How does the Supply and Demand Indicator along with the Strategies associated with it fare?
Supply and Demand Zones and any associated Supply and Demand Strategy have become topics de jour for many publications as well as serving as the heartbeat of some course provider strategies. Some suggest using tick charts for trading Supply and Demand, but most use time-oriented charts. To generate Supply and Demand Zones, a Supply and Demand indicator was used. What are Supply and Demand Zones? How are these Supply and Demand Zones different from Support and Resistance? How do they fare under backtesting conditions?
Let’s get started…
What is Supply and Demand?
Supply and Demand Zones are price zones generated when a consequential move in price is made on a chart. Supply Zones are a form of a resistance zone while Demand Zones are a form of a support zone. These Supply and Demand Zones are formed by particular types of candlestick patterns and behaviors.
Most common Supply and Demand Zone triggers:
- Long wicks accompanied by the next candle’s movement that helps dictate where the zone is.
- Engulfing pattern that takes the engulfed candle’s close or open and the engulfing candle’s respective low or high as it dictates to form a zone.
- Inside Bar pattern or Harami pattern.
Supply and Demand Zones are much like eating a calzone, they are just better fresh. Fresh zones are less likely to fold and they provide the reversal trade that the trader is looking for out of this approach.
Supply and Demand Zones are a form of Support and Resistance, but Support and Resistance are usually particular prices with an undefined nexus of psychological desire to turn the trend back.
Supply and Demand Strategy on Its Own
An indicator that generates Supply and Demand zones (there is no need to know how to actually draw Supply and Demand zones) is being used on its own in this testing scenario. The rules are simple and are at the heart of most Supply and Demand Trading Strategies. They are tested on a 1 Hour and 4 Hour Chart with EURUSD, AUDUSD, and USDJPY.
Bullish Entry:
- Low is below the Demand Zone Top.
- Close is above the Demand Zone Top
- The Demand Zone range must be larger than 15 pips
- The Supply Zone Bottom must be at least 40 pips away from the Close.
- The Low must be the lower than the lowest price of the past 12 candles.
Bullish Exit:
- Stop Loss: Demand Zone Bottom – 10 pips.
- Take Profit: Supply Zone Bottom – 5 pips.
Bearish Entry:
- High is above the Supply Zone Bottom.
- Close is below is the Supply Zone Bottom.
- The Supply Zone range must be larger than 15 pips.
- The Demand Zone Top must be at least 40 pips away from the Close.
- The High must be higher than the highest price of the past 12 candles.
Bearish Exit
- Stop Loss: Supply Zone Top + 10 pips.
- Take Profit: Demand Zone Bottom + 5 pips.
EURUSD – 1 Hour
AUDUSD – 1 Hour
USDJPY – 1 Hour
EURUSD – 4 Hour
AUDUSD – 4 Hours
USDJPY – 4 Hours
Supply and Demand Strategy with Volatility Adjustment
Some practitioners advise to trade when Supply and Demand is at a moderate volatility. Average True Range is a good indicator, but when comparing multiple currency pairs, it is not exact the best approach. However, ADX provides a more uniform measure of volatility.
In this volatility-filtered approach toward the above illustrated strategy, the ADX with a Period of 12 is used for a 1 Hour Chart and an ADX with a Period of 6 is used for a 4 Hour Chart. The ADX Blue Line is between 25 and 40 when the trades are placed in this scenario.
EURUSD – 1 Hour
AUDUSD – 1 Hour
USDJPY – 1 Hour
EURUSD – 4 Hour Chart
AUDUSD – 4 Hour Chart
USDJPY – 4 Hour Chart
Supply and Demand Trading in the Same Direction as the Trend
This Supply and Demand Strategy is rather straight-forward, place a trade with the original rules in place, but when the trend is in the direction of the position desired. For instance, buy orders are only placed in a bullish market. The trendiness is measured for the purposes of convenience by the ADX Directional Index Lines, which are the Red and Green Lines. The ADX is set to a Period 12 for all tests.
EURUSD – 1 Hour
AUDUSD – 1 Hour
USDJPY – 1 Hour
EURUSD – 4 Hour
AUDUSD – 4 Hour
USDJPY – 4 Hour
Trading Supply and Demand Zones when looking for retracement
This is the opposite of the previous section. For instance, sell orders are only placed in a bullish market. The trendiness is measured for the purposes of convenience by the ADX Directional Index Lines, which are the Red and Green Lines. The ADX is set to a Period 12 for all tests.
EURUSD – 1 Hour
AUDUSD – 1 Hour
USDJPY – 1 Hour
EURUSD – 4 Hour
AUDUSD – 4 Hour
USDJPY – 4 Hour
Conclusions on Supply and Demand Strategies
Supply and Demand Trading Strategies were a bit one-sided with USDJPY and AUDUSD because of the massive supply or demand zone created as a result of the Brexit vote. There were Supply and Demand Zones within the giant Supply or Demand Zone that prevented trades from being placed within it. Since this Supply and Demand Zone was not popped, it remains and trades continue to favor one side over another based on the rules expressed.
The best adjustment appears to be of the volatility adjusted kind. In medium volatility on a larger timeframe chart like a 4 Hour Chart is when the best trades appeared to be placed for all currency pairs. The downside is that the sample size is still rather small.
However, a medium volatility strategy that places trades from multiple strategies will be able to overcome concerns about placing enough trades, especially over a 2 year period.
Of course, with all strategies…a Supply and Demand Strategy is maximized when it is automated. Automated trades can be placed on a 24/5 market in the FX Market.
The post Supply and Demand Strategy and Indicator Explained and Tested appeared first on Freevestor.
