Needless to say after suffering many unnecessary losses due to this entry method, I began thinking about to trade the zones more successfully. I came across some good threads on Forex Factory which taught me how to use engulfing candles as an entry trigger into trades at supply and demand zones, this meant waiting for the market to return to the zones, then watching to see if an engulfing candle formed within it, when it did you would enter into the trade using a market order.
This method of using candlestick patterns to enter trades proved to be far more successful than using pending orders. Nobody can predict exactly what the market is going to do but at least by using market orders your reacting to the most recent developments in the market. Trading price action at supply and demand zones requires an understanding of two things.
First, you must have decent knowledge of my method of trading supply and demand which can be found in this article. And second, you must be adept at trading pin bars and engulfing candles.
The general idea of what we are going to do is use our current understanding of how to trade pin bars and engulfing candles as our trigger for entering trades at supply and demand zones. The strongest price action setup you can use in conjunction with supply and demand zones is our good friend the engulfing candle. Engulfing candles, when found in supply or demand zones show us that bank traders have an interest in making the market move away from a zone, the candle itself is the result of bank traders entering into the market.
The way we would have traded this is by first locating the supply or demand zone on our charts, then, when the market returns to the zone we will switch to a lower time frame to see if an engulfing candle appears which we can use as an entry trigger into our trades. When switching to lower time frames to look for trades I suggest you go no lower than the 5 minute chart. If you use things like the 1 minute chart you will encounter a lot of false signals which will end up with you losing money if you decide to trade them.
Now we are looking at the supply zone on the 5 minute chart, we can see an engulfing candle appears shortly after entering the zone , this is our trigger for entering the trade, when we see this candle form we use a market order to place our trade.
We always use a lower time frame for entering supply and demand zone trades using price action. If you entered the market based on the engulfing candle seen on the image of the 1 hour chart the distance of your stop from entry would be 19 pips, however if you went on to the 5 minute chart like on the second image and entered using the engulfing candle seen on here you would have only risked 12 pips, therefore we have decreased the risk on the trade by almost half, this can work out to be a lot of money over 10 — 20 trades.
This presents the one of the big problems a lot of people have when trading engulfing candles at zones, which engulfing candle do you trade? This is where a supply or demand zone gets broken by the market then gets used as an opposite zone.
I think sometimes people apply concepts from other trading strategies and apply them to new trading strategies thinking they will work the same way, the concept of flip zones comes from support and resistance, the difference between flip zones in support and resistance to flip zones in supply and demand, is support and resistance flip zones actually have a valid psychological reason for working based on how breakout traders enter into the market.
Pin bars, as you should already know, show a rejection is taking place in the market, usually this is from a support and resistance level but can be from trend lines and recent swing highs and lows.
Although pin bars are not as reliable as engulfing candles when found at zones they are still a better method of entry than using pending orders. If this was you looking to place a trade at this supply zone the first thing you would do is have the level already marked on your chart, then you would be awaiting the market to return to the level. When it does return to the zone you will then need to switch to a lower time frame to look for a pin bar that you can use as an entry trigger into your trade.
The way you would have traded this would be to first wait for the pin bar to close, then you place a trade sell trade using a market order with the stop-loss placed above the high of the pin.
The way we would have traded this pin bar is exactly the same as what we just discussed. We place a sell trade when the pin bar has closed with our stop-loss placed above the high. Some people would tell you to put it at the far edge of the supply zone this is incorrect. The people who trade supply and demand with price action usually tell you to look for an engulfing candle on a lower time frame when the market enters the zone, this is great advice, but do they ever talk about what types of engulfing candles work better than others?
Maybe it never occurred to them that the two candles which make up an engulfing pattern are directly linked to whether the zone is likely to work out or not. The first is a small bullish candle and the second is the bearish engulfing candle. Whenever you see a small candlestick be engulfed by a large candlestick in a supply or demand zone its a good indication that the zone market is going to move out of the zone.
The reason for this is down to my understanding of how traders think and make decisions. If you look you can see two candles before the bearish engulfing candle there was a bullish large range candle. This candle makes retail traders think the market is going up, so they begin to buy which creates the small bullish candle seen immediately after. Now when the engulfing candle shows up and pushes the market down really quickly, it has the effect of putting the traders who brought under intense pressure to close their positions, this is the important bit, the aspect of how time affects the actions of the traders.
When the engulfing candle is big, like in the example above, the traders are faced with a loss much greater and much more sudden than a situation where both candles that form the engulfing pattern are small. This is the reason these types of engulfing structures tend to work so well. The bigger the loss the traders who brought are faced with, the quicker they will close their positions, which will create the movement out of the supply or demand zone.
The stop-loss location for engulfing setups is a little different to the pin bars setups I showed you earlier. If the market breaks past the high or low of the candle being engulfed it means the setup has been invalidated, you do not move the stop or close the trade before this has happened.
The image above is an example of a supply zone with a bearish engulfing candle within it, this is a setup that would have very likely lost you money had you traded it. The bearish engulfing candle with an arrow above it, while meeting all the criteria of standard engulfing candle teachings, is not a good setup to trade, look at how small the engulfing candle is, it only just manages to engulf the previous candle, when you see engulfing candles like the one above where both candles that make up the structure are small I would advise you to not take the trade.
The reason why these types of engulfing candles do not work well is mainly due to the level of urgency affecting the traders who have sold or brought on the previous candle. If the engulfing candle is small it does not put the traders who have brought or sold on the previous candle at a loss big enough for them to get scared of what the market may do next, if the engulfing candle was much bigger than the candle being engulfed, all the traders on the previous candle will be feeling an intense level of fear due to being at a large loss on their trade.
Another really important factor in whether a supply or demand zone is likely to hold or not is time. Time is a concept traders in general never seem to talk about in regards to their respective method or strategy, yet it remains one of the most important components of the market.
The traders operating in the forex market are all working off different timescales, different traders will come into the market at different times for example. If we work from the current theory that the reason the market returns to supply and demand zones is down to the banks not being able to place all their orders into the market then it makes sense that if the traders who were present in the market when the zone was created are not in the market when it returns, the zone must have a lower chance of working out because the traders who created it are not around to place their trades.
The supply zone above was formed on the 30th October at 1: As you can see the market returns to the supply zone the next day just after the London session has started, and proceeds to move lower over the course of the day, this tells us that the London traders still had orders left over to place at this zone from the previous day. One more thing to understand about time and its relation to supply and demand zones is when you should actually trade them. You see, because certain currencies will only get traded during their respective time zones if you plan on trading a zone after the trading hours for that currency are over do not expect to see any kind of significant movement away from the zone until the next day when the new trading session begins.
There is one thing that caught my eyes. In one of the articles you wrote: I can see their is a zone marked on the 15 minute chart in one image which is also drawn from the second to last bullish candle rather the first bullish candle before the down-move, this is a mistake which I will fix later, sometimes I write these articles too quickly and forget to make the necessary edits, the correct way to draw the zones is laid out in the other article.
I can see multiple bearish engulfing candles which we could take off the Supply zone. I mean, could we just take each engulfing pattern of this Supply zone? The hint the market gives you about a zone beginning to break […]. Notify me of follow-up comments by email. Notify me of new posts by email. Send Me the Download Link. Thanks for picking up on these mistakes, will correct them ASAP.
Thank you for your help as well as your outstanding articles. Reply Cancel reply Notify me of follow-up comments by email. Lear to trade the same way the pros do! Yes, send it to me! No Thanks, I prefer to Lose Pips: Want Free Forex Trading Signals? Get Free Access Now!
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