Trading The Supply And Demand Bounce

Trading The Supply And Demand Bounce

So finally, once we’ve identifier a good trading opportunity, how do we enter these supply and demand bounces? There are roughly two ways and I’ll briefly go over them here.

But because this is an aspect of trading supply and demand that can be quite complex, I will keep some of the techniques I use for a future time Needless to say that the way you trade these patterns can make the difference between profits and losses, even though supply and demand zones by themselves can already give you a potential edge.

1. Immediate Entry

The first way to trade supply and demand is to use an immediate entry, meaning that you just place an order in the supply or demand zone and whenever that order is filled, you’re in a trade.

The benefits of this is that it’s less likely you’ll miss a trade because you can create a pending order beforehand. The drawback is that you might risk that the level doesn’t hold at all and instead end up with a loss. however, if you have defined quality supply and demand zones, this will still work very well.

2. Delayed Price Action Entry

With this technique, you wait for price action confirmation. This confirmation can come in many ways but the general idea is that you want to see in some way that the supply or demand zone is acting as a barrier and blocks the price from going through it.

This entry technique can easily fill an article of its own but popular ways of finding “confirmation” are:

  • Engulfing bars
  • Inside bars
  • Fakeout spikes: bars with highs or lows beyond the zone but still closing inside the zone
  • Opposite direction breakouts

Here’s an example of how you can enter at the close of an inside bar at the supply zone:

Stops And Targets

Even though this can be done in a mechanical way, choosing stops and targets is probably the most subjective topic of trading supply and demand.

Part of the reason for this is that it also depends on who you are as a trader: do you like to have a high win-rate strategy with a low reward to risk ratio, or do you prefer a low win-rate strategy with a high reward to risk ratio?

This is a question that only you can answer, based on how many losses you can stomach. Needless to say is that a strategy that goes for 10R profits (what is R?) per trade, will have more losses on average than a strategy that goes for a 1:1 reward to risk.

That said, here is a good pointer:

Take into account volatility when determining stops

An indicator such as ATR can give you an insight into how volatile an instrument is and as such, can help you with determining how wide your stop loss should be. For example, we could choose to use a stop loss that is twice the 24-period ATR of the entry candle:

Conclusion

Supply and demand is at the core of what trading is all about, so it’s not surprising that it can form the basis of a powerful trading strategy.

The first step in trading supply and demand is understanding what it is, how it works and what drives price action around these zones. While only introductory, the aim of this article was to shed some light on this and I hope you found it helpful.

Supply and demand is easily so extensive that a book could be written about the topic. However, it’s also important to prevent misinformation from spreading so understanding the basics of supply and demand is where everything starts.

The next step for you should be to go out and look at charts. Identify the supply and demand areas and see how the price behaves around these areas. Observe, make notes and build your experience.

If you want me to write more about supply and demand and how to trade it, please leave me a comment on this article. Or if you simply enjoyed my article, feel free to let me know as well

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