What is Supply and Demand?

27th September 2013, 05:47 PM

In the following lessons you will learn how to trade using Set and Forgets supply and
demand methodology. Capitalism rules the markets in much the same way as the
law of gravity rules our planet. Buyers and sellers are in a constant and never-ending
battle trying to agree on a fair price on the traded product

The only reason why a price moves in any, and all markets, is because of the
imbalance in supply and demand. The greater the imbalance, the greater the move
in price.
Why do imbalances occur?

• The currency market, the financial world in general is dominated and ruled by
big investors, institutions, central banks and professional trades. They have
the ability and capacity to move and change the markets with thousands of
orders- These orders create the so called supply and demand imbalances.
• Daily news occurs and affects the world's economies
• Positive news usually increases demand, and reduces supply, leading to higher
prices
• Negative news usually decreases demand, and results in an increased supply
• The retailer and small investor ends up becoming the bait, the liquidity the
professional traders need to fill many of their orders. They can't sell if there
are no buyers interested
Every trader/institution has a different perception of fair price and future value.
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, a seller’s willingness to sell products will also increase.
• The opposite of this shows that as prices increase, we see demand reduces.
Buyers will demand more when prices are lower
REAL LIFE EXAMPLE
Let’s imagine that your partner asks you to purchase some meat for dinner. You go to
the market and see 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 steak might be. You begin to look at alternatives, such as
hamburgers or a chicken; replacement products with which you can get a similar
result at a far lower cost.

While you may decide to pay the increased price of that steak, you have to think of the
market dynamics at work. Not every steak buyer would be interested in doing this;
many would opt for replacement products because they could not afford the new
higher price. This is a living example of a supply and demand SD range. As the steak
price increases, demand for steak decreases.

The next week you go to the supermarket, and see that steak is half of what you
normally pay for it; it's 80% off of last week’s price. Now you will think differently to
the previous week. You will be thinking that you can buy more while the price is
cheap. Other customers are buying while price is cheap, you realise that if you don’t
act fast, all of the discounted meat will be gone before you buy any!

This is demand at work again. As the price of steak lowered, demand increased, not
only for you, but the market in general. This example is very similar to what we see
on the currency markets.

The Forex market is the largest in the world, $5tr is traded every day, and the reason
for this 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 little from broker to broker.
Ultimately, the various markets created by the brokers will, to some extent, be
arbitraged (the simultaneous buying and selling of securities, currency, or
commodities in different markets or in derivative forms in order to take advantage of
differing prices for the same asset.) so they stay close to each other. In the end you
have to 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

instruments have lower liquidity (some Forex cross pairs and exotics), zones are
overshot and then they work great. That is not the picture of "this instrument does not
respect supply and demand” that is the picture of "this instrument 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 correct 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 not a ‘perfect science’,
but there are occurrences in the market that are critical to understand, and a tool to
have at your disposal when you’re analysing charts.

WHAT ARE THE LOOKS OF AN IMBALANCE?

The goal of any small or big investor is to have the capacity to identify where and
when the market is most likely to turn and if it does, where it could be heading to.
This is not the only way to attain low risk and high probability trading opportunities.
As you will see in further lessons, markets usually turn or reverse at price areas where
supply and demand are out of balance, that is to say, at supply and demand
imbalances. The stronger these imbalances are the higher the likelihood the turn in
price. If this is so, how can we identify these levels on a chart?

Why is it that big institutions usually make so much money and are correct most of
the time and at the same time, retail traders and small investors are usually wrong
most of the time and lose most of their money?

The typical small trader will try to find charts where there is a lot of activity, that is,
there are lots of candlesticks trading at a certain area. They will think, well, they've
been told that the more activity you see, the more volume there is, the more probable
price is going to turn at that price level. However, what happens is exactly the
opposite. Price will turn or reverse at price areas where there is a very important
imbalance between supply and demand. What we will see at these imbalances will be
very little trading activity. Most of the activity is mostly on one side of the market.
We will deal with this in further lessons when scoring imbalances on the amount of
trading activity there is at a potential imbalance. Well, it's not many candles at a price
area like classic support and resistance and other technical analysis suggests, it’s
actually very few candles you need to see.

