So I am not worried about releasing this information.
I want to help people in any way I can to understand this methodology.
Applying it once you have the information is what will take anything from months to years, as Alfonso always reminds us in his posts.

So, I hope the information is useful.

Comments and feedback (negative and positive) are important.

Best wishes

PICTURES OF SUPPLY AND DEMAND

So, what does supply look like on a price chart?
What does demand look like on a price chart?

PICTURES OF SUPPLY:
There are only 2 pictures that depict supply on a price chart.
Both pictures have two things in common, they both have bases and they both have drops after the bases.

Picture 1 of supply:
RALLY BASE DROP
This type of supply zone is a reversal pattern which implies they are best used when we are looking for a zone for a potential reversal of a pre-existing downtrend to kick off. They are usually found out at the extremes of moves and can be quite powerful.

The one downside to using this type of supply zone is that they are usually not authentic zones (more on zone authenticity later). They tend to be pullbacks into zones represented by the second picture of supply, the DROP BASE- DROP.

Picture 2 of supply:
DROP BASE - DROP
This type of supply zone is a continuation pattern which by definition implies that they are best used when there is a trend underway (hence why the pattern is a continuation pattern, i.e. continuing a pre-existing trend).

They are usually found in the middle of the curve (again, this is why they are linked to trends because remember what we do in the equilibrium area? we follow the trend!)

They do not work as well for trend reversals UNLESS they are embedded within the larger timeframe zone. For example, say you use the monthly chart as your curve timeframe and price has now arrived at monthly supply. You know you are the extreme of the curve and should be looking for opportunities to sell. Since the monthly SZ is too wide for you to use as an entry zone, you take an X-Ray of that monthly SZ to take a closer look inside it.
This X-ray is taken using your daily lens, your daily timeframe.

Lo and behold, you find embedded within the monthly SZ, a daily DROP-BASE-DROP SZ.
You have just found your entry.


PICTURES OF DEMAND:
There are only 2 pictures that depict demand on a price chart.
Both pictures have two things in common, they both have bases and they both have rallies after the bases.

This type of demand zone is a reversal pattern which implies they are best used when we are looking for a zone for a potential trend reversal to kick off. Reversal of what you may ask? Reversal of a pre-existing downtrend. Like their They are usually found out at the extremes of moves and can be quite powerful.

The one downside to using this type of supply zone is that they are usually not authentic zones (more on zone authenticity later). They tend to be pullbacks into zones represented by the second picture of supply, the DROP BASE- DROP.

Picture 2 of Demand:
RALLY - BASE RALLY

This type of Demand zone like its counterpart supply zone, the DBD, is also a continuation pattern which by definition implies that they are best used when there is a trend underway (hence why the pattern is a continuation pattern, i.e. continuing a pre-existing trend).

They are usually found in the middle of the curve rather than at extremes (again, this is why they are linked to trends because remember what we do in the equilibrium area (the middle of the curve)? we follow the trend!)

They do not work as well for trend reversals UNLESS they are embedded within the larger timeframe zone.


So there you have it, the 4 patterns supply and demand traders use in entering and exiting the financial markets. No matter what market it is, we are looking for these patterns over and over again.

Before we go over the steps we take in identifying any of these 4 patterns, a word about the concept of the flip zone.

THE FLIP CONCEPT DEFINED:

The concept of the flip zone is based on the age-old technical analysis mantra of what was once support becoming resistance and what was once resistance becoming support.

The slight supply-demand twist to this more conventional thinking suggests that a new zone of opposing polarity is usually created in the process of taking out a supply or demand zone.

If a supply zone is what was taken out then a demand zone should be created in and around the same area of the supply zone

If a demand zone is what was removed then a supply zone should be created in and around the same area of demand

See chart examples below for both scenarios

Hi Alfonso
I see there is a new indicator that puts a white dot on basing candles. Where can I get it?
Thank You in advance
Regards
Mark

Hello Mark,

The rectangle extender indicator does it by default. It's been a function available for 1 and a half years I believe. Contact me in private through www.set-and-forget.com contact form and I will send you the last working version.

