Supply and Demand Zones
How to select the correct zones
17th April • 6 min read
Supply and Demand
Selecting the right Supply and Demand zones, can be confusing. How do you know if a zone will be respected or violated?
At SMT FX, we have a few rules when it comes to selecting the right Supply and Demand zone, to help us trade with the large institutions and not against them.
When selecting our Supply and Demand zones, we and SMT FX have a few rules that we need them to obey, in order for the trade to have a higher chance of going in our favour.
- Break of Structure (BoS)
- Leave imbalance behind
- Be impulsive
Optionally, if the zone happens to be an Inside Bar, then this just adds to the list in our favour.
Demand is a Bullish (Buying) Orderblock
Supply is a Bearish (Selling) Orderblock
Swing/Intraday
When selecting our zones on the HTF (higher time frame), we must follow the rules above. When we have a zone that fits our criteria, then we simply wait until price reaches this zone , and that’s when we drop to the LTF (lower time frame) and look for our entry model.
This is how the ChoCh model would look
This is how the Inducement model would look
So as we know, we need an entry model on the LTF to confirm our entry. Now lets have a look at how to deal with a zone that was violated
In the HTF example to the left, we can see that the recent demand zone (we call this the decisional) was violated. Instead the lower demand zone(we call this the extreme zone) was respected.
Moving onto the LTF example, we can get an idea of how price action developed around these two HTF zones, and how our entry model presented itself on the extreme zone.
One reason in particular the decisional was not respected, is likely due to liquidity below that was yet to be swept.
Scalping
When it comes to scalping, we may not always have an entry model within a HTF zone. We could be trading towards a HTF zone or we may have missed an entry within a HTF but are able to trade with the order flow away from the HTF zone.
When it comes to scalping, we stick to the rules we mentioned a lot more strictly as price moves a lot quicker on the LTF, and there’s less room for error.
In the example to the left, we can see why Imbalance can be a reason the extreme zone would be more favourable than the decisional. The right hand example with the $ symbol, shows that the equal lows, represent an area of liquidity, and would mostly likely be swept in order to tap into the extreme zone.
The example on the left hand side, doesn’t clearly display liquidity like the right does, however in this case, we can treat the higher low from the demand zone as liquidity.
By staying aware of price action like this, you will give yourself a better chance of staying safe in the markets.
To recap the rules we follow, we always look for the following.
- Break of Structure (BoS)
- Leave imbalance behind
- Be impulsive
If we don’t meet these requirements, then we simply do not take the trade. There is absolutely no rush to take trades, there will always be another opportunity later on.
See the full video explanation below on our YouTube channel.
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