Second Entry Supply And Demand Zones

A common problem people have when trading supply and demand zones is missing the optimal entry into trades.

Usually traders will identify a zone and watch the market for an entry either by using a pending order or a price action signal. If the market enters the zone, and the trader does not see the necessary signal, he misses the trade, and the market goes off in the direction he anticipated without him.

It’s extremely frustrating when this happens.

What people fail to realize is alot of the time there will be another opportunity to get into the trade whilst it’s still near the supply or demand zone provided you know what to look for.

Today I’m going to show you two methods you can use to get a second chance at entering into a missed supply or demand zone trade, I must warn you beforehand you wont be able to use these two methods on every supply and demand zone you locate. They’ll only work on certain zone structures which I’ll show you throughout the article.

Before we get into the methods themselves you must understand which type of bounce supply and demand zones create when the market returns to them.

When the market returns to a zone it will do one of two possible things….

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It will retreat out of the zone quickly usually in the form of a single large range candle……

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………Or it will make an initial move out of the zone and begin consolidating, usually for the next 3 to 5 candles.

If the market hits a supply or demand zone and makes a quick move out of it, then unfortunately there isn’t really any chance for you to get a second entry into the trade. However if it hits the area then fails to make a significant away from the zone, then there may be a chance for us to get another shot at entering the trade if we failed to get an entry on the initial spike into the zone.

 

Initial Bounce Supply And Demand Zone

 

The first method I’m going to show you is based on exploiting a simple trap the professional traders use to fill additional buy/sell orders when the market hits supply and demand zones.

You may notice on some supply and demand zones when the market first hits the zone it will fail to make a large move away from the zone. You will have seen there has been a reaction to the zone, usually in the form of wicks on the candles or a small move out of the zone itself. It’s this small reaction we are going to use in order to find a second entry into the trade.

 

Second Chance Entry On Supply Zones

image of supply zone on 1 hour chart of aud/usd

Here we have a supply zone on the 1 hour chart of AUD/USD.

I know this isn’t the greatest supply zone ever seen but it will suffice for what I want to show you.

Look at how the market reacts when it first hits the zone, notice the small wicks on the top of the candlesticks ?

These wicks contain the key to seeing if there is another opportunity to get into the trade before the market moves lower.

You now need to switch to a lower time-frame to see the price structure in more detail, I only tend to trade the 1 hour chart so the lowest time-frame I’ll use is the 5 minute, any lower than this and things can become quite subjective.

image of supply zone on 5 minute chart of eur/usd

Once you have switched to a lower time-frame you’ll need to see if another supply zone has been created by the reaction to the supply zone you missed the entry on.

In our example a new zone has been created, this zone formed on the second candlestick after the market hit the zone, on the first image all you can see is a wick but on the lower time-frames you can see a supply zone.

This supply zone is your second chance at getting an entry short.

You use the same entry criteria for entering into this zone as you normally use when trading zones, if you usually place pending orders at supply and demand zones then place a pending order at these zones, if you wait for an engulf to form when the market is within a zone, then wait for an engulf to from when trading second chance entry zones.

 

Second Chance Entry Demand Zone Example

Now we have seen how to get a second entry into a supply zone trade lets take a look at how we can get a second chance into a demand zone trade.

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Here we have a demand zone found on the 1 hour chart of USD/JPY

We can see when the market first strikes the zone it makes a small move up, this move up is what we will use to get our second chance entry.

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On the 30 minute chart we can see the move up has formed its own demand zone.

Note:

You would be able to see the demand clearer if I could go down to the 5 -15 minute charts but MT4 is playing games and wont display the charts properly for some reason.

As is the case with second entry supply zones, you trade second entry demand zones the same way you would trade any other supply or demand zone. Entry is done using pending orders or price action and the stop-loss goes below the low of the zone ( depending on zone of course )

Why Doesn’t The Market Move Out Of A Zone Straight Away ?

 

The reason why there tends to be an opportunity to get a second chance entry is because of how the professional traders in banks and hedge funds operate when they cannot get their whole position placed into the market.

When you see a quick move out of a supply or demand zone it usually means the professional traders have not been able to get the majority of their trades put into the market, which is why the market tends to return to the zone in the first place. In a situation where the market doesn’t move out of a zone straight away and instead consolidates, what the banks are doing here is making sure they get as many of their positions placed into the market as they possibly can.

If you go over your charts you’ll see the market rarely returns to second entry zones.

The reason for this is because the professional traders had enough time to place their positions in the market, therefore there’s no point making the market coming back to the zone as all of their trades have been placed. In the event the market does end up returning to the zone you’ll see that typically the market will just blow straight past it without even stopping or stalling. This is due to what I’ve just explained, the pro traders have already had their trades placed, there isn’t any reason for them to place more trades when the market returns to the area.

