The Official Supply And Demand Trading Guide

Over the past few years a new type of trading method has become widely popular with forex traders.

Supply and demand trading is a trading method where the idea is to find points in the market where the price has made a strong advance or decline and mark these areas as supply and demand zones using rectangles.

The point in which the price has made a strong advance is marked by the trader as a demand zone

A point where the market has made a sharp decline is marked as a supply zone

The main premise of supply and demand trading is when the market makes a sharp move up or down the large institutions i.e banks/hedge funds are not able to get their entire trade placed into the market, therefore they leave pending orders to buy or sell at the zone with the expectation the market will return to the zone and the rest of their trading position will be filled.

To a new trader who doesn’t really know much about supply and demand trading, the theory I’ve explained above sounds like it makes sense.

The problem is the theory above is completely wrong with the way the forex market actually works. 90% of supply and demand traders all trade supply and demand zones with the idea that large institutions place pending orders at these zones ready for when the market returns, this is wrong ! institutions never do anything like this and even if they did put orders at supply and demand zones when the market would hit these orders it wouldn’t move anywhere because pending orders cannot cause the market price to change, only market orders can.

To understand why this is we must talk about something called liquidity.

 

What Is Liquidity ?

 

Liquidity is the ability to buy or sell something without causing a large price change.

Whenever you see the market move is it due to a lack of liquidity in the market, not because there are more buyers than sellers as is commonly taught in trading literature.

When someone places a market order it removes liquidity  from the market because the person who is placing the market order is essentially demanding that his trade is placed right now, his market order is then matched with someone who has pending order to sell placed in the market.

If the market order is bigger in size than the opposing pending order, what will happen is part of the market order will be filled but the rest will remain unfilled, so the market must move higher in order to seek out additional pending orders to fill whats remains of the market order.

What this essentially means is pending orders add liquidity to the market, because they are the orders in which market orders will be matched with.

We as retail traders do not trade at a size big enough to effect the market price, placing and exiting trades is something we never have to think about, for large institution’s however, getting in and out of trades can be a big problem.

Because the trades they place are so big one of the primary goals of a professional trader is get a trade placed into the market with as little impact on the market price as possible, this means finding places in the market where alot of liquidity exist.

Most of the time pockets of liquidity tend to be found at places where retail traders put their stops losses.

The reason why stop hunts are seen frequently in the forex market is down to professional traders placing big trades into the market, they purposely push the price into the location of the stops to unload large trades all at the same price without moving the market a significant distance.

You can actually trades these stop hunts, check my article “Using Oanda’s Order-Book To Trade Stop Huntsfor a step by step guide to finding and trading them.

What I’m want to do now is go through the main rules on supply and demand trading and explain to you why they don’t make sense within the context of how the forex market actually works.

Why Would The Institutions Wait To Get Their Order Placed ?

 

Before we get into the rules themselves I thought I would shed some light on the idea that institutions wait for the market to return to supply and demand zones to get their pending orders placed.

It doesn’t make sense to me that a zone which is really old still contains orders to buy or sell within it. I mean, If there is a supply zone which is three years old and the market has not returned to it for the past three years does it really make sense the banks still have a pending order to sell placed at the zone ?

On top of this, how does the bank know what the market is going to do ?

There’s no way for them to know if the market is going to return to the zone or not so why would they place an order there in the first place ?

Time Spent Away From Zone

 

One of the primary rules supply and demand traders use to gauge whether a zone has a high probability of working out successfully is the amount of time the market has spent away from zone.

Apparently, according to many supply and demand teachers, the longer the market has been away from a supply or demand zone the better chance the market has of turning when it eventually returns.

This again is flawed thinking.

If the bank places a pending order to buy or sell for when the market returns to a supply or demand zone are they really going to wait a long time for this to happen ?

image of old supply and demand zones

If we compare the old supply and demand zones (colored blue), with the more recent zones colored orange, its easy to see how trading zones which have been created recently is far more profitable than trading zones which were created a long time ago.

Lets Imagine you had traded the 6 recent zones I’ve marked on the chart, each zone would have resulted in you having a successful trade, however had you traded the older zones, only one of them would’ve turned out to be a profitable trade.

So really the example above proves to us the quicker the market returns to a supply or demand zone the better the chance it has of giving you a successful trade, older zone do not tend to work out very often, therefore its better if you only place trades in zone which have been created recently.

