Caps & Decision
S&D = Caps&Decision + S/R
What is Supply and Demand trading?
Goods
are bought and sold at what their perceived value is at the time. The
same applies for financial instruments, with the expectation that their
price will change in the future and will be bought or sold at differing
prices, potentially bringing a profit for traders.
Prices
adjust according to willing buyers and sellers, in-turn creating supply
and demand zones, the sellers represent the amount that is available for
sale (supply) while buyers represent the amount available to be bought
(demand). It is when there is an imbalance between buyers and sellers
that we see a change in price, for example, when there are more willing
sellers, price will begin to fall until it finds more buyers and when
there are more willing buyers, price will rise until it finds more
sellers. Knowing where these areas are on a price chart will give you an
edge, and allow you to follow the interests of big/smart money, the
real market movers.
Identifying Supply/Demand zones
First we look at the chart for an area where price strongly shot up from (demand) or dropped away from (supply).
The next step is to mark the base of these moves.
We
always mark the outermost limit of a move, marking the inner is a
personal preference for each of us depending how loose or tight one
wants to keep their zones.
RBD DBR and RBR DBD
As price
moves it creates (swing) highs and lows, the extremes of these moves
can be marked as “bases”, just like the ones marked above. When bases
are created after a “rally” or a “drop” they form a Rally-Base-Drop
(RBD) or a Drop-Base-Rally (DBR).
Let’s mark some on a chart.
Price
can also create small bases along a rally or a drop, these smaller moves
are known as Drop-Base-Drops (DBD) and Rally-Base-Rallies (RBR).
Let’s find some on a chart.
Balance vs. Imbalance
During
the formation of a base, we consider price to be in balance. This is
because there is not a significant difference in the amount of buy or
sell orders in this area thus price doesn’t rally or drop as long as
this balance exists. For price to start moving in a direction there
needs to be more of one type of order (buys or sells) than the other
causing price to rally or to drop, it is at this point a base is
confirmed and a decision that price was either too cheap or too
expensive has been made. When price moves away from a base there are
naturally unfilled orders which remain, so when price returns to the
base in the future we can expect the remaining orders to be triggered
causing a reaction in price. It is this what supply/demand traders try and take advantage of.
When Supply/Demand breaks
After a
level is tested many times or during a strong move, Supply and Demand
levels eventually break. This can be due to the once remaining orders
being triggered and gradually removed, or an overwhelming amount of
orders in the opposite direction breaking the level. Orders can even be
removed manually by a trader who formed the level.
Every
broken supply/demand level holds some significance. Where once were more
sell orders (supply) now more buy orders remain/exist, with the
opposite applying for demand levels. This means upon return to a broken
level, we could see a reaction in price, these levels are often referred
to as “swap” levels.
It is at these levels where we can look for conformation to take a trade. This is how the look on a chart:
Part 2: Supply and Demand as reactions to the FTR
Wouldn’t
it be nice if we were able to trade supply/demand levels knowing when
one will hold or when one will break? Well believe it or not we can,
because as hard as it may sound supply/demand levels are NOT created
equally! There are some that are much more important than others, and
some even further beyond important. Most articles on supply/demand will
mostly have you read about “reactions” to levels, because that is what
is important right? Sure, they are important if all you want to do is
look at the far right of your charts and gamble, but what are the
supply/demand levels themselves reactions to
Hopefully
we have pricked your attention, because this is going to be the first
time something as important as this will be covered in a supply/demand
article and it is very exciting to be writing about. I can already hear
you all screaming; hold on! Supply/demand levels can be reactions to
other supply/demand levels! Or Support/Resistance levels! Or MA’s and
fibs! Please…If you are still using MA’s and fibs, let me direct you to
our technical analysis article.
The truth is; supply/demand are often reactions to the Flag Limit (a RBD or DBR after a break of a high or low). You can read about the FL here.
It is these levels that are the important ones, the ones that will
contain price in a range, and give you the heads up when price is going
to change direction. Sure there are other areas and reasons
supply/demand forms, just like the ones you yelled at me earlier, but
these are lesser important levels, ones that are much more subjected to
breaks and fake moves!
Knowing the important ones will keep you on the right side of the market at all times.
Here is
some help on defining these levels, but remember, to truly understand
them you need to find and mark them out for yourselves!
There are plenty of other supply/demand levels which I did not mark, but they would all hold lesser importance than the ones formed after the breaks of highs or low. However, important levels can also break so it is important to monitor these levels for signs of reversals. When they break however, they hold a lot of importance.
You
can see from the image above I marked a DBR after a break of the highs
to the left of it. This is a level that forms after a break of a high,
it’s a FTR, and we can expect it to bounce price, but it doesn’t, it
breaks. The FTR that proceeds is the RBD that is the important one, this
is where we want to keenly look for PA.
How to trade Supply and Demand Areas
Conventional
supply and demand trading teaches the game of probabilities; by trading
enough zones, with a decent enough RR, one should make money. These
levels are in general blindly traded with a stop just above, and a
target at the next level, this is very often done with limit orders,
longing there is a decent enough RR (2:1 is usually good enough).
