4 Supply And Demand Trading Rules You Must Follow

Supply and demand zones are one of the core strategies I use to trade the forex market. I have been trading the supply and demand strategy since it became a popular method back in 2009, in the years since then I’ve spent a lot of time trying to make supply and demand trading as profitable as possible, in doing so I had to change a lot of the supply and demand trading rules which traders commonly use because the rules themselves didn’t quite make sense with the reality of how the market works.

Over the course of this article I’m going to walk you through the 4 rules you need to help make your supply and demand trading more profitable.

 

1. Only Trade In The Direction Of The Most Recent High/Low

 

Most of the traders who trade supply and demand zones try to predict where a movement will end instead of trading in the direction of the movement itself.

What these traders typically tend to do is mark all the supply or demand zones which the market hasn’t encountered yet and wait for the price to enter these zones before going either long or short. Usually these supply and demand zones will have been created a long time ago which means they don’t have a high chance of causing a reversal anyway ( more on this in a minute )

Whilst the traders wait for the market to hit these old zones which they believe are going to cause a reversal, there are lots of  zones forming in the direction of the current movement which the trader is neglecting to trade because he is so focused on predicting where the movement will reverse.

If the trader just stopped trying to find where the whole market was going to reverse and instead concentrated on taking trades at zones which formed in the direction of the most recent high or low, they would find themselves having far more winning trades.

A new high or low is a signal that the current momentum is to the upside or downside, by trading against this momentum you are unnecessarily putting yourself at risk of losing money because you’re trying to trade against the trend.

image of demand zone which formed after a new high

Here’s an example…

The trader would have had the supply zone already marked on his charts before the price made a new high, when the bull move occurred and a new high was made, the trader should have seen it as a signal that the price wants to keep moving higher, instead he places a short trade because he believes the supply zone will cause the market to reverse.

After hitting the supply zone the price only manages to drop a small distance before breaking higher again, making another new high and forming a demand zone in the process. When the market returns to this demand it causes another up-move, had the trader taken this trade instead of the supply zone trade, its likely he would have made some money because he was trading in the direction of the current momentum as opposed to trading against it.

If you always trade in the direction of the most recent high or low you’re giving yourself the best opportunity possible to have winning trades, reversals are very difficult to predict and usually when the market does reverse there will be another chance for you to get in right at the beginning of the reversal anyway, so there’s no need for you to try to anticipate when a reversal will occur, just wait for it to happen and then trade in the new market direction.

 

2. Do Not Trade Zones Which Were Created A Long Time Ago

 

One of the main rules Sam Sedien implements in his trading of supply and demand zones is the idea that zones which formed a long time ago have a higher chance of working out successfully than zones which were created recently.

Like I explained in my supply and demand trading article this assumption is incorrect and makes no sense with how the banks operate in the market. Sam and other supply and demand teaches say old zones work because they have seen the price reverse at old zones before, but the reality is there only saying the old zones cause a reversal because there is no other reason they can point to as to why the reversal occurred.

It kinda comes back to what I was saying in my multiple trading strategies article about how people who use one method will always look at the method as being the sole cause behind all movement in the market.

Sam Sedien teaches people that price moves because of a supply or demand zone being hit, the traders who then trade supply and demand using his teachings think every reversal begins from the market entering a supply or demand zone which is wrong, the only way the market will reverse is if the bank traders take profits off existing positions or place trades in the opposite direction to which the price is currently moving.

Both of these decisions are made based on how many orders are currently in the market, it has nothing to do with supply and demand zones it just happens to be that on some occasions the banks end up taking profits or placing trades at the same point where an old supply or demand zone formed.

This is why people think old supply and demand zones work, they see the price reverse at one of these old zones and think the zone itself is what has caused the reversal, not bank traders placing trades or taking profits which is the real reason for why the price has reversed.

Since I mainly trade the 1 hour chart I consider any supply or demand zones which formed over a week ago to be old, if the market returns to one of these zones I wont trade them nor will I expect them to cause a reversal, if the price does end up reversing at one of these zones I know it’s not the zone itself which has caused the reversal and is probably banks placing trades or taking profits.

 

3. The Size Of The Move Away Doesn’t Matter

 

Another rule which Sam and other supply and demand traders use is the idea that the bigger the move away from a zone, the better chance the zone has of giving you a profitable trade.

