Trading the Forex market requires the mastery of basic technical tools to help you identify trading opportunities.
By understanding price action, you will be able to identify market structures and profit from them.
When trading forex using supply and demand strategy, you need to be able to draw support and resistance levels correctly to identify flip zones.
These flip zones are a good indicator of market changing direction so that you can plan your next move accordingly.
In this article, I will discuss the concept of a flip zone and how you can trade it using supply and demand strategy.
What is a Flip Zone?
By definition, a flip zone is a zone or an area where price flips from support to resistance or from resistance to support.
As price flips from support to resistance, a demand zone is violated and a supply zone is created.
As price flips from resistance to support, a supply zone is violated and a demand zone is created.
On the chart below, price tested the support level four times before breaking the structure and flipping from a support level to a resistance level.
This is a flip zone.
Here’s another example where price flips from a resistance level to a support level.
Price created a resistance level and tested it twice before breaking above it creating a flip zone. Then price retraced back down to test the newly formed support level.
So now that you know what a flip zone is, let’s see how you can add this concept with your supply and demand strategy.
How to Trade a Flip Zone
Supply Zone Flips to Demand Zone
When price tests the supply zone and breaks above it, this tells you that price might continue higher instead of moving lower.
As price violates the supply zone, you need to switch from selling to buying the market.
Once you identify the flip zone, you need to look for a newly formed demand zone around the flip area to place your buy order as you expect the price to come back and test this demand zone and continue moving higher.
The next chart shows how price created a flip zone and retraced back down to the newly formed demand zone and tested twice.
Demand Zone Flips to Supply Zone
When price tests the demand zone and breaks below it, this zone is no longer valid as the flip zone indicates a change in the market direction.
The next step is to look for a newly formed supply zone around the flip zone to trade.
Once you identify a supply zone, you need to draw your distal and proximal lines and wait for price to retrace back up to test the zone and trigger your short position.
As you can see, price did come back to your supply zone and went down flipping the support to a resistance and pushing price lower.
Let’s take a look at another example:
Price created a supply zone and retraced back up to test it. Then price returned to this supply zone creating a gap inside the zone and broke above it creating a flip zone.
Notice that the resistance flipped to a support but not on the same price level.
Then price created a new demand zone around the flip zone and came back to test it giving you the opportunity to go long.
A flip zone is a key indicator to spot a change in the market sentiment. When a flip zone happens, a supply (demand) zone is violated and a new demand (supply) zone is created for you to trade at the first retracement.
As a trader, you need to be nimble around market structures and be able to act quickly as the market sentiment changes from bullish to bearish or vice versa.
The flip zone is an amazing tool to add to your trading arsenal so that you are prepared to trade in different market conditions along with your supply and demand strategy.