What is Supply and Demand?

In the next lessons you will be able to learn how to trade Set and Forget's supply and demand methodology. The well known forces of capitalism
rule the markets the same way the law of gravity rule our planet. Buyers and sellers are in a constant and never-ending battle.

The only reason why price moves in any and all markets is because of an imbalance in supply and demand. The
greater the imbalance, the greater the move.

In the mean time, news occurs every day affecting our planet's different economies. Positive news usually means increased demand and
lessened supply, equating to higher prices. Negative news usually means lower demand and increased supply.

Supply is simply the amount available, while demand is the amount that is wanted. Supply is the amount available at a particular price,
while demand is the amount that is wanted or desired at a specific price.

 As prices increase, seller’s willingness to get rid of their products will also increase. This is called the supply curve.
 On the other side of that equation, buyers will demand more at lower prices; as price increases we will generally see that demand fall

Trading is not gambling. Gambling is not trading

There are some aspects that relate them with each other, and a few very important things we can learn from expert gamblers.

Why are we interested in learning how to trade supply and demand? Why do we have to make a trade plan? Why do we follow a set of rules to
trade?

The answer to all of this is "to have an edge", to be able to identify buy and sell signals in the market and execute the trades systematically in
order to have consistent results.

To be more precise 'having an edge" means having greater probability on our side. Notice the word "probability". It's very important to
understand that no edge can give us guarantee of success, it can help only with probability. Under such circumstances wouldn't it be right to say
that a trader's edge is to think in probabilities and to understand this gambling industry is the best place to look at. The entire industry is based
on probability with an edge in favor of the operators.

Like expert gamblers, the best traders think of trading as number game and trade probabilities to produce consistent results. Probability word
suggests inconsistency but it can still produce consistent results over a large sample of trades if the edge is good enough and is applied
consistently.
Watch this 15 minutes very interesting video dealing with exactly the gambling concept

REAL LIFE EXAMPLE

Let’s imagine that your wife asks you to purchase some meat for dinner. You go to the market and notice that the price of the steak you normally
buy has almost doubled! It’s now going to cost you twice as much to enjoy your barbecue, you quickly begin to think how valuable that lamb
steak might be. You begin to look for alternatives, such as a pork hamburger or chicken; replacement products with which you can get a similar
result at a far lower cost.

While you may decide to pay the doubled price of that steak, you have to think of the market dynamics at work. Not every steak buyer would be
interested in doing this, and many would opt for replacement products. This is a living example of a demand curve. As price increased, demand
decreased.

Let’s say the next week you go to the supermarket and you notice that that same lamb steak is half of what you are used to pay for it, or 80% off
of last week’s price.Now your thinking will be very different to week's. You will be thinking that you can load up while the price is cheap.
Customers are loading up too while price is that cheap, and you realize that if you don’t act fast all of the discounted meat will be gone before
you know it!

This is demand at work again. As price has moved lower, we've seen how demand increased. Not only for you, but the market in general. This
example isn't all that different than what we can see on the currency markets.

The Forex market is the biggest on Earth, and the reason for that is the heavy demand behind the traded assets. Currencies are the basis for
the world’s economy. Whenever one economy wants to trade with another economy (provided different currencies are used) a Forex exchange
will be required.

Unlike markets that are traded through an exchange, each Forex broker is essentially creating a market. More or less, the charts will look the
same, but individual bars can be different and price patterns in particular can vary a bit from broker to broker. Ultimately the various markets
created by the brokers will to some extent be arbitraged so they stay rather close to each other. In the end you have to just trade what you see
on your charts and ignore everything else.

What we perceive as the personality of a pair is just manipulation of a pair. Some pairs have lower liquidity (some cross pairs and exotics),
zones are overshot and then they work great. That is not the picture of "this pair does not respect supply and demand", that is the picture of "this
pair is being manipulated, bear traps, and bull traps".
Remember that Forex is the biggest market in the world, it's traded by professionals and not by retailers. A hunter has all sort of traps to
capture its prey, so do the big institutions. We are trying to combat professional hunters, as retailers we are their prey.
SUPPLY & DEMAND, AND THE MARKETS, HAVE MEMORY
How many times have you seen a market retrace back to a level where a recent major move started from, only to respect that level almost
exactly before making another strong directional move? It happens often enough to be something that you need to understand and know how to
make proper use of, because these scenarios can often yield very high-probability and high reward to risk trades.

It’s important to note that the trade setups at Set and Forget are no a ‘perfect science’, but they are occurrences in the market that are critical to
understand, and a tool to have at your disposal when you’re analyzing charts,

The first point you will need to understand is: A market will often ‘remember’ and respect where a major move started. That is to say, if a market
retraces back to the level or area a major move started from, many times (not every time) it will again bounce or fall away from that same level /
area. As a supply and demand and price action trader, this is a BIG clue for us and we can use it to develop several high-probability entry
technique: WoW trade, PCP, trend line breaks, etc.