If
a proper plan is in place, this method will make you money, but it is
still essentially gambling, and here at RTM we don’t gamble. We want to
be absolutely sure a level is going to hold, and once we know, we want
the very best RR on every trade we take (yes 15:1 can be more common
than you think!). By looking for PA in the correct spots, there is no
reason you shouldn’t be able to get into great trades, with great
rewards and very little risk. You can find everything you need to know
about PAin the markepediasection. So get to work, log your progress in the homework section and join our great community.
By Harry & Pedini
Which is supply, which is demand
When
price makes a rally with a strong pole up (this whole lesson works vice
versa for poles etc down), there's sure to be some profit taking by the
institutions, allowing price to drop back into the pole.
Price
will very often flag at the top of the pole, as the institutions either
begin to add long positions to take price higher, or begin to hide short
positions to turn price.
To understand the break of a flag, be aware of Order Flow and Liquidity gaps
This article deals with the latter scenario; price rising (rally), flagging (base), and then dropping (drop!)
The flag
was a way for the institutions to keep retail traders buying in the
expectation of an advance in price, giving them lots of orders to sell
against.
Seen
in a slightly higher timeframe, this is a very uniform cap on price,
and in every TF there's a really strong pole moving down from it
The cap price is obviously way too high, so when price returns to it, the sellers are waiting.
There are often other signs that a cap will hold, such as the engulf in the chart above, or compression on approach
Caps are simply excellent places to look for price to turn!
Here's a video on Price Caps
http://youtu.be/469ZS2YxjhE
Homework:
Mark at least 200 caps on your charts - there are so many to see that it won't take long.
Draw
a box from the cap to where price hit it later. Note how price
approached the caps, and how it reacted. If price broke the cap, note
what happened next. Was the cap still relevant?
PRICE CAPS
(whiteout) understand that every Rally Base Drop - Drop Base Rally or Rally Base Rally - Drop Base Rally -is a decision point.
http://readthemarket.com/index.php/en/forum/homework-dbr-and-rbd/27-drop-base-rallies-and-rally-base-drops?start=50#3491
(whiteout) rbd/dbr
are correlated to the timeframe, so inside a D1 RBR you can find some
H4 or H1, DBR/RBD/DBD/RBR, inside an H1 DBR you can find other M5 RBD
etc etc.
The main point is to find decision point and assign the right value to them, that's why you wanna see how that point will react in the future.
exactly, decision point are change in value, bigger the change bigger the value.
You could pinpoint the
decision even on M1, like ifmyante, or you can trade the supply/demand
zone on HTF [a S/D zones is just another way to express the same
concepts...a decision about the value of the price].
Obviously, as you
said, is all related to the timeframe...this stuff works on every
timeframe, from MNTLY to the M1, LTF are just ..faster and with more
much noise, that's why is better start with an HTF, then go down.
(IF) Every DBR and RBD
has its own importance and value, and nearly every one can be traded.
For each one that you find, zoom out to the HTFs, and see what
historical significance the decision point has.
Perhaps it's a failure to get back into an important PA Zone - these ones are special.
Perhaps it's within an
HTF compression zone to the left - ask yourself would you take this
trade, or wait for the tip of the zone?
The bigger picture will always help you decide on the significance of a DBR/RBD
(IF) RBD is more powerful than DBD outside it.
(IF) My boxes are drawn where open/close is broken. a DBR/RBD is itself a reaction to something in the past
(IF) in a bigger
picture range, Supply and Demand zones near the edges may not hold as
well as others. Fakeouts often occur, because price is attracted to the
limits of the range
(Benhur) Nothing promises that zone will hold price, even at first visit.
The zones we mark on the charts are mainly a mapping of decisions in the market. Decision can take price either way.
Zones are meant to be broken, and this market decision has its own significance too.
As further you go with your reading skills, you will be able read the hints and clues for zones to hold or to break.
Your task at this time, is to train your eyes defining the zones.
Your next step, is to
investigate how price is behaving around these zones. there are few
things you should bare in mind while you do this work:
1. Be aware of how
price had printed the zone you marked, what it was reacting to, and how
the decision of price to move further look like.
2. Be aware of how price is approaching the Zones, what is the dynamic.
3. Is price come from a valid opposite zone ? Remember that price goes from Demand to Supply and vice versa.
4. Be aware of the reaction of the first touch, how deep it went inside, what had stopped it if any?
5. what are higher or
lower TF tell you. SD discipline is a Multi time frame concept. We trade
price levels, not candles, so Story may vary on different TF
6. (more Advanced) Look for correlations with Index and other pairs.
it might look
intimidating, but actually it's should be very simple. Zones are always a
reaction of past Price Action (aka: always look left).
As much as you can go
back in history, the better your understand be of how price move. there
is no randomness for this market, all can be explained with PA reaction,
result, decision. just look for reasoning for levels and zones
creation.
Like Support and Resistance lines, When zones of Supply and Demand are broken, they become the opposite.