These price areas where there is little activity and a sudden strong impulse is what we
are interested in because all the potential activity is mostly on one side of the market,
the big investor. These investors will leave a footprint when they execture their
transactions, we are going to learn how to locate these footprints left on the charts and
trade with them, not against them. We are looking for a significant amount of unfilled
orders, these unfilled orders leave a trace or a footprint on a price chart that can be
easily located if you have trained your eyes and brains long enough.

How does it look like on a price chart? Below is EURUSD Daily chart for 4th
September 2018.
• The areas within the ellipse at [2] and [4] with a lot of candles is what
traditional technical analysis would tag as "support and resistance levels". Price
areas with lot of trading activity and potentially a lot of volume.
• When price reaches these levels [2], it can't push through it, it stalls and stay
there for a bit because there is some supply at that level. However, with so
much trading activity and congestion at that price level, we can't say the
imbalance is strong enough.
• When price reaches these levels [4], price doesn't even stop for a second, it
goes through it and it continues its decline on the way down to [6]
• If we pay closer attention to price levels [1], [3] and [5], there is not too much
activity, the typical investor would probably ignore it and consider it not to be a
good price level to sell.
 • However, that is exactly what we are looking for, a very strong imbalance with
not too much activity at the origin of the move and a strong move away, these
are the kind of footprints big investors are leaving behind.
• Having a strong or very strong imbalance does not mean that price is always
going to react positively as expected. An example of this is supply level at [3].
It was not respected even though the strength of that level was important and
there was not too much activity. It stalled there for two days and then it was
eliminated

This is exactly what you are going to learn in the lessons. You will be guided step by
step how to find these footprints left by big investors and trade with them, not against
them.

Trading is not gambling. Gambling is not trading

There are aspects of trading and gambling that relate with each other, and there are
some 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 the buy and sell
signals in the market and execute the trades systematically to enable consistent results
in our trading.

To be more precise 'having an edge" means having probability on our side. Notice the
word "probability". It's very important to understand that no edge can give us
guaranteed success; it can help only with probability. The trader's edge is to think in
probabilities and to understand this, it is best to look at the gambling industry. The
gambling industry is based on probability, with an edge in favour of the operators.

Have you ever wondered how it is possible that the biggest and shiniest hotels are in
Las Vegas? It is the Casino that provides the profit to make these “dream hotels “
come true. Not only do they want you to live there so they have you close but they
also provide you with free drinks so that you do not even leave the constant lure of the
gambling possibilities.

Let’s look at a roulette wheel. It consists of (pockets) with numbers from 1 to 36 and a
0 ( in American roulette even of a second (00) pocket. 18 pockets are in black, 18
pockets are in red with the green 0(00) numbers in green. If you bet red it is not a
50:50 change to win. Actually it is the 2.7% additional edge (roulette with one “0”)
that the casino has over you because if the 0 falls the casino wins as well. So in fact
your chance to win is (47.3:52,7) and hence the Casino has the edge. Is the Casino
concerned when you win against the odds a million? No because the Casino knows
that after thousands of spins the Casino makes the money back and some more. It has
the edge over you and all the gamblers.

Like expert gamblers, or for that matter also the casinos, the best traders think of
trading as number game and trade probabilities to produce consistent results. The
word probability suggests inconsistency, but it can produce consistent results over a
large sample of trades if the edge is good enough, applied consistently, just as with the
example of the casino.