 

The Strength Of The Move Away

 

One of the fundamental rules to trading supply and demand is “The stronger the move away from a zone the higher the chance the market has of having a strong move away when it eventually returns”

In other words, if you mark a zone on your charts which has a strong move away from it, how likely that zone is to result in you having a successful trade depends on how big the move which created the zone was.

If you marked a supply zone which had a huge drop consisting of multiple bearish large range candles then according to the rules the zone has a really high chance of working out successfully if you decide to trade it.

Unfortunately the likelihood of a supply or demand zone giving you a successful trade has nothing to do with whether the move out of the zone was strong or not.

How many times have you placed a trade at a supply or demand zone which has a strong move away only to see the market fly straight through it when it returns ?

A large number of times I bet.

This is because the strength of the move away has nothing to do with how strong the area is.

image of failed demand zone on 1 hour chart

Common supply and demand teachings would say this is a strong area, yet as you can see the market breaches it without even stopping ! Which brings me on to my next point…….

How To Determine Which Zones Are Stronger Than Others

 

Now we know a big move away from a supply and demand zone doesn’t have any effect on the likelihood of a trade working out profitably or not we need to answer the question “how do you determine which zones are stronger than others”?

The answer is where is the zone in relation to the trend.

image of demand zone

Check out this demand zone on the daily chart of EUR/USD

Whoever brought when the market was down here has a lot of money at their disposal.

To know why requires an understanding of market psychology.

As a trending movement increases in length, more and more people begin trading in the same direction. Look at the last drop you can see on the chart before the demand zone is created, at the time of this drop tens of thousands of traders are all beginning to go short expecting lower prices, in order for the market to be able to move up from here, someone needs to come into the market and buy from all the traders who are going short.

This would take a huge amount of money, probably hundreds if not billions of dollars.

The market eventually stops falling lower and begins advancing higher, creating the demand zone marked on the image. This zone has a very high probability of giving us a successful trade, not because it has a strong move away, but because we know whoever brought down here creating the zone has invested a lot of money into the market.

Why would someone spend all that money buying up all the sell orders from thousands of traders if their still expecting the market to move lower ?

Another example:

image of demand zone on daily chart

This example was taken from the 1 hour chart of EUR/USD

Apart from the change of time frame the example above is a very similar to what we looked at previously. First we have a significant downtrend which many people can easily see with one look at the chart, then we have a strong, near vertical move up. This move up tells us somebody has come into the market and brought up all the sell orders from the traders going short into the downtrend.

Again why would someone come into the market and buy from all the traders going short if they were expecting the downtrend to continue ?

The supply and demand zones which have the highest probability of working out successfully are the ones found at trend reversals. A demand zone created after the market has been going down for a long duration of time has a much better chance of working out profitably than a demand zone which forms at the beginning of a down-move.

It’s the same for supply zones too.

In a situation where the market has been going up for a long time a supply zone which forms late into the lifespan of the move up has a far better chance of resulting in a successful trade than a zone which is created at the bottom of the move up.

Time Taken To Return To The Zone

 

There are two types of trading institutions participate in.

The first is intra-day trading, in which the aim is to capture many small market movements over the course of the trading day generating small amounts of profits in the process.

Bank traders who trade intra-day will want their trades placed during that day, none of them will hold their positions overnight, this means the market makers will have to work the price in the market to places where these intra-day traders will want to buy or sell.

The majority of theses places will be supply and demand zones.

So if we know these intra-day traders will not hold trades overnight then its likely that if the market doesn’t return to these zones within a 24 hour time-frame they have a much lower probability of working out.

Here’s a rule for supply and demand traders who primarily trade the 1 hour chart.

You should only trade zones which the market manages to return to in 24 hours.

If the market has failed to return to a supply or demand zone you have marked on your charts within 24 hours then the zone becomes invalidated, you don’t trade it again, it has no relevance anymore.

I’ve completed lots of test on this and found 24 hours is the max, anything over this and the probability of the zone decrease dramatically.

If your someone who happens to trade supply and demand zones on the daily chart, then the market must return to the zone within a month, if it hasn’t returned before the end of the month the level becomes invalidated and you must not attempt to trade it if the market returns.

The reason for this is due to the other type of trading banks participate in, long-term position trading.

These long-term positions the banks take is what causes trends to occur in the forex market.

The large institutions who operate in the forex market all collaborate together in which direction their planning to take the market and then manipulate the prices so it makes everyone think the market is going to go in the opposite direction to the way in which they are going to be placing their trades.

image of demand zone on USD/JPY

Here is an example I found on USD/JPY

First notice how there is a significant downtrend which by this point had been in place for nearly three years, due to the fact the market has been going down for such a long time it means the majority of the traders in the market are going short.