We call them swap zones, but their significance are still valid.
http://readthemarket.com/index.php/en/forum/homework-dbr-and-rbd/27-drop-base-rallies-and-rally-base-drops?start=550#19426
Begin with the Highest Time Frame. Mark each Time Frame in different color, or changing form of line style.
Dive in lower TF, while your HTF zones are marked.
(Benhur) From some
observations, I can report that news just accelerate price toward levels
of interest. So IMO its not the news, its is pure price bias.
Price could turn at the extreme, so if you would TT it, its where you take the least risk.
But, if price turn from valid turning level with HTF trend, it is expected to cut through.
The DBR shows where true demand is within the FTR which forms after an engulf of an important barrier
SCALES:
What I can see,
though, is that there is a bigger reaction to the right when the DBD/RBD
engulfs something of more significance to the left. To
be more precise, it's when the DBD/RBD is a decision point for that
engulf to happen. I guess that's the same thing as the "source" of the
engulf?
One final point, and
another "driving the point home" lesson for me, is that the low marked
"Tested, so expect deeper into zone" is the FTR for this H1 zone,
despite how tiny it is. It does have a tiny reaction at 'z', but does
not give the big move up one would like. Notice that price CP'd away
from this FTR, it did not LQ away, so we should not take the First Time
Back.
price caps materials compressed by madwt.
FL (Harry): very often
what you see in the HTFs as an FL (in the shape of a rbr/dbd) is the
reaction to the LTF original one. make no mistake, unless the true FL
breaks there is no break.
so always dig down to find the true limits of it
PRICE READING: by madwt http://readthemarket.com/index.php/en/forum/journals/1984-the-journey-to-rtm-master?start=25#30388
Zone Drawing
http://readthemarket.com/index.php/en/forum/homework-compression/26-about-compression?start=450#7711
(IF) On RBD supply, it
is best to extend the zone from the top of the highest wick to the
point where engulf occurs, and viceversa for DBR.
DECISIONS
https://readthemarket.com/index.php/en/forum/homework-find-the-decisions/34-find-the-decisions?start=75#8193
Mel: What is a decision point: Well it's a price point on a chart where a decision has been made to take price either higher or lower
Where can I spot a decision point ?
You will see that new decision points take place at Unfresh Supply or Demand areas.
Let's take a Supply area for example. New supply is created because of a new decision point.
Now to take this supply away and break it , the big boys will need to make a decision and put lots of money in the market to take the supply out. So you will see that unfresh demand , eventually becomes Fresh Supply once it gets broken. This happens because all the demand was consumed (multiple retest of the area) and that there was finally a decision made to take price lower.
Mel: What is a decision point: Well it's a price point on a chart where a decision has been made to take price either higher or lower
Where can I spot a decision point ?
You will see that new decision points take place at Unfresh Supply or Demand areas.
Let's take a Supply area for example. New supply is created because of a new decision point.
Now to take this supply away and break it , the big boys will need to make a decision and put lots of money in the market to take the supply out. So you will see that unfresh demand , eventually becomes Fresh Supply once it gets broken. This happens because all the demand was consumed (multiple retest of the area) and that there was finally a decision made to take price lower.
(Harry) so a decision is made whenever price respects or breaks a previous decision, for example a previous swing high or low.
start from something that breaks maybe as its easier to spot, and take it from there.
do decision point hold
forever? NO. they do break depending on price approach and significance
but that creates another decision.most (important ones at least) give a
good reaction on first visit, but you need to also consider how close
your next possible reaction (trouble) area might be and such.
(Harry) the point of the exercise is to mark one (or more) turning points and look left to see why it turned there.
i do this every time i
want to see what a swing high/low was a reaction to, obviously most are a
reaction to either a previous RBD DBR or to an FL.
where it hit or if it engulfed is important too, so make it a habit and go investigate every turn
(omid) Price always want
to cause mpl, so there are left orders at the extremes of the FL and
price can FO to the extremes to cause MPL. from the last drop, price
shoot away and break the previous lows and break out tf the FL zone so
that can be important DP and price can react to in the future. the SR of the FL (point of outbreak of FLzone) and price can FO to the true supply of the FL, MPL.
(Alecs) IF's teaches that price always move from FL to FL.
So when price change his direction, it should be inside a FL where ITs decided that price was too low or too high.
Mark the point and look left for that FL.
When you do this for enough times you will learn a lot about FLs and about your ability to Read The Market.
https://readthemarket.com/index.php/en/forum/homework-find-the-decisions/34-find-the-decisions?start=175#31832
https://readthemarket.com/index.php/en/forum/homework-find-the-decisions/34-find-the-decisions?start=175#31961
(Harry) that's the spirit of that exercise.
open a chart and mark a turn. then look left for the reason.
do that every day, helps a lotThe point of the exercise is to mark one (or more) turning points and look left to see why it turned there.
i do this every time i want to see what a swing high/low was a reaction to, obviously most are a reaction to either a previous RBD DBR or to an FL.
where it hit or if it engulfed is important too, so make it a habit and go investigate every turn
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