Supply & Demand Part 1We will talk about ranges, Premium & Discount levels and trading them.
I'm going to explain the basics of Supply & Demand simply. This is Part 1 of a 2-part series. We’re going to cover the concept of buying high & selling low, ranges, Premium & Discount zones and taking entries & exits based on what we learned.
Buying high & selling low
Before we get into the topics, let's quickly understand the concept of buying high and selling low. We'll be using this concept throughout this idea.
Why is it good to buy low and sell high?
Let's imagine that we're trying to buy & sell a pair of shoes.
If you buy at the 0.25 level and price goes up to 0.75, you make a profit.
But if you bought at 0.5 and price goes up to 0.75, you would make less profit.
If you buy at 0.25 and price goes down to 0, you make a loss.
But if you buy at 0.5, you make much more of a loss.
In the examples above, we can see that buying low is beneficial because it reduces how much money we lose and at the same time increases how much we can earn.
The same logic can be applied to a sell. If we sell high at 0.75, we have less money to lose if price goes to 1 AND at the same time, we have more money to gain if price goes down to 0.25.
But if we sell at 0.5, we have more money to lose (if price goes up to 1) and less money to gain (if price goes down to 0.25)
The point is that it’s best to sell high and buy low.
Range
Let’s talk about what a range is. A range is the area between the latest swing high and swing low. A new range is formed when structure is broken and confirmed.
Let’s look at how structure is broken. (a bearish structure break)
We have our swing high and swing low to the left of the chart. This is currently our range. Then, price pulls back up and closes below the swing low (it breaks structure to the downside). A structure break only happens when a candle’s close is below the last swing low. Always check this on the previous candle and not on the current realtime bar which is forming. The current realtime bar will repaint and we won’t be sure if the close of the candle will actually remain below the last swing low (until the candle has finished forming).
Now that our break of structure happened, we have to confirm the new low which just formed. We confirm this low by waiting for price to come up again and close (and not just form a wick) inside the range we had. Now, we know that our new low is confirmed.
Once our new low has been confirmed, we can draw our new range. The new range’s top will be the highest high (i.e. the high which caused that confirmed low). The new range’s bottom will be the confirmed low.
Let’s look at how a bullish structure break is formed.
We have our range to the left of the chart. then, price comes down and then closes above the range. Now, we have an unconfirmed high.
To confirm this high, we wait for price to close back inside the range. Once that’s done, we have our new range.
Premium & Discount zones
To understand Premium and Discount zones, let’s use a fib. The fib is divided into 4 zones: 0%, 25%, 75%, 100%
A premium zone is the upper 25% (75% - 100%) of the fib and a discount zone is the bottom 25% (25% - 0%) of the fib.
The other area in the middle (25% - 75%) is fair pricing.
Aim to buy when price reaches the Discount zone (buy low) and sell when price reaches the Premium zone (sell high).
Combining ranges with zones
Let’s look at a way we can use what we learned to take entries and exits.
For a buy: look for a bullish structure break. Then wait for price to close inside the range (to confirm the bullish structure break). Now, we have a new range.
Draw a fib on the new range. Wait for price to reach the Discount zone of that fib. A candle low should be within the discount zone. You can buy there. Exit when price reaches the bottom/top part of the premium zone.
If price fails to go down to the Discount zone to give us an entry and instead reaches the Premium zone and goes even higher above the new range, that means that a new range formed and we have to wait for this new range to be confirmed. This new range’s top will be the high that was broken, and the bottom will be the low that caused the move up which broke the high. Wait for price to close inside this new range for it to be confirmed. Then we have to wait for our buy signal again.
For a sell: look for a bearish structure break. Then wait for price to close inside the range (to confirm the bullish structure break. That is our new range.
Draw a fib on the new range and wait for a candle high to reach within the Premium zone. Sell there. Exit when price reaches the bottom/top part of the Discount zone.
If price fails to go up to the Premium zone to give us an entry and instead reaches the Discount zone and goes even lower below the new range, that means that a new range formed and we have to wait for this new range to be confirmed. Our new range’s bottom will be the low that was broken, and the top will be the high that caused the move that broke the low. Wait for price to close inside this new range for it to be confirmed. Then we have to wait for our sell signal again.
I hope you find this useful!