Then out of nowhere we get a sudden up move. This is significant because of how long this downtrend has been in place, many many people are selling USD/JPY due to this downtrend, for the market to suddenly move up means the banks have entered the market and brought huge positions off all the traders who have been selling.

What the banks do then is very clever, they let the price drop, this makes everyone think the downtrend is going to continue so they all start selling again. When the market returns to where the banks initially brought, they buy again, this second round of buying coupled with the mass liquidation of losing positions by the traders who were selling is what causes the market break significantly higher and begin trending.

When large institutions place trades in the market they will want all their trades to be entered at a relatively similar price range, they will not place one trade at one location and then wait until the market has moved far away from their first trade before placing the second one, this is why the market returns to the daily demand zone shown on the image.

Trend Direction

 

As with most forex trading strategies supply and demand traders incorporate the concept of trend into their analysis of the market.

The problem is the way the traders implement the concept of trend.

Typically what a trader will do is go on the daily chart and see that overall the trend is down, therefore they are only going to take trades at supply zones as they have been told to always trade in the direction of the daily trend.

There is nothing wrong with this so long as the trader is taking trades off the daily chart.

If the trader is taking trades off a lower time-frame then problems can arise as they are always going to be trading against the trend on the time-frame they take trades off.

If for example the trader take trades off the 1 hour chart then they are unnecessarily going to lose on multiple trades because they believe they should be trading in the direction of the daily trend, regardless of whether the trend on the 1 hour chart is up.

People don’t realize, the trend on the time frame you place all your trades off is the one you should be following. If you trade the daily chart then you should be trading in the direction of the daily trend, if you trade the 1 hour chart you should be trading in the direction of the 1 hour trend.

Summary

For the most part a large percentage of the trading information you hear online is wrong, It doesn’t take a genius to figure out the facts if you spend a small amount of time analyzing the details. Pending orders cannot move the price of an exchange rate, the fact that supply and demand trading is primarily based off this assumption means either Sam Seiden doesn’t know much about trading forex or he purposely gives out incorrect information in order to get people to buy his trading courses.

If you begin trading supply and demand zones using the adjusted version of the rules laid out to you in this article I’m sure you will achieve a better success rate when trading the zones.

Resources

The links below are to all the other articles I have written about supply and demand trading found on this site.

A Simple Supply And Demand Indicator You Can Use On MT4

The Two Types Of Supply And Demand Zone

How To Easily Draw Supply And Demand Zones

How To Trade Supply And Demand With Price Action

Warning Signs Of A Supply And Demand Zone Failure

What Makes Supply And Demand Trading So Popular ?

Supply And Demand Zones Inside Breakout Zones

Second Entry Supply And Demand Zones

Finding True Supply And Demand Zones Using Oanda’s Order Book

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

IMPORTANT: The Book Will Be Sent To The Email Address You Provide Below

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30 comments

  1. Tasir

    Thank you so much for clearing the misconceptions of Supply and Demand trading.
    Your explanations contains much fresher air and crystal clear.

    • ForexMentorOnline
      Author

      Np Tasir, glad you found the article helpful 🙂

      I have a book coming out at the end of December that goes into more detail as to how money actually gets made in the forex markets and why retail traders typically tend to lose money.

      The book will be sent to all the people who have subscribed to my daily support and resistance level service, i see that you have signed up too but have not confirmed your subscription, if your interested in receiving this book along with the support and resistance levels please find the confirmation email and confirm your subscription.

  2. Chippy

    Finally someone who also sees the S/D common fallacy. For years I have been asking S/D gurus how pending orders can move price….

    Are you selling your book soon?

    • ForexMentorOnline
      Author

      Its no use chippy, these gurus and their followers are too caught up in understanding the illusion of the markets rather than the reality, I tried to tell the traders on panoramia’s thread over at forex factory that pending orders cannot move price but they simply ignored the message.

      I released the book last month, I will have another book coming in the next couple of months which will be packaged with the Zero Sum Fun book, if you’ve already purchased Zero Sum Fun you’ll be able to get the next book at a discounted price.

