When it comes to looking at a chart, you need to retrain your mind to look at what the underlying data symbolises as opposed to just looking at it as a load of candles.
In truth, the charts show us what we don't need to see: filled orders - trades that have already happened.
If you think about it, what turns price? Unfilled orders and market orders. Limit buys and sells are used for liquidity, so when you look at the order book, all you are seeing are places where large market orders can be placed, or where somebody or an institution is playing a mind game for suppression and manipulation, as written about here: https://steemit.com/cryptocurrency/@technicalanal/buy-walls-and-sell-walls-you-re-doing-it-wrong
So we're looking for areas where there are stacks of unfilled orders to take a trade from. You can check my previous post about that here: https://steemit.com/cryptocurrency/@technicalanal/the-most-important-technical-analysis-supply-and-demand
There is a big difference in advantages between institutional traders and retail traders. Banks are looking at where there are unfilled orders - they are actually looking at that data - whereas retail traders spend their time looking at charts which is showing the complete opposite.
To summarise the posts I've made before on this:
- Big imbalances in supply/demand levels cause price to rapidly shoot away from an area of accumulation
- We look to those areas to take a trade
- On retesting the level, price should react to the unfilled orders and make a similar move to before
What we also need to consider as important:
- The longer price accumulates at a level, the more orders are eaten up and the level becomes less significant
- Quick retests show a massive imbalance in the order books - this is the ideal scenario to trade
In simple maths:
If we have 1000 buy orders at a level, and 900 sell orders at a level, price is going to spend a lot of time there. When the 900th sell lot is filled, price is free to move.
In another scenario, if we have 1000 buy orders and 50 sell orders, price isn't going to hang around a lot. We have a huge imbalance. This is great for us, because once we revisit, we can expect a big reaction to profit from.
Now, onto some pictures of how we trade these scenarios.
I'll look for 3 areas where I can take a trade from a supply or demand level. Let's look at a supply level.
As price approaches, the first level we can look for a trade is the very lower limit of the box, though this is usually the least responsive:
The second and most reliable trade to take is where the bulk of the orders are, at the upper limit of the box, otherwise known as MPL - max pain level. This is where we have a more favourable R:R because we can have a tighter stop loss and a bigger upside.
The entire principle of supply and demand trading seems very basic, but a lot of it comes down to your emotions. Once you look to take your first trade at a level like this, where you expect price to react, your emotions will run extremely high.
Imagine a huge green candle steaming towards your level. What's your first reaction?
You won't expect anything to be able to slow that down, not until you start seeing some low volume candles first. This is the hard part about trading.
It's also harder when you want to wait for an MPL trade and can expect price to turn at any moment in that untested supply or demand level. My third place for entry is if there is confluence with a support or resistance line within the zone.
I've oversimplified the entire strategy, but this is it in its purest form. There are other pieces of the puzzle to consider, most importantly price action upon approach, as well as overall trend.