TRADE WHAT YOU SEE ON YOUR CHARTS

Due to the nature of a 24 hours Forex market and a multitude of different brokers offering different price feeds and commissions, charts may
look different amongst brokers. Not only that, but their servers close candles at different GMT times, once may close it at NY close, another one
at GMT 0, or GMT +1 or +3. All this will change the looks of any chart, a CP may look like an ERC candle, a basing candle on Broker #1 may not
be a basing candle on Broker #2.

What can we do about it? Nothing. Just trade what you see on your charts.

The rule with any trading methodology is that you trade what you see on your charts, as simple as that. ECN versus non-ECN broker, that does
NOT matter at all. You just trade a set of rules, be it supply and demand, EMA crosses, CCI overbought/oversold, any set of rules, you trade
them based on what you see on your charts, why should look at your neighbor's charts? Are they better? Who says so? Your neighbor?
Imagine you are happily married with your wife, you have many friends happily married, are your friend's women better than yours? No, they are
all women, each of them awesome by themselves, try to have a sane relationship with your wife without looking at your friend's women, your life
will be better
The same applies to trading, trade what you see on your charts, don't look at other broker's charts, your broker offered you a price feed, trade it!
That's all, as simple as that.
Type of SD levels: Extremes (valleys and peaks) versus Continuation Patterns (CP)
There are many nuances that you need to learn through practice and a lot of screen time. There are as many nuances as different brands of
cars are... BMW, Ford, Mercedes, Chrysler, Chevrolet, they all have different colours and shapes, but they all are cars. The same applies to the
2 types of imbalances.

Imbalances and different cars brands

How do you think you are able to make out the differences between different Ford models? Because you've seen so many in your life (you may
have own a couple), you were interested in those models, you read about them on magazines and articles, saw them on TV ads... your brain is
used to seeing them, so you can differentiate between almost identical models.... Trading and learning share the same processes, practice and
time are needed.

There are only 2 types of supply and demand imbalances.

1. Valleys and Peaks

2. CP (Continuation Pattern) and PCP (Potential Continuation Pattern)

1- VALLEYS & PEAKS

Best at the extremes of the curve or close to it. These Vs (valleys) and inverted V shapes (peaks) swings are normally reactions to previous
levels, to either another valley/peak or a continuation pattern. Most of the time a retest of a swing will be in reality a second pullback to the level.
Try to lean on clear and obvious valleys and peaks, if you are unsure then regard it as a CP (read below).

 Drop-Base-Rally or Drop-Rally

 Rally-Base-Drop or Rally-Drop

IMPORTANT: the base of a valley/peak don't necessarily need to be 50% candles. In fact, most common valleys/peaks are composed of strong
bullish/bearish engulfing and piercing patterns. Most of the time, these patterns don't have a basing candle. Learn more about these patterns on
this lesson

A valley stands for potential demand, it is composed of a base and 2 legs (leg down, leg up) and a base, where the second leg
confirms the move away from the base
A zone's basing candles can be easily identified by using Rectangle Reader indicator and the fractal dots indicator (Bill Williams). This fractal
indicator draws small dots at the lows low and lowest high of the candle, it requires a V or inverted V shape with 2 candles making a higher low
to the left/right of the candle or making lower highs for the opposing zone.
2a. CONTINUATION PATTERN (CP)
A CP is composed of 3 legs, first leg would be a rally/drop, then a basing area and a second leg (rally/drop) that confirms the
imbalance at the base. Both legs should be ERC candles.
Very important: locating and drawing CPs can be very tricky sometimes. There are as many variations as there are colours in the light
spectrum. Don't get obsessed with having all of them right, sometimes they will be valleys/peaks, or a mess. Your trading decision and trend
can change if you don't draw it correctly, but you just can't control everything, you just can't, we must assume we'll always be making mistakes,
it's part of the game.

 Best for momentum, when trading with the trend

 Low odds when the Trendline is broken on the TF it's been drawn
 Low odds when price has been running for a while and more than 3 CPs have been formed in a row
 High odds at the beginning of a trend change or reversal or after a WoW trade that goes with the bigger picture's trend and momentum
A CP is composed of these formations:

 Rally-Base-Rally
 Drop-Base-Drop

2b. POTENTIAL CONTINUATION PATTERN (PCP)

A PCP is a potential continuation pattern that has neither created a second leg (imbalance) nor any profit margin. It's the basing pattern that
happens before a CP is confirmed. Read the lesson on how to score a level to understand what variables are needed to confirm an imbalance.

PCPs are Rally-Base-#### patterns that occur on ALL timeframes (price is fractal) where ### stands for a potential rally/drop in price in the
direction of the path of least resistance.

 The bigger picture trend is with us

 A WoW trade is playing out and there is room to opposing HTF SD zone
 A HTF SD zone has been taken out, PCPs are usually formed before or after the break
 PCPs don't necessarily need to be 50% candles, they can be Marubozu candles as well
Watch this small video that explains the differences between both types of levels

Video File Name: Types of supply and demand levels, swings and continuation patterns

Sometimes it's very tricky to distinguish a CP from a valley/peak, you have to read price action and see if the zone is made of nested zones that
close above/below previous one, if it closes higher/lower, etc. You have to pay attention to all that, the rules cover that already, the only problem
here is that we must read price action candle by candle to see the non-obvious ones.

