TLDR;
This video explains the supply and demand trading strategy, a popular and potentially profitable method for traders. It covers identifying, drawing, and trading supply and demand zones, as well as using supply and demand curves to improve trading decisions. The video also introduces odd enhancers to filter high-probability zones.
- Supply and demand imbalances drive price movements in the market.
- Identifying and trading these imbalances can lead to profitable trades.
- Using odd enhancers helps filter out low-probability zones, increasing the odds of success.
Introduction to Supply and Demand [0:03]
The video introduces the concept of supply and demand as a popular and potentially profitable trading strategy. It explains that price movements in the stock market are driven by these forces. By understanding the dynamics of supply and demand, traders can anticipate price movements and track smart money without complex analysis. The video aims to provide the tools needed to master supply and demand in the market, covering core ideas for identifying, drawing, and trading market imbalances.
Understanding Supply and Demand [1:56]
The supply and demand concept states that high supply and low demand for an asset will drive prices down, while low supply and high demand will push prices up. Examples include investors buying safe-haven assets during uncertainty, which increases their prices, and the Federal Reserve raising interest rates, which makes the US dollar more attractive due to increased interest yield. A supply zone is above the current price with strong selling interest, while a demand zone is below the current price with strong buying interest.
Balance and Imbalance in the Market [5:18]
The market moves in a pattern of balance and imbalance. A balance area has equal buying and selling activity, resulting in sideways price movement. An imbalance area occurs when buyers or sellers are in control, causing the market to move in their direction with large candles. The video uses a chart to illustrate balanced areas (blue boxes) and imbalances where sellers exceed buyers, causing prices to drop quickly. The goal is to identify these balance areas to profit from the subsequent imbalance.
Reversal and Continuation Patterns [7:56]
There are two types of structures: reversal and continuation patterns. Reversal patterns, which signal a change in trend direction, include drop base rally and rally base drop structures. Continuation patterns, which signal a continuation of the current trend, include drop base drop and rally base rally structures. The video focuses on reversal patterns due to their higher probability of success.
Identifying Supply and Demand Zones [9:44]
Identifying supply and demand zones involves a three-step process. First, identify the current market price level. Second, look to the left of the current price to find extended range candles (ERCs) in the last drop or rally. ERCs have large bodies with little or no wicks. Third, find the origin of the move, which is the base of the supply or demand zone.
Incorporating Market Gaps [11:12]
Market gaps are useful for identifying supply and demand zones, acting as indicators of market imbalances. A gap is an empty space between two candlesticks where the price either rises (gap up) or falls (gap down) from the previous candle's close with no trading in between. Professional gaps occur in the opposite direction of the prevailing trend, signaling a strong demand zone, while novice gaps occur in the direction of the prevailing trend and often lead to a reversal.
Drawing Supply and Demand Zones [14:20]
Drawing supply and demand zones involves using two lines around the base of the zones: the distal line (outer line, away from the current price) and the proximal line (inner line, near the current price). The base should have less than six candles, with bodies less than or equal to 50% of the candle's total range. The price leaving the base should have at least two extended range candles. The base should not have more than six candles, only doji candles, long tails or wicks, or stair-step candles.
Methods for Drawing Zones [16:44]
There are three methods for drawing proximal and distal lines based on risk appetite. The conservative method places the distal line at the highest wick of the base and the proximal line at the lowest body. The high-risk method places the distal line at the highest wick and the proximal line at the lowest wick. The low-risk method places the distal line at the highest wick and the proximal line at the highest body.
Trading Supply and Demand Zones [21:21]
To trade supply and demand zones, buy at demand zones and sell at supply zones. Place limit orders at or beyond the proximal line and set stop losses at or beyond the distal line. Wait for the price to return to the zone to trigger the orders. Reversal structures are preferred for trading due to their higher chances of success.
Understanding Supply and Demand Curves [23:09]
Supply and demand curves help traders determine if the price is near a higher time frame supply or demand zone, which is important for buying low and selling high. The curve helps avoid buying at a supply zone or selling at a demand zone, ensuring trades are with the trend. Identifying the curve involves a three-step process using multiple time frame analysis.
Identifying Supply and Demand Zones Using Multiple Time Frames [24:51]
The first step is to choose a higher time frame. The higher time frame should be three to six times greater than the intermediate time frame. For positional trading, use a monthly chart as the higher time frame, a weekly chart as the intermediate time frame, and a daily chart as the lower time frame. The second step is to identify the supply and demand zones under control on the monthly chart. The third step is to divide the area between the proximal lines of the supply and demand zones into three equal areas: a high area, a low area, and an equilibrium area.
Drawing and Using the Curve [27:28]
To divide the curve area, either count the points between the two proximal lines and divide by three, or use a Fibonacci retracement tool with levels set at 0%, 33%, 66%, and 100%. The curve helps professional traders sell when the price is high and buy when the price is low, taking advantage of retail traders' tendencies to follow trends.
Trading with the Curves [29:36]
On the larger time frame, the curve indicates whether the price is high, low, or in the middle. When the price is high on the curve, the trading bias is to sell only. When the price is low on the curve, the trading bias is to buy only. At the equilibrium area, either trade with the prevailing trend or do not trade at all. The video provides examples of how to identify supply and demand curves and plan trades accordingly using monthly and weekly charts.
Odd Enhancers for Supply and Demand [36:04]
To improve the probability of success, use odd enhancers to select high-probability zones. There are 21 odd enhancers, but the video focuses on five important ones. These enhancers help filter supply and demand zones, preventing traders from buying every demand zone and selling every supply zone without proper evaluation. A scoring system is used to analyze these enhancers and assign a final score to each zone.
Strength of Price Move and Time Spent at Base [38:46]
The first odd enhancer is the strength of the price move from the base. A strong move consists of big candles and gaps, while a weak move has small candles. Strong moves indicate a high probability of success. The second odd enhancer is the time spent at the base. The best zones have between one and six candles in the base. Zones with more than six candles are considered weak. Basing candles with long wicks are also a sign of a weak zone.
Fresh Zones and Reward to Risk Ratio [42:46]
The third odd enhancer is fresh zones. A fresh zone is a supply or demand zone that the price has not tested yet. The first retracement tends to be the strongest and most reliable. The fourth odd enhancer is the reward-to-risk ratio. Choose trading opportunities that offer at least a three-to-one reward-to-risk ratio.
Overlapping Zones and Scoring System [46:46]
The fifth odd enhancer is overlapping zones, also called nested zones. Look for overlapping zones from different time frames. Higher time frame zones are more powerful than smaller ones. A scoring system is used to interpret the final score. A score of 10 means a limit order can be placed. A score between 8 and 9 suggests a confirmation order. A score below 8 indicates no trade. The video concludes by emphasizing that these odd enhancers improve the chances of taking the right trades but do not guarantee success.