His rational for this rule being valid is, the bigger the move away from a zone the more out of balance the levels of supply and demand are said to be, therefore the higher the chance the price has of reversing when it comes back to the zone.

image of a supply zone with a large move away

Since the supply zone above has a strong drop away Sam would say it has a better chance of causing a reversal because there is more supply than there is demand, in other words, since the move down from this supply is big it means there are more sellers than buyers.

The idea that the if there are more buyers than sellers is a complete myth, I’ve seen many instances over the years where people have said if the price moves up it’s because there are more buyers than sellers and if it moves down its apparently because there are more sellers than buyers, its unbelievable when people say this because it makes no sense at all…

The only way the price can move up is if the buy orders coming into the market are bigger than the sell orders coming into the market, it makes absolutely no difference if there are more buyers than sellers, there could be 1000 sellers and 1 buyer, if the 1 buyer is buying more than what the 1000 sellers are selling the price will move up.

So firstly saying the strength of the move away has an influence on whether the zone will work out because there are more buyers/seller than buyers/sellers is incorrect and secondly the size of the candles which construct the move away from the zone do not show if the orders which came into the market and caused the price to move are big or small.

If a move away from a demand zone had three really big bullish large range candles it doesn’t mean the buy orders which caused that movement to occur were bigger than a zone which only had three small bullish candles, how many buy orders needed to cause the price to move up, depends entirely on the amount of sell orders coming into the market.

image of two demand zones

Supply and demand traders would say the second demand zone is stronger the first demand zone because it has a bigger move away, but I know the amount of buy orders which caused the second demand zone to form were smaller than the buy orders which caused the first demand zone to form.

You can see this by looking at what the market was doing before the demand zones were created.

Before the first zone formed the price was dropping rapidly, at the time it would have looked like the market was going to continue moving lower so lots of traders will have been placing sell trades expecting the price to keep falling. Before the second demand zone formed the price was also dropping, but it was not declining to the same extent to what we see with the first zone.

This means the amount of sell orders which were coming into the market before the second zone formed were far smaller than the sell orders which were being entered into the market when the first zone formed. If more traders are selling, it means there are more sell orders coming into the market, the higher the number of sell orders coming into the market, the bigger the buy orders need to be in order to cause a reversal.

So even though the move away from the second demand zone was much much bigger than what we see with the first demand zone, the buy orders it took to cause that move were actually far smaller than the buy orders which were needed to cause the first demand zone to form because there were more traders selling.

Determining which supply or demand zones are stronger than others is mainly based on where the zone is found in relation to the rest of the trend and knowing which type of supply or demand zone has formed i.e rally-base-drop drop-base-rally.

You can get more detail on seeing where the zone has formed in relation to the rest of the trend if you read my supply and demand trading article.

 

 

4. Make Sure The Market Returns To The Zone Quickly

 

Whereas Sam Seiden says the longer the market has been away from the zone the better chance it has of giving you a successful trade, I say the quicker the price returns to the supply or demand zone the more likely you are to end up with a profitable trade.

If the banks have trades left which they were not able to place when the price moved up or down forming the supply or demand zone in the first place, they’ll take some profits off their trades and force the market back into the region where their trades were placed ( i.e a supply or demand area ) so they can get the remainder of their positions entered into the market.

image of demand zone which formed after a new high

The X’s above show the points where the banks have been placing buy trades.

When the price shoots up creating the demand zone, the banks still have a few more buy trades left which they need to get placed. In order to get the price to drop back into the zone the banks must take a little bit of profit off the buy trades they have been placing, when the banks take profits the current buy orders are consumed and the price begins to drop.

When the price falls into the region where they have placed their first buy trades they use the new sell orders which have come into the market from the traders on the lower time-frames placing sell trades because of the drop, to get the rest of their buy trades entered into the market.

This whole event happens within three hours of the demand zones creation, if the price continued to rise after the demand zone formed then its unlikely the banks would have made the market return to the zone because all of their trades would have been placed.

The rule which I give in my supply and demand trading article is if the market has not managed to return to any zone found on the 1 hour chart or below within 24 hours of its creation it means the banks are probably not going to use the supply or demand zone to get more trades placed.

