In order to trade forex with supply and demand strategy, you must the 5 essential odd enhancers to help you select only the zones that have high probability of success.
Remember that not all supply and demand zones work. You can’t just buy every demand zone and sell every supply zone.
For that you need to learn how to filter them properly using odd enhancers to evaluate your zones.
In this article, you will learn the 5 essential odd enhancers that you need to incorporate in your trading system to help you choose the right supply and demand zone to trade.
This will increase your odds of success and minimize your potential losses in the forex market.
If this is your first time hearing about supply and demand, I suggest you read my previous posts to have an idea of what I am talking about here in this article:
- What is Supply and Demand?
- How to Identify Supply and Demand Zones?
- How to Draw Supply and Demand Zones?
Odd Enhancer 1: Strength of the Move
The first thing to look at it is the strength of the move out of the basing structure. In other words, we look at how did price leave the supply or demand zone. Was it a strong move or a weak move?
A strong move has long big candles and sometimes gaps are formed as price leaves the zone.
A weak move has many small candles and the drop or the rally doesn’t go far from the zone itself.
On the chart below, the price left the supply zones with strong bearish candles to the downside making them very strong zones to trade. Notice how price did not need to go all the way up to test the supply zones to move down in a strong fashion. This shows how great the imbalance is at these supply zones.
Now, let’s take a look at an example where the move out of the base zone is weak. The demand zone is considered weak because the price left the zone with small candles. The move out of the demand zone is weak. As a trader, you should avoid trading weak zones because price will ignore it and pass through it.
Odd Enhancer 2: Time at the Base
The second odd enhancer is the time spent at the base. Here, we look at how many candles are in the basing structure. In general, the best zones have between 1 to 6 candles in the base. Beyond 6 candles, the zone is considered weak and price might ignore it and therefore, resulting in a losing trade.
On the chart below, we have a rally-base-drop with one basing candle at the supply zone. This is a very strong basing structure. For the demand zone, the price spent a little more time and created three candles at the basing structure.
Another thing to consider when analyzing your basing candles is the tails or the wicks. Basing candles with long wicks are a sign of a weak zone.
On the next example, the price spent too much time at the base creating more than six candles. Therefore, this supply zone is considered weak. Look how price retested the zone and broke above it.
Odd Enhancer 3: Fresh Zones
A fresh zone is a supply or demand zone that price has not tested yet. The first retracement tends to be the strongest and most reliable one to trade. As a trader you should always choose fresh untested zones to stack the odds in your favor.
After a second retracement to the zone, it is better not to consider it because there might not be enough supply or demand to move prices.
On the chart below, we have two fresh supply zones that price has not tested yet. These are good zones to short once the price retraces back to either one.
Same thing for the fresh demand zone below, if price returns to test it we go long.
In the first retracement, the price tested the supply zone and moved down, the same thing happened in the second and third retracements. After the 3rd retracement, the price broke above the supply zone as no more supply was found there.
Notice how price left the supply zone after the second and the third retracement. The strength of these last two moves are weakening. This signals a potential shift in the market imbalance as more buyers are stepping in creating a breakout above this supply zone.
In this example, the price broke the demand zone after the second retracement. Notice that price penetrates deeper inside the demand zone with each retracement. This is a good signal that the demand zone is no more valid and a potential break through is expected.
After the second retracement, the demand zone is no longer valid as the market imbalance shifts from demand to supply.
Odd Enhancer 4: Reward-to-Risk Ratio
The reward-to-risk ratio gives us a good idea of whether we have a chance of making money trading a supply or demand zone or not. We need to choose trading opportunities that offer us at least 3:1 reward-to-risk ratio.
A ratio of 3:1 reward-to-risk ratio is a perfect ratio because we are risking 1 to gain 3.
For example, if a trade has 10 pips stop loss, then the target should be at least 30 pips away from my entry point. If the market doesn’t give at least a 3:1 ratio, we stay away from the trade and we look for another one offering 3:1 reward-to-risk ratio.
A 2:1 ratio is also a good ratio, and trades could work out just fine, but again we are choosing high probability setups and leaving those with low rate of success.
A 1:1 ratio or less is considered a non-valid entry signal since the market doesn’t offer a good opportunity to make money.
In this example, we have a good reward-to-risk ratio greater than 3:1. Here we have a good chance of making money trading this pair.
The next example shows a bad trade since the risk is greater than the reward and price did not move far enough from the supply zone to give us good odds of success.
Notice how price left the supply zone and did not go all the way down to test the demand zone. Always choose 3:1 reward-to-risk ratio to give yourself more room to make money.
Odd Enhancer 5: Overlapping Zones
The last odd enhancer in our selection is the overlapping zones or the nested zones. Here we look for overlapping zones from different time frames.
For example, if you have a supply zone on a daily time frame that are located inside a monthly supply zone, this daily supply zone is considered strong and presents high probability of success.
In general, higher time frame zones are more powerful than smaller ones. If your zone is nested inside a higher time frame one, it is a strong zone.
Here, we have a daily supply zone (in blue) that is nested inside a higher time frame monthly supply zone (in red). To find nested zones you start with a higher time frame, in this example the higher time frame is the monthly. We draw the monthly supply zone then we move to the daily time frame to look for supply zones within the monthly zone.
On the next example we have a daily demand zone nested inside a weekly demand zone. These are fresh zones on both the weekly and the daily time frames.
The odd enhancers we discussed here in this article are very important tools to help you filter your supply and demand zones.
Because supply and demand zones don’t work all the time, you need a system to let you filter out the good zones from the bad ones.
Remember that these odd enhancers don’t guarantee the success of the trade, instead, they give you a better chance of taking the right trades when they show up and leaving the ones that have low probability of success.