Watch this 15 minute very interesting video dealing with exactly the gambling
concept
https://www.youtube.com/watch?v=7jyokhjUCyk
Supply and Demand core rules in a few slides. Watch it over
and over
26th September 2016, 04:09 PM
Before we even start with the lessons, I would like to state that successful traders
realize that they are not in the trading business to trade, but rather to make money, and
to do that they need patience. A patient trader with a second rate system will generally
outperform an impatient trader with a better system. Having said that, your trading
system and trading plan still has significance but not the way you think or as much as
you might thing. Its significance lies in the fact that it is your system that gets you out
of losers quickly and keeps you in the winners, the exact opposite of what most losing
retail traders do in the trading careers. The system will helps¡ you take the emotion
out of the trade, remove the panic, and build your confidence in the rules and your
trading plan.

Trader should understand that what everyone knows is not worth knowing. After
all, popular formations and studies/indicators get everyone going in the same direction
and then as they panic to get out, the best traders have already taken the other side.

The best traders know that once you get into the trade at the right price and the market
moves in your direction, they should "leave it alone". A wise person once said that
"Prediction is very difficult, especially when it pertains to the future". Consequently,
you should not let your opinion or someone else's get in the way of seeing the price
action and supply and demand, which is what ultimately determines direction.

Before delving into the lessons laid out in different blocks in the Classroom I would
like you to understand the main concepts used to create the rules set we use to trade
supply and demand imbalances at Set and Forget.

Let me use a few slides to explain to you what these core rules are, basically you want
as many timeframes as possible (at least three) aligned in your favour in the direction
you intend to trade. Use the top timeframe of your sequence, the monthly chart in a
Monthly/Weekly/Daily sequence, and plan trades on the Daily chart in the direction of
the Monthly trend.

The slides and the videos will NOT use any charts, it's been done on purpose. Why? I
want you to understand the concepts behind these rules, you need to use your
imagination a little bit. By understanding the core concepts you will be ready to look
at the charts using these concepts while wearing the supply and demand glasses.

The following slides use the Monthly, Weekly and Daily timeframes as an example.
Any timeframe combination can be used but I highly recommend you to use this
combination because I guess you want to have a life, maybe I am wrong and you love
staring at your trading platform for hours chasing for trades. Traders are often limited
by the number of trading opportunities due to the time it takes to analyse multiple
markets. When analysing the bigger imbalances and sequences, we will be able to
move through hundreds of markets at a relatively fast pace. Less time in front of the
computer, less stress and less over analysis and over-trading, resulting in a better life
and relationship with your couple, children, family and friends. Family and friends are
away more important than your trading my friend, do not ignore that fact, FAR more
important.
WATCH THIS VIDEO TO UNDERSTAND THE CORE RULES BEHIND SUPPLY AND
DEMAND
Do not take counter-trend trades, focus on clear trending scenarios and great
imbalances. Work on your patience and wait, otherwise you will be blowing up your
account very past. Create and use a professional attitude and mindset. Do not take
any advanced or counter-trend setups if you have not been profitable for 9 months in a
row.

Watch video over and over. If you understand the concepts in the video below you
will have the foundations of the strategy, these foundations will help you
tremendously in the forthcoming lessons, there are a few of them The realignment
and the sequence are the two core concepts you need to understand, never forget about
them, DO NOT ignore these two core concepts, without them the rules will not work.

WATCH VIDEO
THESE ARE THE KIND OF IMBALANCES YOU WANT TRADE
Be patient my friend, be patient. I am 95% sure you will ignore this statement. Why?
I know for a fact. You are a human being, your ego and emotions are probably
controlling your actions as it does in everyone else, you are probably not an exception.
You will tell yourself you are, but that's probably not you but your ego or the evil on
your left ear whispering at you what you want to hear.

If you are patient these are the kind of setups you want to plan and wait for, just wait...
they will happen no matter what you do. The markets move the way they move based
on supply and demand imbalances, lack of demand or supply, excess of demand or
supply. We just can't change that.

Find below a few trading setups for clear trending scenarios, these are the ones you
should be focusing on for a very long period of time, actually you should only be
trading with a clear trend. I know you will break that rule, just remember when you
break it and have losses after losses taking counter-trend or unclear scenarios.