Cheers,
Alfonso

I don't trade flip zones, I use them as confluences to wait for new imbalances to be created or wait doing nothing while the flip zone is being respeceted, that's all.

Cheers,
Alfonso

Flip zones can be VERY subjective, so you'd better lean on imbalances not those that have already been disrespected if you want to conserve your capital
Cheers,
Alfonso

USDJPY in a downtrend, new Daily supply zones created at 113.52. If it breaks out lower more supply zones will be created. Since monthly, weekly and daily, even H4, are in a downtrend, short supply zones on the way down to weekly and monthly demand zones.

I have now an Instagram account where I'll be posting some trade setups and updates as well.

You can follow me at https://www.instagram.com/setandforget/

Cheers,
Alfonso

basic and simple question

I notice that a lot trade the daily chart imbalances, but something i see is the price takes off and does not come back to these areas again but instead creates further areas .. typically when the market is trending .. so in this case how do you trade the daily charts?
The question is more down to my lack of understanding ..

I wait for a new imbalance, as simple as that I lean on daily charts and imbalances, there are lots of trades! I don't want to spend 4-8 hours a day in front of the charts. 30 minutes a day is enough. Cheers

AKT Thank you for such a great summary. Reaffirms my interpretations of Alfonso's lessons...

You are most welcome mrodrigues
Glad to help.

best wishes

Hello everyone
Following some questions about the posts I made above on top down analysis I thought it might help if I went through one from start to finish using pictures.
In this example, I am assuming the role of a weekly income trader.
So my TOP time frame will be........the weekly chart.
So immediately i also know my "trend chart" will be the daily chart
My entry time frame will be the 4hr chart

I hope you find this example useful.

Best wishes

The sequence for multiple time frame analysis I use is

Curve - Trend - Zone analysis

Curve analysis on chart 1 (biggest chart)
Trend analysis on chart 2 (trend chart, also known as intermediate chart)
Zone analysis on chart 3 (apply odds enhancers to zones on this chart).

That is all there is to it really

best wishes

Thanks AKT/ Can you show us how you you determine the trend direction not using our traditional method (Supply zones being created and respected = Downtrend, Demand zones being created and respected = Uptrend), but using 3 Newtons laws? I mean controversial moments, the beginning of a trend D1, consolidation or clear direction, etc

Hi conom,

I think you may be misunderstood me when i used the analogy of Newton's laws of motion to discuss trends.
I did not mean that we use Newton's laws to determine trend
I only used the laws to try to explain Trends in general.
As SAD traders, by default we must use our "traditional method" for determining trends i.e.
supply being created and respected = downtrend,
demand being created and respected = uptrend,
demand being created and respected, supply being created and respected = sideways trend

best wishes

Thanks a lot AKT.

One question, in this chart of the EUR/USD daily there is a daily demand zone below. My question is , if the TL is broken that trade can't be taken. Or could it be because the weekly is still in an uptrend?

Hello mrodrigues, if i may please,

According to the rules of re=alignment, one the TL on a particular timeframe is broken we can not continue to trade the trend on that timeframe. We must wait for that timeframe to "re-align" with the chart one timeframe higher.

So in your example of EUR/USD, you would not be able to buy on the daily chart anymore if that trend line is broken.
You would have to wait for price to reach weekly demand to start looking to buy again

The one important exception to this rule is that the only time you would be allowed to continue to buy this daily chart is if the DZ you posted was embedded inside a weekly demand zone, in which case the rule of re-alignment would have been met.

Hope that clarifies it for you

best wishes

Hy!
That TL isn't broken yet! A candle need to open and close outsite the TL, and the HighHigh and the LowLow have to be outsite too. (the strategy said) Or not?