How To Identify And Trade With Supply And Demand Zones (Chapter 2)

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How To Identify And Trade With Supply And Demand Zones (Chapter 2)

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In this article, I will present 2 main topics.

– Instructions on how to identify a Supply or Demand zone.

– How to BUY/SELL, how to set Stop Loss, Take Profit with them in Forex trading.

If you do not know what Supply and Demand zones are, you can read this article: What Are Supply and Demand Zones? The Idea Of This Strategy?

Ok! Now let’s go through each part so you can fully understand the strategy.

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How to identify the basic Supply and Demand zones

Identify the Supply zone

The Supply zone has 2 common patterns: (1) RP – Reversal and (2) CP – Continuation.

(1) Reversal pattern (RP): Rally – Base – Drop

Reversal Supply pattern
Reversal Supply pattern

The price moves sideways after an uptrend and creates a sideways candlestick zone called the Base. Then it falls dramatically with a long body candlestick. This Base is the reversal Supply zone (RP).

For example:

An example of the reversal Supply pattern
An example of the reversal Supply pattern

The 6 candlesticks moving sideways in the image above are the Base. When the gold price falls sharply and creates a red candlestick with a long body, this Base becomes the reversal Supply zone.

(2) Continuation pattern (CP): Drop – Base – Drop

Continuation Supply zone
Continuation Supply zone

The price stops decreasing and creates sideways candlesticks. Then it continues to fall significantly. The sideways zone (Base) in this process will be the Supply zone.

Detailed example:

An example of the continuation Supply pattern
An example of the continuation Supply pattern

Identify the Demand zone

The Demand zone is similar to the Supply but we will focus on the strong bullish candlesticks.

(1) Reversal Demand pattern (RP): Drop – Base – Rally

Reversal Demand pattern
Reversal Demand pattern

For example:

An example of the reversal Demand pattern
An example of the reversal Demand pattern

When the market bounces back, it creates a long green candlestick. Then the Base will be the Demand zone (RP).

(2) Continuation Demand pattern (CP): Rally – Base – Rally

Continuation Demand pattern
Continuation Demand pattern

Detailed example:

An example of the continuation Demand pattern
An example of the continuation Demand pattern

How to trade with the Supply and Demand zones

All we need to do is to watch for the strong bullish or bearish candlesticks. This is a sign of cash flow from large organizations. When the signal appears, it’s time to look for entry points.

How to trade with the Supply zone

After identifying the Supply zone, the main job is to wait for SELL opportunities. When the price returns to retest the Supply zone, find an appropriate entry point and place a SELL order.

For example, the yellow zone is the Supply zone of gold (XAU/USD).

(1) When the price returns to this zone and creates a small body candlestick, this could be a signal that it will stop increasing.

Trading with the Supply zone
Trading with the Supply zone

(2) Place 1 SELL order (Risk/Reward = 1:2)

+ Set the stop loss a few pips above the Supply zone to avoid being swept by the market.

+ Set the take profit to overlap the below Demand zone.

Result: The price drops sharply and touches TP.

Trading result with the Supply zone
Trading result with the Supply zone

I have another example about the gold price.

(1) The price increases and enters the Supply zone. Then it begins to show a slow increase signal with a small green candlestick.

Sell Gold at the Supply zone
Sell Gold at the Supply zone

(2) Place 1 SELL order (Risk/Reward = 1:3)

+ Set the stop loss a few pips above the Supply zone.

+ Set the take profit to overlap the below Demand zone (as the picture shown).

Result: The price falls sharply and hits TP.

Trading result with the Sell order
Trading result with the Sell order

How to trade with the Demand zone

The first thing to do is to identify the Demand zone. The next is to wait for the BUY signal. When the price retests the Demand zone and creates a bullish reversal signal => Place a BUY order.

We have an example of the Gold BUY order (XAU/USD).

The price falls back to the Demand zone and creates a reversal signal.

How to trade with the Demand zone
How to trade with the Demand zone

Place the BUY order:

+ Set Stop Loss below the Demand zone.

+ Set Take Profit in 2 Supply zones.

As a result, the price increases and hits both TP1 and TP2.

Result of the BUY order
Result of the BUY order

It is already quite long so I’ll save the real trading experiences for the next article. We’ll also learn the reason why you should use a daily chart and when the Supply and Demand zones are no longer make sense.

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