The setups below belong to Stocks, similar setups are available for Forex,
Commodities, Metals and Indexes. Supply and demand works on any market and
timeframe. Check out the Stocks trading channel to see these setups and the
discussions around them.
Type of SD imbalances: Extremes (valleys and peaks) versus
Continuation Patterns (CP)
27th September 2013, 05:50 PM
There are many nuances that you need to learn through practice and this is only
achieved by a lot of screen time. Once you start to look for SD imbalances you will
realize that they all look a bit different. To identify them correctly as what they are
(Extremes or CP’s) is the difficult part in the beginning. However just because they
look a bit different does not mean they are not “Extremes” (Valleys/Peaks) or CP’s.

Imbalances and different car brands

There are as many nuances in such imbalances as there are different brands of cars
(from BMW to Ford, Mercedes, Chrysler, and so on.) They all have different colours
and shapes, but they are all cars. The same applies to the types of imbalances that
manifest themselves on a chart.

Why do you think you are able to make out the differences between different Ford
models? The answer is because you've seen many of those cars throughout your life
(you may even have owned a couple), you were interested in those models and you
read about them in car magazines, articles and TV ads. All in all, your brain is used to
seeing them, so you can differentiate between almost identical models. Trading and
learning share the same mental processes. Practice and time are needed to distinguish
between different imbalances from one another.

Remember these words

Supply and demand creates price action, price action creates patterns.
Before we begin with this lesson it is important to note that you come across four
candlestick types:
• ERC Candles, which stands for Extended Range Candle (those are long
candles with long candlestick bodies and closing at about 80% of its candle
range
• Base Candles, which are candle body (difference between open and close) is
less than 50% of the entire range (high to low).
• Failed ERC candles, these candles can be defined as a candlestick that looks
like an ERC (explosive and wide candle) which fails to close high in the
candlestick range and whose body is 50% or less than the whole candle stick
range. The failed ERC ends up being a 50% candle, but it's not a pause because
it's a strong and explosive candle. Failed ERC candles are discussed in its own
separate lesson here
 • Marubozu candles, tight candles with tight bases with no wicks or hardly no
wicks at all
Watch short video showing examples of these different candlestick patterns

Please note that this is a terminology used in Supply & Demand trading and could
differ from the classical candlestick types you might have heard in other forums,
websites or books. For instance Failed ERC candles is a new term I recently added to
define certain candlestick patterns that are very common. These candlesticks could
have other names in those many books sold out there, I just don't know since I only
know the basic candlestick patterns.

There are 2 types of supply and demand imbalances:

1. Valleys and Peaks
2. CP (Continuation Pattern)
1- VALLEYS & PEAKS
Valleys and Peaks are V shape (valleys) and inverted V shape (peaks) which are
normally reactions to previous imbalances. Most of the time a retest of a swing will be
in reality a pullback to an imbalance level. (More on this matter later- for now just
keep this as a heads up). Lean on clear and obvious valleys and peaks, if you are
unsure then regard it as a CP (read below).

Some of Valley/Peak features:

• Used for the calculation of the SD range at the extremes
 • Best probabilities to take at the extremes of the SD range or close to it (more of
it in later lessons)
• They are the building blocks of a trend
Valleys and peaks are composed of these formations:
• Drop-Base-Rally or Drop-Rally
• Rally-Base-Drop or Rally-Drop
IMPORTANT: When you see a valley (as shown in the chart further below) a peak
or a CP that you identify in a chart you need to understand that the imbalance
formation alone only qualifies it as a “potential demand” – nothing more nothing less.
This is very important to understand and should always be kept in mind when you go
through your training. Only when such imbalances are qualified further, which you
will learn in later lessons, will you be able to define true supply and demand levels. I
cannot stress this out more!

A valley stands for potential demand, it is composed of the following:

• 1 leg/move down
• A base
• 1 leg/move up
Therefore we can say Drop-Base-Rally or Drop-Rally. The move up (rally away)
confirms it as a valley.

