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How to Identify Supply and Demand Curve?

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In order to identify supply and demand curve, we follow a 3 step process that helps us
determine the location of the price in relation to supply and demand in control.

These 3 steps are:

1. Locate the current price,

2. Look up and down to identify the closest supply and demand zones,
3. Divide the area between the two proximal lines into 3 equal zones,

The reason why we determine the curve is to avoid buying high and selling low. In other
words, buying at supply zone or selling at demand zone.

This step is crucial when trading forex using supply and demand. Our goal is to trade with
the trend, not against it.

By identifying the supply and demand zones in control on a larger time frame, we are able to
better position our trade and avoid getting stopped out of a good trade.

Contents [ hide ]

1 The Curve

2 Identify supply and demand curve

3 How to trade using the Curve

4 Conclusion
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The Curve
Supply and demand are two dynamic forces that establish market prices. These forces are
driving prices up or down based on who’s in control.

For instance, if supply exceeds demand, price tends to go down as more sellers are
interested in selling instead of buying the asset or product.

If demand exceeds supply, price tends to go up as more buyers are interested in buying
instead of selling the asset or product.

In forex, supply drives currencies down and demand pushes them up. For example, if the
European Central Bank (ECB) decides to lower its interest rate, investors sell the Euro
because of the low interest yield. This creates a bearish momentum across all euro pairs as
the currency is weakened by the change in interest rates.

The lower interest rates creates a high supply and low demand that drives the euro down
according to the law of supply.

In the case of high demand and low supply would be the ECB increasing the interest rate
making it stronger enough to shift the curve from high supply to high demand and
therefore, pushing the euro higher as more buyers are interested in buying.

The curve is basically a tool that traders use to determine whether the price is located near a
higher time frame supply or demand zone.

This is very important as we want to buy low and sell high to make pro몭t.

Identify supply and demand curve

To identify supply and demand curve, we use a larger time frame to draw our zones in
control and determine the location of the price on the curve.

Step 1몭 Choosing your higher time frame

The multiple time frame analysis consists of analyzing at least 2 to 3 different time frames of
the same asset or pair to construct a bigger picture about the the long-term trend. We want
to trade with the trend, not against it. The MTF allows us to align our trades with the higher
time frame trend. Remember, the larger time frame always wins.

The rule states that when you choose your time frame combination, the higher time frame
needs to be 4 times greater than your intermediate time frame and so on. For example, if you
want to swing trade, your higher time frame would be the weekly chart. The intermediate
time frame would be a daily chart because there are 몭ve days in a trading week. The lower
time frame wuold be the 4 hour chart.

In this article, we’re going to use the monthly chart as our higher time frame, the weekly
chart as our intermediate time frame and 몭nally the daily chart as our lower time frame.

Step 2몭 Identify supply and demand in control

The second step is to determine who’s in control: buyers or sellers.

As we open the monthly chart, we start by locating the current price. Then, we identify the
closest supply and demand zones to the current price.

From the chart below, we can see clearly that price is near the higher time frame demand
zone.

The next chart shows the current price located almost in the middle of the curve between
supply and demand in control. The way we trade this market is to move withe the prevailing
trend. Here we are in an uptrend, we can still buy as long as the lower time frames give us
good pro몭t margin to make money. Otherwise, we don’t diddle in the middle.
Step 3몭 Draw the curve

The third step is to divide the area between the two proximal lines into 3 equal areas. You
start by drawing the closest supply and demand zones, and you divide the distance between
them by 3몭 High, Low, and Equilibrium.

There are two options to divide the curve area. The 몭rst option is simply to count how many
pips there are between the two proximal lines and divide them by 3.

The second option is to use the 몭bonacci retracement tool to identify supply and demand
curve without having to divide the area manually.
To use the 몭bonacci tool, you have to modify the settings to get exactly 3 equal areas on
your chart:

change the 몭bonacci levels to the following: 0%, 33% (0.33), 66% (0.66), and 100% (1).

Now that you changed the 몭bonacci settings, you can draw the curve from the proximal line
of the supply zone to the proximal line of the demand zone.

The 몭bonacci tool will divide the are into 3 equal zones automatically.
How to trade using the Curve
On the larger time frame, the curve serves as an indicator as to whether the current price is
high, low, or in the middle between supply and demand in control. Based on this information
we can decide whether we buy, sell, or do nothing.