  3. Rob

    I have been trading for about 8 months now, and when I came across this concept of Supply and Demand, it immediately caught my attention. Except when I started doing my research, out of all of the articles that I read, I couldn’t bring myself to FULLY agree with ONE of them. Further research had brought up the name Sam Seiden a lot, so I figured I would check him out. The man seems to know what he’s talking about but these exact questions that you have answered here, were lingering in the back of my mind. He mentions a LOT that pending orders move the markets… and me as a very novice trader felt almost stupid, to think anything otherwise, simply because he was a floor trader so he must know what he is talking about. After reading this, I realize that it is NOT the pending orders that move the markets, it is when these orders are actually FILLED. I read a lot of comments and he confused a lot of people with this. Running into this article really made me realize that, him and quite a few other “mentors” either don’t know what they’re talking about or simply don’t know how to relay the message to the people properly. By the way, I 100% agree with everything in this article! Teaches me not to be so naive.. THANKS GUYS!!!

  4. Pingback: A Simple Supply And Demand Indicator You Can Use On MT4 - ForexMentorOnline– ForexMentorOnline

  5. Kadamash

    You guys have no idea lol
    Supply and demand is so real. The realest concept in trading. Its the only thing that makes sense in buying and selling anything. You guys must be the “confirmation traders ” who are to scared to trade against price when its opposing with force……………..or maybe you are “chart patten” traders or even “fibbonachi” traders lol those conecpts are a pile of trash. Google fibbonachi and then explain what the hell that has to do with buying and selling anything.

    Trendlines, fibbonachi, chart patterns are all illusions. They dont exist in buying and selling, so why put them on your chart. Trading isnt that complicated so why complicate it?

    Do your research on supply and demand properly and put into practise. You will be suprised and scared of how real it really is. Only thing that makes sense.

    Please do your

    • ForexMentorOnline
      Author

      Err Kadamash, I’m not sure where this attack has come from, this whole site is about teaching people that buying and selling is the only thing to focus on in the market, I’ve never said supply and demand doesn’t exist, I said the theory behind supply and demand trading which Sam Sedien promotes is incorrect, because its based on a set of assumptions which dont make senese with how things work in the market. Nobody on this site is a pattern trader or fibonacci trader, in fact if you read my fibonacci article you’ll see I even say fibonacci levels dont exists and the people who use them are simply trading illusions, so saying I have no idea about the market is stupid.

      Please read the rest of the site, I guarantee you’ll be the one who is scared and surprised, not me.

  6. If I might question the fx internet websites the utmost protected and dependable web-site what it is, I want in direction of start out mastering around forex small by little.

  7. Hi, I do believe this is an excellent site.
    I stumbledupon it 😉 I’m going to revisit yet again since
    i have saved as a favorite it. Money and freedom is the greatest way to
    change, may you be rich and continue to
    help other people.

    • ForexMentorOnline
      Author

      Yes around 10 – 20 pips for zones on the 1 hour chart and 100 pips for zones on the daily chart. This will vary depending on the current volatility and the currency being traded.

  8. Youness

    The chart examples you gave are the 1hr TF, which is ok if you accompanied them with a top down chart analysis of the weekly and daily TF charts so we know where we are in the big picture.

    While the 1hr chart may show a valid supply zone, we could be sitting right in the weekly demand. We don’t know that from your charts because you conveniently chose not to show them to us.

    Also Sam Seiden and others never claimed that pending orders per se move the markets, it’s the filling of pending orders that move the markets…he’s not stupid…he even says “willing” buyers and “willing” sellers to exclude fake pending orders…..

    In your article, your focus is on the traders in the banks and big institutions who should be making money from trading for their bosses, that’s why it doesn’t make sense to you why would they be locking a chunk of their capital in a zone that might not be visited in weeks/months or years. I get that logic.

    But there is another part of the market where traders get paid commissions based on the number of orders that have been filled at a specific price range, and almost always they’re partially filed due to the huge size of their orders before the market runs away from them, so they must wait till the price comes back to their authorised price range before they start offloading their remaining pending orders if they’re lucky.

    By the way, I’m not one of his student or affiliated to him in any shape or form, but I felt obliged to clarify things that have been said about Seiden, as I watched most of his free YouTube videos.

    • ForexMentorOnline
      Author

      Hello Youness

      Seeing where we are in the bigger picture has nothing to do with the points I was explaining in the article which is why there are no images of the daily or weekly charts showing top down analysis. Teaching people why the move away from a supply or demand zone has no effect on whether the zone itself will work out profitably or not, does not require me to show whether we are in a daily or weekly supply or demand zone because it has nothing to do with it. The article is not about showing my analysis on trades taken from supply or demand zones it’s about explaining why certain rules don’t make sense within the context of the market.

