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Supply and demand

Support and resistance as retail draws it, supply and demand zones as institutions leave them, and how to find a zone worth trading.

Two ways to read the same level

Retail traders draw support and resistance. Institutional traders, the smart money, read supply and demand zones. You need to understand the retail way of thinking in order to understand what the smart money does with it.

Support and resistance drawn as lines on USD/CAD, 4-hour.
Support and resistance drawn as lines on USD/CAD, 4-hour.
The same idea drawn as zones on AUD/CAD, 1-hour: each box marks where the selling began.
The same idea drawn as zones on AUD/CAD, 1-hour: each box marks where the selling began.

Support and resistance

Support and resistance is the ceiling and floor concept. The most obvious levels are the ones with three touches or more, the areas where the market reversed or at least respected the price. A reversal at one of them is more convincing when it comes with a power move into the level, a strong rejection, larger candles, and a long time since the level was last touched.

When the level fails

Be honest about how often this happens to you. A candlestick formation fails. Support breaks, stops you out, then price goes exactly where you wanted it to. You get wicked out by a few pips. The engulfing candle, the pin bar or the doji turns out not to be reliable enough. Ask why. Banks and institutions split their large orders into smaller pieces around these levels so that they get filled at good prices without disturbing the market. The stops under an obvious support are exactly the liquidity they need to fill a buy.

Support traders buy at the level; their stops sit just below it, inside the liquidity.
Support traders buy at the level; their stops sit just below it, inside the liquidity.
The stops are taken, then the real move and the break of structure follow.
The stops are taken, then the real move and the break of structure follow.

What a supply or demand zone is

A supply or demand zone is the footprint that big money left when it entered the market. When looking for one, you want to see aggressive buying or selling: on the supply side, three big red candles leaving a level say momentum and volume came in bearish; on the demand side, three big green candles say the same about the buyers.

Supply on the left: three large red candles leaving the level. Demand on the right: three large green candles.
Supply on the left: three large red candles leaving the level. Demand on the right: three large green candles.
Not a demand zone: candles leaving a level with no momentum and no volume behind them.
Not a demand zone: candles leaving a level with no momentum and no volume behind them.

Why trade zones instead of lines

The retail trader buys at the support line and sells at the resistance line, and is stopped when the level is run. The smart money buys the discount below the level and sells the premium above it, the places where the retail stops were just collected.

Left: retail entries at support and resistance, and where each one is stopped. Right: the same swings read as discounts below the level and premiums above it.
Left: retail entries at support and resistance, and where each one is stopped. Right: the same swings read as discounts below the level and premiums above it.

How to find a zone

There are three things to look for.

  • Momentum candles: find where the run of three to five big candles started. That origin is the zone.
  • Consolidation: an area of accumulation or distribution before the move.
  • Wicks: an area price has rejected with long wicks.
A demand zone on USD/CAD, 4-hour: the momentum candles leaving it mark where the buying began.
A demand zone on USD/CAD, 4-hour: the momentum candles leaving it mark where the buying began.
Demand: price returns to the zone months later and leaves it with momentum again.
Demand: price returns to the zone months later and leaves it with momentum again.
Supply on USD/JPY, 4-hour: the zone where the selling began is returned to and rejected.
Supply on USD/JPY, 4-hour: the zone where the selling began is returned to and rejected.
Consolidation, in this case accumulation, then a retest of the zone before the move.
Consolidation, in this case accumulation, then a retest of the zone before the move.
A demand zone marked by wicks on USD/JPY, 15-minute: price reacts sharply each time it reaches it.
A demand zone marked by wicks on USD/JPY, 15-minute: price reacts sharply each time it reaches it.

Before and after

Before: consolidation, wicks and the momentum candles on the left define the demand zone, and a buy waits at its edge.
Before: consolidation, wicks and the momentum candles on the left define the demand zone, and a buy waits at its edge.
After: the zone holds and price leaves it.
After: the zone holds and price leaves it.

Replay the zone

Click the candle that formed a zone on the Trade Desk and it replays what was happening: the release behind the momentum candles, and your own trades drawn against the zone. It is the fastest way to see whether you bought the level or the discount.

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Lessons open in the app with your progress saved and each one linked to the page it teaches.

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Supply and demand - TradeDNA University | TradeDNA