Why is it important to score supply and demand zones?
If you have been trading forex using supply and demand for a while, you’ve probably found yourself stuck not knowing which zone to choose, especially if you have at least two zones close to each other.
You know that it’s either one or the other, but which one to choose and based on what do you make your decision?
Often, you are either entering earlier than you should, or placing your order on a zone that price won’t visit at all. This is frustrating because sometimes you have to wait for a longer period of time for the price to return to your zone and trigger your orders. By choosing the wrong supply and demand zones, you are leaving some good trades on the table.
So how can you filter out these supply and demand zones you’ve identified so that you only pick those presenting high probability of success. Remember, the goal is to stack the odds in your favor and not the way around.
The solution is to have a scoring or a filtering system. The scoring system is based on analyzing four major odd enhancers to give a final score to each one of them on a scale of 1 to 10. This system will help you score supply and demand zones to let you decide which one to trade.
Because not all supply and demand zones work, it is vital to have a filtering system in place to help you choose the right zone to trade.
In this article, I will show you step-by-step how to score supply and demand zones using four odd enhancers.
Odd Enhancers in Supply and Demand
In this section, we will focus on four major odd enhancers to analyze and score supply and demand zones we want to trade.
These odd enhancers are filters we use to assess whether the supply or demand zone we identified is considered a high probability zone or not.
For each odd enhancer, 3 scores will be assigned depending on the supply or demand zone. The final score is simply the sum of the four scores.
Odd Enhancer 1: Strength of the Move
The first odd enhancer is the strength of the move out of the supply or demand zone. When we identify a zone, we ask ourselves: how did price leave the zone?
If price left the zone with long candles, this means the imbalance is strong and more unfilled orders are still available at this zone.
If the departure from the zone is weak represented by small candles, this means that probably no more unfilled orders are still there for us to trade.
Based on this first odd enhancer, we can give a score from 0 to 2 points maximum. From the chart below you can see how we score supply and demand zones based on the strength of the move.
In this example, we have a supply zone where price left the zone with strong big candles. This zone shows high probability of success because of the strength of the move out of the basing structure. The score we’ll give to this supply zone is 2 points.
Notice how price dropped when it returned to test the zone.
The next chart shows a weak supply zone where price left the supply zone with weak and small candles. This shows how the imbalance is at this price level.
Weak departure means that no more unfilled orders are left to be traded and the sellers are losing interest in selling at this price level. Soon, they will be outnumbered by buyers that will take control of the market and move prices higher beyond this supply zone.
Odd Enhancer 2: Time at the Zone
The second odd enhancer that we use to score supply and demand zones is the time spent at the base. You ask yourself: how long did the price spend at the base?
Normally, we want to have a supply or demand zone with 1 to 6 candles maximum at the base. If the number of candles exceeds 6 candles at the base, we ignore the zone.
If the imbalance is important enough to generate a directional move, price has to spend less time at the basing structure. This is why we need to have between 1 to 6 candles maximum at the base.
Here’s an example where we have a demand zone with too many candles at the base. This is a weak zone because price did react to it but failed to move higher and finally went through the zone to look for another demand imbalance.
The score for this demand zone is zero.
The supply zone above, in the other hand, is a strong zone because we have one candle at the base. Price did return to the supply zone and dropped giving us a great profit margin before it returned for the second time to test the supply again.
The score for this supply zone is 2.
Odd Enhancer 3: Fresh Level
The third odd enhancer in our list is whether the zone is fresh or not. The concept of a fresh zone is basically a supply or a demand zone that price has not tested yet.
A fresh zone that has not been tested has a score of 3 points. This is the one we need to focus on when trading supply and demand in forex. We need to stack the odds in our favor by choosing fresh untested zones to trade.
If price retraces back to our zone for the first time, we give it a score of 1.5 points. We can still consider this zone but again we are looking for high probability trading zones.
If price retraces back again for the second time, we give it a score of zero as it has less probability of success. At this point, most of the unfilled orders are gone and price might just pierce the zone and move away to find another supply or demand zone.
Here we have a price chart with a fresh non-tested demand zone at the bottom of the chart and two non-fresh demand zones at the top.
The score for the fresh zone is 3 points, whereas the two top non-fresh zones have a score of zero because price retraced twice to the zones.
Odd Enhancer 4: Reward-to-Risk Ratio
the final odd enhancer that we’ll use to score supply and demand zones is the Reward-to-Risk Ratio. This odd enhancer looks at whether we have a chance of making money or not. the ideal situation is to have a supply or demand zone that gives us a 3:1 reward-to-risk ratio. Less than 3:1 ratio is a bad trade.
So we need to risk less and gain more.
If the zone gives us at least a 3:1 ratio, we give our zone a score of 3 points.
If the zone gives us a 1.5:1 ratio, we give it a score of 1.5 points.
If the zone gives us a 1:1 ratio, the score is zero as we igonre the zone and we wait for another opportunity.
On the following example, we have a trading setup giving us more than 3:1 reward-to-risk ratio. Once the price retraces back up to the supply zone, we short because we get more room for price to move before being stopped.
For this trading setup, the score is 3 points as we have more than 3:1 ratio.
In this example, we have a reward-to-risk ratio of 1.08:1, which is considered a weak zone to trade because we have not enough room for price to move. The score for this zone is zero.
How to Score Supply and Demand Zones?
Now that we have a scoring system in place to help us score supply and demand zones, we need to interpret the final score to either execute the trade or wait for more confirmations.
Score of 10 Points:
A final score of 10 points means that we can place a limit order (pending order) at the supply or demand zone we want to trade.
The score shows that the zone is strong zone, fresh with less than 6 candles at the base, and giving us a good reward-to-risk ratio to make money.
Now all we have to do is to place a limit order and wait for price to trigger our trade.
Score between 8 and 9 Points:
If the score is between 8 and 9 points, we have two types of entries: Market order and Confirmation order.
A Market Order:
A market order is a an order placed when price is anywhere inside the supply or demand zone.
A Confirmation Order:
A confirmation order is an order placed when price dips into the zone first and crosses above or below the proximal line of the supply or demand zone. Here are the rules:
- Any one candle has to close inside the zone first,
- A second candle on its way out has to pierce the proximal line of your zone. The moment it pierces the proximal line, we place a market order.
Score below 8 Points:
If the final score is below 8 points, it simply means that there is no trade. The supply or demand zone with a score below 8 points is a weak zone that has low probability of success.
In this section, we will go through some examples from the live charts to show you how to score supply and demand zones correctly.
The first example shows a supply zone with a score of 10 points. The strength of the move is strong giving us a 2 points. The zone is fresh, price did not test it (3 points) and price spent as little as one candle at the base (2 points). Finally, the zone has enough room to give us a 3:1 ratio (3 points).
The final score is 10 points and with this score we have to place a limit order at the proximal line of the supply zone and wait for price to continue moving higher to trigger our pending order.
This is a good example of the perfect trade.
The next example shows a supply zone with a final score of 5.5 points. In this example, the supply zone is fresh (3 points) but has 6 candles which makes it a weak zone to trade (0 point). Next we have an okay move out of the zone because of the two ERCs we give it 1 point. The reward-to-risk ratio is 2:1 scoring 1.5 points.
The final score is 5.5 points which is a good example of a bad zone to trade. This supply zone is considered a low probability zone based on our final score.
The four odd enhancers used in this filtering system are what you need to score supply and demand zones. This system helps you choose the right supply and demand zone to trade and eliminates all the bad and weak zones from your watchlist.