Recap:

  • Only trade zones in the direction of the most recent high or low, if the price moves up and creates a demand zone whilst at the same time making a new high then place a buy trade at the demand zone. Don’t look to predict where the up-move will end using supply zones, just follow the most recent high or low
  • Do not take trades based on old supply and demand zones, if a zone has formed a few weeks or few years ago it’s probably not going to result in a successful trade.
  • Zones with a large move away do not have a higher chance of working out successfully than zone with a small move away, the most important factor is where the supply or demand zone is in relation to the rest of the trend.
  • Make sure you trade zones which the price returns to quickly, if the market has not managed to return to the zone within a day of its creation then the banks are unlikely to use it to get more trades placed. ( This only applies supply and demand zones on the 1 hour chart and below )

Summary

The hope the 4 rules I have given you today will help you trade supply and demand zones more effectively, the rules these gurus and teaches give out always sound good to naive traders but rarely make any sense with how the market actually works and it’s only through a lot of study can you reveal the right rules which will benefit your trading.

Thanks for reading, if you have any question about the rules discussed in today’s article please leave them in the comment section.

Get My 6461 Word Book On Supply And Demand Trading To Learn......

  • How Old Supply And Demand Zones Do Not Cause The Market To Reverse And The Reason Why Traders Mistakenly Believe They Do
  • Why The Time It Takes For The Market To Return To A Supply Or Demand Zone Will Determine Weather The Zone Has A High Chance Of Causing A Reversal To Take Place
  • The Differences Between Zones Created By Bank Traders Taking Profits And Zones Created by The Bank Traders Placing Trades

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10 comments

  1. aki

    well seem like supply that wasn’t more than 3days seem working perfectly since it require liquidty to consumed bank order nor sell or buy it might take a while to find or attract retails trader to jump in market .. especially when there is news incoming ..
    if not carry the HH LL was a good idea to make profit for intraday ..

      • aki

        sam seiden might be true or perhaps but i like yours more.. well this week example only , there is nfp this thursday but today is monday , so bank , might created zon and left it behind untill nfp news , you know there is price action call fakeout srflip fakeout resistance/support , FTR fail to return and compression im sure you know about it , for me it does if it was left for 3days , if more than 3days , i just let it make [ i mean bank ] decission , sell or buy .. i want to send you picture how i read price action tho but here’s can’t.. hahaha btw sorry for my bad english .. there is a zone has characteristic that we can used as our supply or demand even it was left behind for 3 days even a week month also .. but recent zon like you said is the best way to carry out trade .. i am nothing but i love your theory ..

        • ForexMentorOnline
          Author

          From you answer I can see you have learned supply and demand from the read the market website or the thread in forex factory.

          I wouldn’t much confidence on what they say regarding S+D zones. Their problem is they think the whole market works because of the zones, they are caught in trap of looking at the market from one perspective, if the market turned without hitting a supply or demand zone what they will do is go down through the time-frames to find a zone which fell inline with the reversal. Then they would say the market turned because of it hitting this zone found on the lower time-frame, really the zone had nothing to do with the reversal, but they assume it did because they believe the whole market works because of supply or demand zones.

          Don’t get me wrong some of the things they say make sense, but for the most part their way of looking at the markets fails to take into account a large number of things which can cause price movement. When something happens which doesn’t fit their way of looking at the market i.e supply and demand zones, they’ll mold the theory to fit the event instead of taking a step back and analyzing if there was any other cause behind the event taking place.

          Btw thanks for visiting the site and dont worry your English is fine I can understand you easily.

  2. Vic

    In that very first snapshot on a top pic. i calculated 24-25 candles from the drop and back to same top, would that be considered valid supply area ?

  3. Matt Stein

    You say “I consider any supply or demand zones which formed over a week ago to be old,…”

    and

    “You should only trade zones which the market manages to return to in 24 hours” in your The Official Supply And Demand Trading Guide article

    So, doesn’t that mean that you consider any supply or demand zone which formed over a 24 h ago to be old????

    • ForexMentorOnline
      Author

      Hello Matt

      The supply and demand zones which formed 24 hours ago are considered to be old like I said in the Supply And Demand Trading Guide, when I made this article I found that there were a large number of zones that worked within a week of their formation but I later found that this was only because they had formed at the point where the banks had placed a large quantity of their trades into the market. The zones which the market must return to within 24 hours of their creation are the types of zone which do not form when the market makes a major swing high or low, they typically tend to form during a swing up or down as opposed to marking the point where the swing up or down begins.

      Sorry if this is a little confusing, I’ll be sure to make some articles on it in the near future which explains it better.

    • ForexMentorOnline
      Author

      Only the books at the moment Suffian, in the future there might be a course or something but for now it’s just the articles and books I have available.

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