Price Action Trading Using Supply & Demand ZonesSupply and Demand Trading Strategy is a price action strategy that focuses on identifying Institutional Buying & Selling Footprints on a Price Chart. This strategy doesn’t rely on any indicators or oscillators; entire focus is on Price Action.
Owing to the sheer large size of their orders, Institutional buying or selling leaves behind certain footprints which create specific chart patterns.
Price Action Trading Methodology relies on a vast number of Price Patterns, however Supply Demand Trading Methodology focuses only 4 Specific Price Formations. These are classified as Supply & Demand Zones.
Supply & Demand Zones
These zones are areas on a price chart where price in the past had spent very little time and had moved in an explosive manner. Such sharp moves in price is possible only because of Institutional buying or selling. Owing to the structure of these zones, there is a very high likelihood of having unfilled institutional orders in any zone.
Demand Zone Formations
Rally-Base-Rally (RBR)
A Rally- Base- Rally is a price action pattern that represents the formation of a Demand Zone. It is generally found in strong uptrends, indicating a continuation of the uptrend. This type of pattern is characterized by a leg-in candle followed by a basing of candlesticks and then another Big Explosive leg-out candle. If you look at the leg out candle created in the chart below, it shows a strong vertical rally which is very likely due to institutional buying activity.
Drop-Base-Rally (DBR)
A Drop-Base-Rally is a formation that represents another Demand Zone pattern. It is a reversal formation, in which a drop is followed by a sideways price movement and then a strong bullish rally. The leg out candle ideally should be a big explosive move which will depict institutional buying activity.
Supply Zone Formations
Drop-Base-Drop (DBD)
Drop-Base-Drop is a price action pattern that represents a Supply zone. A bearish drop followed by a basing or sideways price movement and then an explosive bearish continuation downwards. It is a continuation pattern which can be used to trade & participate in the down trend.
Rally-Base-Drop (RBD)
Rally-Base -Drop is a price action pattern that represents another supply zone. This formation is characterized by an upward move then a basing of candles and a strong explosive move downwards. Explosive drop after basing indicates the footprint of institutional selling activity. This formation is generally found at the end of an Uptrend signalling a reversal.
Trade Action at Zones
Supply & Demand trading methodology is a retracement strategy. Long trades can be initiated when price retraces to a Demand Zone & Short trades can be initiated when price retraces to a Supply Zone.
However, all zone formations aren’t alike, one must qualify the zones based on factors like how Explosive was the move from the zone, how much time price spent in the zone & most importantly what Reward to Risk Ratios do they zones provide.
These zone formations combined with Trend, Location & Multiple Time Frame Analysis lays down the ground rules for Supply Demand Trading.