      If I was explaining how I took a trade from a supply or demand zone or why a trade didn’t work out profitably, then I would have put images in of the supply or demand zones on the higher time-frames but since I’m not doing this, there’s no point.

      Really it makes no difference whether pending orders move the market or not, they are not placed at supply or demand zones ready for when the market returns because the banks cannot predict ahead of time, whether the number of buy or sell orders coming into the market upon its return to the zone will be enough to fill the pending order they have placed there.

      That is something which can only be worked out when the market is inside the zone, at which point, the banks will use a market order to get their trades placed.

      This idea of the banks getting paid commissions based on the number of orders they get filled is also something I understand but like you said this happens in a RANGE, not a supply or demand zone which is what we’re talking about.

      Anyone who has read my supply or demand book will remember the example in the book of the banks getting trades placed at multiple different prices that were close together. If the banks have any orders left which they need to get placed the market will revisit the range before proceeding to move in the direction of the trend.

      Again this happens in a RANGE, a range is not a the same as a supply or demand zone.

  9. destiny

    You the real MVP!!thanks for the material.I’ve always doubted the assumptions behind the known demand and supply strategy then you came in and cleared everything.please continue your working of educating other traders.it is because of guys like you that people like us get to see the road clearly.thanks man

  10. nkosi

    Hi friends and fx mentor great articles indeed and they are valuable. My challenge is some of the articles they never show pictures it says error some picture can not be reloaded. Please help

    • ForexMentorOnline
      Author

      Hello nkosi

      I’m not sure why the images aren’t loading properly, it might be an issue with your internet browser, which browser are you using ?

  11. nkosi

    using the internet explorer especially the first article about the official supply and demand trading guide, it says they are old cant reload. do you mind sending me the whole document of all the articles through the email address about supply and demand.

    email:beckhammoroane@gmail.com

    thank you!!!

    • ForexMentorOnline
      Author

      Any really Matt, I just tend to trade AUD/USD EUR/USD USD/JPY because these are the currencies which i’m most familiar with but you can use supply and demand zones on any currency.

  12. nkosi

    Hi, the book you sent me this week about the swing low and highs. When I try to view it,it says file damaged or corrupted even if I try converting to a work format it still gives me problems. Its the word book you sent on swing lows and highs. Can you send it via my email address?

    Thank you
    Nkosi

  13. Enio

    Hi, Enjoying all your articles, Thank you so much.

    2 Questions,
    1) Since I’m prapering myself to go live I want to trade h1 frame, when you say to only respect sup/dem zone for 24 hours do I need to take into consideration the market sessions or just start from the zone and continue from that ?

    2) In your experience, concentrating on AUD/USD EUR/USD USD/JPY pairs, would I have enough trades in a month to be able to generate upwards of 10% monthly by trading h1 levels ?

    Sort of wandering how many trades would you take daily / weekly etc.

    Sorry if asking for too much here, but thanks in advance and thank you for these great articles you’re writing.

    Thank you again
    Enio,

  14. Brad Alexander

    Thanks

    These links are, without a doubt, the best explanation of Supply and Demand trading I have seen.

    This is not my normal strategy and after attending a Sam Seiden seminar a few years ago, I tried it and failed. Now I know why!

    Brad

  15. M Shaipudin M Husain

    The best information on supply and demand trading. Would it be possible for you to share all the articles in pdf for easy printing and reference.

    I already downloaded your free guide to supply and demand zones that work.

    Thank you.

    M Shaipudin

    • ForexMentorOnline
      Author

      I’ll have a look into Shaipudin, I’ve got some new supply and demand articles on the way so I might make a big PDF containing all the articles once their complete.

  16. ForexMentorOnline’s way of thinking has merit and value. I am a long time trader. I also studied Sams and others various S/D methods. The core principle as stated sounded good, the notion of “unfilled” orders has merit. However some of their methodology is questionable. ForexMentorOnline has simply answered some of these questionable concepts. He happens to be largely correct in the ideas he presents in his writings. Study them. Try them. I have urged all my friends and other young traders I meet to read his material.

    There is still though no such thing as the proverbial “holy grail” so stop looking.

    Traders can in fact find locations where there are unfilled orders. Problem is and always will be traders cant determine market depth. So trading is and always will be a difficult endeavor. It will never be easy. But ForexMentorOnline does help us to understand it somewhat better.

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