Supply and Demand Price Action Course: Trading Like Banks
Master Supply and Demand Trading, a powerful strategy rooted in Smart Money Trading principles. This course explains how to identify and draw high-probability supply and demand zones using Price Action Analysis, enabling you to potentially enter trades alongside institutional players and avoid common Market Manipulation Strategies.
Why Supply and Demand Works: The Role of Smart Money
Market movements are driven by imbalances between supply and demand, primarily caused by the actions of banks and large institutions (Smart Money). Due to the size of their orders, they often cannot place their entire position at once without adversely affecting the price. They must break orders into smaller chunks.
Sometimes, even breaking down orders isn't enough due to insufficient opposing liquidity. In these cases, institutions let the price move away from their initial entry area and engineer a return later to fill the remainder of their position. Supply and Demand Trading aims to identify these original entry zones and trade the subsequent return, aligning with institutional flow.
Defining Supply and Demand Zones
Supply and demand zones are specific areas on the chart identified through Price Action Analysis:
- Demand Zone: An area where price made a strong upward move. It represents significant institutional buying interest (banks placing buy orders). Think of it as an advanced form of support.
- Supply Zone: An area where price made a sharp decline. It represents significant institutional selling interest (banks placing sell orders). Think of it as an advanced form of resistance.
The core idea is to mark these zones and anticipate a potential reversal when price returns to them, as institutions may still have unfilled orders at these levels.
Finding and Drawing Supply and Demand Zones
Identifying high-probability zones requires looking for sharp, decisive price movements away from a specific point of origin.
Locating the Origin:
- Base Structure: Zones originating from a small consolidation (a few candles in a tight range) before the sharp move are often considered higher probability. This sideways action tends to trap more traders, providing liquidity upon return.
- Single Candle: Zones can also originate from a single, distinct candle before the sharp move.
Important Note: The strength of the move away doesn't necessarily dictate the strength of the zone. A zone with at least one large candle moving away is considered valid. Zones formed from a 'base' often perform better due to the trapped trader dynamic.
Drawing the Zones:
Consistency is key. Here's a common method:
- Supply Zones: Draw the rectangle starting from the open of the last BULLISH candle before the sharp drop. Drag the top of the rectangle to the highest high reached just before the drop. If the candle immediately before the drop is bearish, find the most recent bullish candle prior to that.
- Demand Zones: Draw the rectangle starting from the open of the last BEARISH candle before the sharp rise. Drag the bottom of the rectangle to the lowest low reached just before the rise. If the candle immediately before the rise is bullish, find the most recent bearish candle prior to that.
The rationale for using the opposite-colored candle relates to how banks typically place orders – they don't usually buy into strong bullish candles or sell into strong bearish ones.
Key Rules for Trading Supply and Demand Zones
Avoid common pitfalls by adhering to these critical rules based on Smart Money Trading logic:
- Trade Recent Zones (Old Zones Rarely Work): Contrary to some beliefs, freshly created zones are far more potent than old ones. Focus your Price Action Analysis on zones formed relatively recently.
- Trade Fresh/Untouched Zones Only (One Time Use): Supply and demand zones are generally effective only on the first return of price. Once a zone has caused a reversal, its power is significantly diminished. The unfilled institutional orders are likely filled on that first touch. The exception is zones forming at the boundaries of clear consolidations, which might hold for multiple tests *while the consolidation is active*.
Understanding these rules helps filter trades and focus on higher-probability setups, avoiding traps often associated with simplistic support/resistance thinking or misunderstanding Market Manipulation Strategies.