Supply and demand zones relative to the time
In addition to trading volumes, there is another important parameter – this is time. In relation to the price chart, we will talk about the time interval of the chart (timeframe).
In the picture above, I depicted demand zones at different time intervals. The first graph displays the price behavior of the M1 timeframe (one minute). We see a characteristic demand zone in which a price reversal is formed. However, when moving to an older M15 timeframe (fifteen minutes), it becomes clear that our initial zone is not so important in a longer period of time and at any time the price can push it and go lower since it is inside a stronger volume that operates from an earlier demand zone. Having switched to the H1 timeframe (one hour), it becomes clear that the demand zone of the M15 timeframe is not so strong, and there is a stronger volume that acts from the zone located below. Thus, we can increase the timeframe more and more and we will detect zones on each of them,
Based on this, the basic law of work on demand and supply zones should be highlighted – When forming transactions based on reversal signals from zones, only zones of a specific timeframe should be taken into account, and therefore, the operating time of these zones is also limited by this timeframe. Let’s analyze this law in more detail. Firstly, if we determined the offer zone on the M15 timeframe, we should not switch to the senior timeframe and focus on its zones. Secondly, the zones have the concept of “working hours”. This means that any zone acts only a certain one, after which it ceases to exist. This is due to trading volumes. The buyer closes the purchase and its volume is removed from the market, therefore, the balance of supply and demand is shifted. If the volume that formed the zone leaves the market, the zone ceases to exist, this is manifested in the price movement to the new zone. Thus, zones have a specific time reference. In other words, the zone on the M1 timeframe is unlikely to exist longer than a couple of hours, and the zone from the hourly timeframe will last a maximum of several days.
Supply and demand zone indicators
On the Internet, there are a lot of offers of various indicators, which miraculously can indicate supply and demand zones. But to assess their effectiveness, let’s look at the essence of these concepts. Supply and demand are volumes of purchases and sales. Therefore, in order for such an indicator to become real, it must display on our chart a balance of volumes (the real amount of currency bought and sold). I have already written many times in my articles that in the forex market it is impossible to obtain data on the real volume due to the decentralization of the market. One bank has one number of applications, the other another, and even if there was an interbank information exchange system, we would never know which of these applications have real cash volume and which credit (formed using leverage). Based on this, creating a real similar indicator is simply impossible. So, all that is offered to you is simply the fruits of the stormy imagination of the authors, who most often use the algorithm for binding zones to support and resistance levels. The only volume that takes place in the forex market is tick (the number of price changes per unit of time). And based on the tick volume, we can make an assumption about areas similar in their parameters to the demand and supply zones. Such areas are in the main oscillators of the RSI and CCI type. which takes place in the forex market is a tick (the number of price changes per unit of time). And based on the tick volume, we can make an assumption about areas similar in their parameters to the demand and supply zones. Such areas are in the main oscillators of the RSI and CCI type. which takes place in the forex market is a tick (the number of price changes per unit of time). And based on the tick volume, we can make an assumption about areas similar in their parameters to the demand and supply zones. Such areas are in the main oscillators of the RSI and CCI type.
Zones on the RSI indicator
The RSI oscillator is an indicator that refers to the zone. The principle of operation of this indicator is that it signals the entry and exit of prices from the so-called overbought and oversold zones. When creating these indicators, the definitions of these zones were also described. The overbought zone occurs when the market is oversaturated with purchases and the seller’s offer begins to form. The oversold zone occurs when the market is saturated with sales and the buyer begins to form demand. If we compare these definitions with the definitions of supply and demand, it turns out that, in fact, it is one and the same.
In fact, this indicator shows areas of oversaturation with supply and demand, and this is exactly what we are looking for. When the indicator line enters one of the zones and is there, it is believed that the formation of a reversal position has begun, and when the indicator line goes beyond the boundaries of the zones, it is believed that the signal for the reversal has begun.
Zone market reversal strategy
In order to summarize my story about supply and demand on Forex, I would like to tell you one very simple strategy that is available to anyone.
To work on the strategy, we need a chart of absolutely any instrument in the foreign exchange market and an RSI indicator. The time period of the price chart is absolutely not important, but it is desirable that it is not too small. I chose 30 minutes. The indicator period is set to standard – 14.
The principle of receiving signals
To receive signals, we need the potential zone on the price chart to coincide with the zone on the indicator:
- We determine the direction of the trend on the price chart. At the moment, an uptrend is operating on the chart. Therefore, we will try to determine the zone of potential price reversal and the transition to a downtrend;
- It is necessary to find a more or less strong resistance level inside our trend. The easiest way to find it is by possible side channels on the chart. One of these channels is indicated on the chart “A”;
- We compare our channel with the indicator readings. If the indicator is overbought, then the zone is true. In our case, there is a zone on the chart, but the indicator is under the overbought zone. This zone does not suit us;
- If there are no more such levels, we are waiting for the indicator to enter the overbought zone;
- In zone “B”, the indicator entered the overbought zone, which means that the desired reversal may be nearby;
- Now we are looking in the history of the indicator for the previous entrance to oversold and checking against the price chart. If there is a zone in that place and on the price chart, we compare it with the current price. The current price should be at the level of this zone. On our chart it is. So the signal is true;
- At the moment when the indicator comes out of overbought, we can open a sell position;
- We set a stop order just above the offer zone on the price chart;
- We will make a profit when the indicator reaches the oversold zone.
In conclusion, I will repeat my opinion a little regarding the work using these zones. I tested this working method and came to the conclusion that the market is too volatile to be able to work comfortably in these zones at intraday intervals. And working on them in the long term does not make much sense because of the large error and the very size of the zones, which often exceeds the possible profit.