Here are the different trading scenarios based on the curve:

When price is VERY HIGH in the curve (inside the supply zone), we SELL only.
When price is HIGH in the curve, we SELL only.
When price is VERY LOW in the curve (inside the demand zone), we BUY only.
When price is LOW in the curve, we BUY only.
When price is at EQUILIBRIUM, we have 2 options: either trade with the prevailing
trend or we don’t trade.

Let’s put everything together and see how we can identify supply and demand curve and
plan our trade accordingly.

The 몭rst thing we do is to begin with the larger time frame to determine the location of the
current price and the supply and demand in control. This gives us the frame work to look for
trading opportunities.

We draw the closest supply and demand zones and use the 몭bonacci tool to divide the area
into 3 equal levels or zones as shown on the chart below:
The current price is located between the LOW and EQUILIBRIUM areas in the curve, which
means that we can only buy as long as the trend is up.

On the weekly chart, price broke the trendline and created a new supply zone. Then price
moved down and created a new demand zone nested inside the monthly demand zone.

On the monthly chart, we have price at low/equilirbium in the curve and the trend is up.

On the weely chart, price is moving sideways with a weekly demand nested inside a monthly
demand zone.

If you think of selling when price tested the weekly supply zone, then you are trading against
the higher time frame trend. As we said in the beginning, the higher time frame always wins.
Here we should avoid selling at weekly supply because the trend is up and the pro몭t margin
is less than 3몭1 reawrd-to-risk ratio.

Instead, we wait until price hit either the monthly or the weekly demand zone to go long.

As we can see, price went back down to the monthly/weekly demand zones and rallied to
the monthly supply zone.

As long as we trade with the long-term trend, we are safe.

When price is near the higher time frame demand zone, we buy only.

At this level, buyers are interested in buying more and pushing the price higher. If we sell at
lower time frame supply zones, we simply giving free money to the market.

Here’s another example:

On the monthly chart, price is High in the curve. This means that we only SELL fresh supply
zones on lower time frames.

On the weekly chart, price is moving up creating new higher highs and new higher lows. We
also con몭rm the trend using the trend line connecting the two higher lows together to draw
the trend line. 
On the same time frame (weekly chart), we draw our supply and demand zones to align our
views with the monthly chart (the higher time frame). We have a supply zone nested within
the monthly supply zone. This means that this weekly supply zone has a high probability of
success because it overlap with the higher time frame zone.

Same thing for the demand zone down at the bottom of the chart. These nested or
overlapping zones have high probability of success because the higher time frame zones are
more powerful than the lower ones.
Now that we know the price is high in the curve and the trend is up, we need to 몭nd a supply
zone to place our entry and stop orders accordingly.

We don’t buy at demand zones because price is high in the curve. Price is near monthly
supply zone, which means that soon price will reverse down and pierce all the demand
zones that are up in the curve.

To do that, we can either use the weekly chart or simply use the lower time frame to 몭nd a
suitable entry zone. If the weekly zone is clear like in this example, we can just stop here and
place our entry right at the proximal line of the weekly supply zone. But if the weekly zone
gives us a large stop that we can tolerate or the zone is not giving us a clear entry point, we
can move down to a lower time frame.

On the lower time frame (daily chart), we have a nested daily supply zone within a weekly
supply zone. This is a high probability zone to trade. We place our entry at the proximal line
and place our stop order above the distal line. The pro몭t margin is good as we have a 3몭1
reward-to-risk ratio.

For the exit we place our take pro몭t at the opposing demand zone.
Price hit our entre and dropped all the way down to our target giving us a nice 3몭1 pro몭t.

Notice how the risk changes from monthly to daily supply zones. If we were to trade the
monthly zone, we would have placed a large stop loss and price would pierce almost half of
the zone before reversing back down compared to the weekly and the daily supply zones.

Conclusion
When we identify supply and demand curve, we know exactly what we should do. We know
that we need to buy low at demand zone and sell high at supply zone and not the way
around.

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Previous Post:
 The Ultimate Guide to Master Supply and Demand in Forex

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5 Essential Odd Enhancers in Supply and Demand
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2 comments

Adonitrades
05/09/2021 at 5몭31 PM

I am an INSTITUTIONAL ORDERFLOW trader and I day trade after reading this article I
observed it can be used for long term trades..but can it also be used to day trade

Khalid 
05/09/2021 at 7몭15 PM

Yes, it can be used to day trade. In this article I used the monthly chart to 몭nd the
curve, if you are a day trader, your higher time frame could be either the daily or the
4-hour chart to 몭nd the curve.
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Demand trading. The focus of this blog is to teach you how to trade Forex using Supply and Demand
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