Every level is different, so you need to read candle by candle every time.

One thing is for sure, If the zone is not clear to you, the wisest thing you can do is waiting for confirmation.

Gaps are the strongest form of imbalance

A gap stands for an extreme imbalance, too much buying/selling pressure that orders are not filled and creates gaps up/down (blank area with
no price action within) at a worst price. Gaps are usually (not always) filled short after its creation.
Always draw the zone that is right below/above the gap, not the zone right before it. The origin
of the imbalance is always at the origin of the gap
The first thing you want to do is become an expert at locating these kind of levels on any price chart, be it on a H4, D1 or Monthly timeframe. It doesn't
matter which timeframe you choose since price is fractal, whatever structures and patterns there are on H4, you will find them as well on other timeframes.

Some say that drawing levels correctly can be "considered an art". I don't agree with that, if you have rules that can be applied the same way every single
time, there should be no art on it. It just takes practice and a lot of screen time, so be patient, your mind and eye need training, and lots of screen time till it
becomes second nature to you.

How far back in time do I need to go in order to find supply and demand levels? As far as you need to, days, weeks, months or years!

How do I draw a level in a consistent and mechanical way?

A level is composed of two features or prices:

1. The proximal line. The price closest to current price

2. The distal line. The price further away from current prices Both prices can be easily identified on a price chart thanks to the indicators
we use, they draw price labels for both lines as well as the width in pips for any level

​
​

30 MINUTES VIDEO THAT SHOWS HOW TO DRAW ZONES

Video File Name : How to draw supply and demand levels in a consistent way
MOST COMMON CPs (Continuation Pattern) CANDLESTICK FORMATIONS
These are the most common candlestick formations that can be seen on CPs

1. Several 50% candlesticks at the base

1. 50% candles are automatically detected by MT4's rectangle reader indicator, a coloured dot will be drawn in the middle of a 50%
basing candle
2. A single 50% basing candle

1. When the zone is composed by a single candle and not too wicky, it's advisable that we extend the drawing of the zone to cover
the highs/lows, price will often retest just the wicks and bounce off it without pulling back to the base

1. Marubozu candlestick

1. Marubozu are tight base candlesticks with no wicks at all or almost no wicks
2. They are very strong bullish/bearish signals after the break of a HTF zone or WoW trades are playing out, common in CPs and
PCPs

1. Engulf patterns

1. Bullish and bearish engulf patterns are very common on CPs, they are high odds formations if they are momentum engulf patterns
and opposing zone is far from it

1. A pause in the market without basing or marubozu candles (more difficult to see)

1. There are times where we won't have a basing candle or a marubozu candle to tell us there is a CP, but it will be an obvious pause
that took out an opposing zone. Don't get obsessed with this kind of CPs, they are rare, you could start seeing them everywhere if
you get obsessed. Location and what a candle has accomplished is important, width is as well

Not all basing candles are CPs

Watch this short 8 minutes video to learn more about this nuance

Video File Name : Not all Basing Candles are CPs

FRESH levels versus ORIGINAL levels
Supply and demand Imbalances can be defined by its freshness:

1. Fresh (untested). New imbalance created but price has not pulled back yet
2. Not fresh (tested). Price has retested zone at least once. For a zone to be considered tested, we need to have at least 1 full OHCL
candle consolidating away from the base
3. Original
1. Level has been created out of the blue, not being a reaction to any previous level
4. Original and fresh. Same as original, but the level is also fresh (untested)
5. Used up. Price has pulled back to level several times, 2 or more retests. Not good for trading, confirmation with a new trend on your
entry TF would be neeed

A potential imbalance will be considered a level once it scores correctly as described in the scoring lesson.

FRESH LEVELS
How do we know if we have an fresh level of supply? (Opposite for fresh levels of demand)

1. Look right to find fresh levels

2. Draw a "virtual" horizontal line at the proximal line, and see if price has touched the level
3. If price has not tested the proximal line then level will be considered fresh
4. Nesting of multiple levels is irrelevant to the freshness or originality of a level. Just look right and see if level was retested after it
consolidated away

If price consolidates away from a level and closes with a full OHCL candle, the new imbalance will be considered as a fresh
level (check the scoring lesson for other variables to validate the level)
ORIGINAL LEVELS
How do we know if we have an original level of demand? (opposite for original levels of supply)

1. Look left to find original levels

2. Draw a "virtual" horizontal line at the distal line, and move back n time as far as you need to UNTIL price meets a new candle
3. If the candle it touches is not part of another imbalance, then the level will be considered original
4. You are not allowed to cut through candles, that is, once price meets nice candlesticks to the left, stop and check if that candlestick is
a reaction to a previous level
5. If a previous level was overshot but no close above/below it, and a new potential imbalance is created, we won't consider the new
imbalance an original one, we must remove the previous level solidly, not just overshoot it

If price consolidates away from a level and closes with a full OHCL candle, and then retests the imbalance, the level will be considered as
non-fresh (check the scoring lesson for other variables to validate the level)