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Here’s the second entry supply zone we looked at earlier.

When the market runs into a zone and fails to move back out of it quickly it means the professional traders need to get more traders to buy in order to get the entirety of their trade placed into the market.

In the example above you see the market react to the 1 hour zone in the form of a small drop, which is what creates the supply zone you will use as a second entry.

The move back up into the zone gives traders on the lower time-frames the impression that what they are seeing is a pullback to the up-move, they begin buying as they believe the market is about to continue moving higher.

Of course this all a trap, really the buy orders generated by these traders are being used by the professional traders to get more sell trades placed into the market. If you look closely you can see a bearish pin bar inside the second entry zone. This pin is where the majority of retail traders would have placed their buy trades. When the pin was forming it would have looked heavily bullish, giving the retail traders the impression a large move higher is taking place, they all start buying thinking the market is going to move higher and the pro traders start placing the rest of their sell positions using the buy orders coming into the market from the traders trading the bullish candle.

 

What Are You Looking For ?

 

When it comes to looking for opportunities to get a second chance at entering a supply or demand zone, what your basically looking for is a move into a supply or demand zone and then a small move out of the zone, either by seeing wicks on the candles or a small engulfing candle, this is on the time-frame you trade by the way.

If you see this then possibility exists that you may be able to get a second chance at entering into the supply or demand zone trade.

Remember to make sure you do not go below the 5 minute chart when trying to locate your second entry zones.

 

 

Second Entry Engulfing Candle Supply And Demand Zones

 

The next method I’m going to show you is based on something which occurs quite frequently when the market exits out of a supply or demand zone.

Commonly when supply and demand zones are hit the market will move out of them in the form of a large engulfing candle, these engulfing candles can be used to get a second chance entry as they tend to create their own supply or demand zones in the market.

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Check out the demand zone above.

If you had missed your optimal entry into this zone you would be kicking yourself right now as the market went on quite a run after it hit this zone.

Notice the bullish engulf candle which forms as the market exits the zone, this engulf creates a new demand zone…….

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I’ve marked the demand zone the bullish engulfing creates as it leaves the lower demand zone.

Look at the spike into the zone which takes place three candles after the engulf, this spike is what you will need for your second entry into the trade.

 

Engulfing Candle At Supply Zone Example

 

Lets take a quick look at a supply zone created by an engulfing candle.

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Here we have a supply zone on the 1 hour chart of USD/JPY

If you failed to get an entry short into this supply zone then the bearish engulfing candle marked with an X is the second opportunity you have to get a sell trade placed.

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You can see how the bearish engulfing creates its own supply zone.

The bullish candle seen after the bearish engulfing moves back into the supply zone created by the bearish engulfing, had you placed a pending order to sell at the bottom of the zone created by the bearish engulfing then you would have had a profitable trade on your hands.

 A Couple Of Rules

 

In comparison to our first second chance entry strategy, the engulfing zone method has a couple of rules you must follow in order to make sure you trade the zones correctly.

Rule number one is to not go down onto the lower time-frames to find the source of the supply or demand zone created by the engulfing candle.

If you do then the probability of your trade being executed decreases as most of the time the market will only manage to spike the outer edge of the zone before moving away from it.

The second rule is to use pending orders placed at the edge of the zone for your entry into the trade.

Most of the time the market will only just spike the area before moving out of the zone, you can try to use a price action signal to get into the trade but I doubt you’ll have much success with it, the market doesn’t spend a long enough time in the zone for you to wait for a pin bar or engulfing candle to form so I would stick to using pending orders.

Overall the engulfing candle supply and demand zone is a more frequent occurrence than the first second chance entry we just looked at.

I would say it’s also simpler to understand and trade. All you need to do if you have missed your entry into a supply or demand zone is wait to see if the market leaves the zone with an engulfing candle, if it does then you simply mark the new zone the engulfing candle creates and put your pending order to buy/sell at the edge of the zone.

It’s to important to note the market must strike the new zone soon after its creation. Don’t keep the new zone marked on your charts as a place where you will look for opportunists in the future, if the market fails to hit the zone or it hits the zone and moves in the direction you anticipated remove the zone from your charts, it is unlikely for the market to turn at the zone if it does manage to return.

 

Summary

 

Missing out on successful trades is something we all hate, hopefully with the two methods outlined to you in this article you’ll be able to increase the amount of profitable trades you take and in turn, make more money.

If you have any questions surrounding the strategies outlined to you in the article please leave them in the comment section below.

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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2 comments

  1. Esther Yim

    Hi there, I love your posts and learned a lot from it. You taught us the fundamental of Supply & Demand as well as how to enter a trade based on these theories. Could you also enlighten us how and when should one takes profit? Many thanks!

    Love from Malaysia!

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