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

In today’s article I’m going to show you another way of using Oanda’s order book tool to find trading opportunities based on old supply and demand zones.

My other article “Using Oanda’s Order Book To Trade Stop Hunts”, focused on using the open orders graph to find prices where clusters of stop losses had accumulated in the market and then trading runs into these stops as a means of entering into trades.

Today’s article is a little different…..

Instead of finding stop losses we are going to be locating supply and demand zones.

Where the method we’re going to be using today differs from typical supply and demand zone teachings is, instead of finding recent zones which turn the market due to professional traders placing trades, we are going to be identifying  zones which the market has not returned to for a significant length of time. In Sam Seiden’s supply and demand methodology he says zones in which the market has not returned to for a long duration have a higher probability of working out successfully than zones which have been created recently, whilst I’m not going to go into details of why this assumption is wrong ( read this article for more info ) what I’m going to reveal to you is a method of locating old supply and demand zones which have a high chance of presenting you with a successful trade.

The important thing to understand about the levels I’ll be showing you how to trade and identify today is the reason the market actually turns at these zones.

Recent supply and demand zones cause the market to turn due to banks and institutions wanting to get additional trades placed, the reason older supply and demand zone can cause the price to turn is down to retail traders closing losing trades.

The Theory


If you’ve ever placed a trade without at a stop before then you’ll know how it feels when the market begins to move further and further away from the price you entered at.

Your loss is continuously getting bigger which means you are put under more and more pressure to close the trade and accept the loss.

The dream scenario for a trader who has been holding on to a losing trade for a long time is the market returning to the point where the trader initially entered his position, after going through the pain of holding a losing trade for all that time, the first thought on a traders mind when the market comes back to where they entered is to close the trade and escape with the smallest possible loss.

Knowing these traders are likely to close their trades as soon as the market returns allows us to formulate a trading strategy based on the movement that will be caused by them closing their trades. Usually the only way you would be able to identify where losing traders have placed their trades is by guessing, but by using Oanda’s open positions graph we can see not only where these traders have placed their losing trades, but also how long they have been in a losing positions, this is important ! The longer a trader has been in a losing position the more likely they are to close their trade as soon as the market returns, we will use this simple fact to figure out which supply and demand levels have a higher probability of working out successfully than others.



Reading The Open Positions Graph


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The open positions graph allows us to see where the traders using Oanda currently have open buy or sell trades.

Not only this, we are also able to see the status of their positions.

The blue and orange bars on the graph shows us whether the traders are in profit on their trades or at a loss, additionally with a little bit of investigation, we can figure out when they have placed their profitable or unprofitable trade. This will be useful to us as one of the main components of assessing how high a probability a supply and zone setup is relies on us knowing how long traders have been in unprofitable positions.

The graph is split into two sections LONG and SHORT the color of the bars show us the current status of the traders positions.

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If the bars are colored orange it means the traders are in a profit on their trades.

If the bars are colored blue, it tells us their at a loss.

Whilst the orange-colored bars ( which show traders who have trades open in profit ) are important for other order-book strategies, what we’re interested in today is the traders who currently have trades open which are at a loss.

We are going to translate the blue bars into supply and demand zones for which we will look for trading opportunities.


How To Determining Good Levels From Bad Ones


Of course take one look at the open positions graph and you’ll quickly see traders are trapped in trades all over your charts, some of these levels have a higher chance of working out than others. To determine which zones are better than others we have to understand the effect time has on the mindset of the traders who are stuck in losing positions.

When traders are in losing trades the longer they spend being at a loss the more anxious they become to close their positions.

What this means is, the blue bars on the graph which are far away from the current market price are the traders who have the highest probability of closing their losing trades as soon as the market returns to the point where they entered at.

The zones we will draw based on these traders will have the highest probability of giving us a successful trades, don’t dismiss the zones created by the traders who have only been at a loss for a short amount of time. Although the level of anxiety in these traders is much lower when compared to the traders who have been at a loss for a long time, they still constitute to a potential force in the market. When the market reaches these lower probability levels its likely there will be a reaction, maybe not enough to turn the market, but enough to cause it stall or pause for a short while.


Trading Examples


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I want you to focus on the open positions graph above.

You can see I’ve marked some black dots on the image, these dots represent the levels at which a high percentage of traders using Oanda are stuck in losing positions.

Remember, the highest probability levels will be the ones which the market is far away from, we’ll still need to mark the levels that are close to the current market price as these do have the potential to generate a small reaction upon the market returning.

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On the image above I have marked all the supply and demand zones according to where traders are stuck in losing positions.

The zones colored blue contain traders who have been at a loss on their trades for what I consider a long time, these are the areas in which the market has a high chance of turning in the other direction. The two supply levels colored green, mark the places where traders who have not been at a loss for a significant amount of time are found, both of these zones have a lower probability of pushing the market back in the other direction, but will still have an effect on the market if it manages to return.

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Here’s what happened when the market ran into the supply and demand zones.

First we can see the bottom demand zone would have resulted in a successful trade had you traded it, this demand zone contained traders who had gone short without a stop back when the market was falling on the 18th of September, these traders must have thought the move lower was going to continue, therefore they placed sell trades to try to take advantage of what they believed was going to be another move down, when the market began moving higher, they still had the belief that the market was going to fall, causing them to hold onto their sell trades.

In total the traders who went short forming this bottom demand zone ended up holding onto their losing trades for 4 days before the market was able to return, there’s no chance these traders would have continued holding their losing trades when the market comes back to the zone, after being at a loss for such a long time, the dominating thought on their minds would have been close the trade and escape with a small loss,  in their heads they think ” if I don’t close now, the market may move against me again” the pain of having to hold onto a loser yet again will make them close their trade.

After the hitting the bottom demand zone the market then advanced higher into the green supply zone marked with 1.

This zone was one in which the traders who were stuck in losing trades had not been at loss for a long time, therefore their level of fear was not as great as the traders who in losing short trades at the blue demand zone seen below.

The traders that made up the bottom demand zone had been in losing trade for over 4 days !  The traders in the green zone had only been at loss for 10 hours, that’s a big difference in mindset.

Notice how the market still reacts to the green supply zone.

The reaction is small ( it’s easier to see on a lower time-frame ) but it is enough to stall the market for a short period of time.

Moving on, the next supply zone the market encounters is another low probability zone.

Although the traders who have been stuck in this zone have been in losing trades longer than the zone below it, ( 28 hours compared to 10 ) their level of fear is still not high enough for them to immediately close their trades upon the market returning.

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This is what happened when the market entered the zone as seen on the 15 minute chart.

The initial reaction as the market hit the zone is a bearish pin bar, whilst this is not enough for us to potentially take a trade if the candle after it was a bearish engulfing then you could have considered taking a trade entry.

We almost get this. After the bearish pin the next candle is also bearish, at some point during the time this candle was forming it would have been a bearish engulfing candle, had this candle remained a bearish engulfing it may have been possible for you to take a trade, unfortunately the candle turns into a bullish pin and the market starts climbing higher.

Now we come to the third supply zone.

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This is the first supply one which contains traders who have been at a loss for significant length of time, the traders who make up this zone have been in a losing trade for 5.5 days, their level of fear is incredibly high yet as you can see the zone fails to provide any meaningful down movement.

The fact that this supply fails to make the market move lower even though its defined as a high probability area is why it’s still really important to use price action as a means to enter trades in supply and demand zones, although the supply zone was a high probability area it doesn’t mean the market is certain to fall when it reaches it, had you place a pending order to sell when the market hit the zone its likely you would have lost money.

Finally we come to the last supply zone found between the 121.200 – 121.324 price range.

The traders who are trapped in long trades around here have been in losing trades for 11 days, after being in a losing position for so long these traders must feel like its Christmas the way the market has magically returned to their entry point.

To begin with the market spikes the supply zone, creating a bearish pin bar in the process ( you can see this on the 1 hour chart ), while you could have traded the pin bar on its own without any other additional confirmation its better to switch to a lower time frame to look for a bearish engulfing candle, basing your trade entry an engulfing candle instead of the pin bar does two things:

First it means you increase the risk reward ratio of your trade because your stop-loss will be smaller compared to trading the bearish pin on the 1 hour chart, and second it will give you that extra little bit of confirmation of the market wanting to move lower. If you were to trade the pin on its own as soon as it appeared you wouldn’t be able to determine what kind of pin bar it is e.g stop run pin, profit taking pin, bank traders selling pin, by waiting for the next candle to from you can eliminate many of the potential causes of the pin bar.

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On the 5 minute chart above we can see the creation of the bearish pin bar and the candle that followed it.

The pin bar itself followed the two candle structure of most high probability pin bars, initially we had a large bullish candle run up into the zone, this was followed by a significant bearish engulfing candle.

By significant I mean, for a single candlestick to overrun the momentum of another takes alot of money, the bullish candle is very large, the fact that it was countered by an equally big bearish engulfing candle means some professional traders must have wanted the market to go down from here, if they didn’t, then who sold creating the bearish engulfing ?



Trading old areas of supply and demand is a risky trading method if you use the most popular understanding of supply and demand trading talked about online, by using the order-book you can find acceptable levels to trade that have a real world reason as to why they should work, the levels which Sam Seiden points out should work in his typical way of trading supply and demand have no valid reason behind them working, pending orders are not left at old levels of supply and demand, banks and institution do not wait a long time for the market to return to these places before entering their trades.

The levels we can find using the order book have a real reason for working based upon the psychology of the traders in the market, we all know thousands of traders fail to use a stop loss when placing their trades, and the majority of us know what its like to be stuck in a losing trade for a long time, us knowing this allows us to understand why the supply and demand zones found using the order book work the way they do.

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  • 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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  • The Differences Between Zones Created By Bank Traders Taking Profits And Zones Created by The Bank Traders Placing Trades
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