The basing of an imbalance is created by basing candles, which mostly are so called
50% candles. These candles can be easily identified by using the “Rectangle Reader
Indicator” I have created for the Metatrader 4 platform. This indicator is the most
important tool we use for this methodology and should be used when working with
Metatrader 4.

In addition the fractal dots indicator (Bill Williams) indicators found as a standard
indicator on the MT4 platform will help you by drawing small dots at the lowest low
and lowest high of a fractal swing. It requires a V or inverted V shape with at least 2
candles making a higher low to the left/right of the candle or making lower highs for
the opposing zone. These tools have been created exclusively for Metatrader 4
because it's the platform that I personally used. Some of these indicator's features can
be replicated on other platforms like TradeStation, NinjaTrader, etcetera, but they are
not necessary to trade this rules set.

IMPORTANT: The base of a valley/peak does not 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, hence you may have noted that I mentioned that we only have bases in some
cases in the above explanation. Learn more about these patterns in this lesson

In the first chart we have an imbalance valley scenario (Drop-Base-Rally) and in the
second chart an imbalance peak scenario (Rally-Base-Drop).

Important: In the valley chart right below you will see a highlighted “Demand
Zone”. In the explanation box it is mentioned that candles #3, #4 and #5 confirms the
zone as valid demand. Please do not get confused as I have to admit the explanation is
a bit misleading. The zone highlighted is a “potential” demand zone and the candles
#3,#4 and #5 only confirms it as a Drop-Base-Rally imbalance.
2a. CONTINUATION PATTERN (CP)

A Continuation Pattern or CP is a pause in the market before price resumes

current trend. In an uptrend it requires a rally followed by a base, followed by
another rally. In a downtrend a CP requires a drop followed by a base followed
by another drop. Legs in and outs must be ERC candles or failed ERC
candles (clear ones with very large bodies).
The bar(s) in a CP base can have any color. A CP is a pause in the market. We can
think of this pause as accumulation of buy orders for longs (or the distribution of sell
orders for shorts).

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 just a mess (there is
a more advanced lesson in the last block). Your trading decision and trend analysis
can change if you don't draw them correctly. This is part of trading. Unfortunately,
most of the times charts do not look nice and clean with great formations as described
and shown in textbooks – this is the hard and true reality. The sooner you come to
grips with it and accept it the quicker you will learn. Having said that, nobody forces
you to trade messy formations, as there are a lot of instruments to trade. Furthermore
part of the tradability scoring of a supply/demand zone that will increase the
probability of a trade and which I will show you later, comes back to this subject.
Nevertheless you better get used to the fact that you just can't control everything and
accept that you will always be making mistakes. It's part of the game.

A Continuation Pattern is composed of these formations:

• Rally-Base-Rally
• Drop-Base-Drop
Some of its features:
• CPs are best for momentum trading, when trading with the trend or
bouncing off of a bigger timeframe
• ERC and failed ERC candles cannot be part of a CP pause. A CP is a pause, a
pause cannot be made of an ERC. However failed ERC candles can be part of
either the leg in or leg out (clear ones with large bodies)
• Low odds when the Trendline is broken on the TF it's been located on, or a
bigger timeframe is in control
• Low odds when price has been running for a while and more than 3 consecutive
Continuation Patterns have been formed
• High odds at the beginning of a trend change, at potential reversals or after a
WoW trade that goes with the bigger picture's trend and momentum
Please note that things mentioned in this feature paragraph might be new to you.
Please do not worry if they are not yet clarified. This will all be taught in later lessons.

Please also note that you will come across such situations in almost every lesson but
again it will be taught later. The further you advance the more things become clear
and the puzzle pieces fit together. Therefore it is important and I cannot stress this out
more often, that you go through this course over and over and over as mentioned in
the first lesson. Write this down or better tattoo it on your skin : - ).
VALLEYS, PEAKS AND CPs
Watch this short video showing some examples the differences between valleys and
peaks (swings) and CPs

Every level is different, imbalances don't occur in perfect formations every time, you
need to read candle by candle.

Sometimes it's very tricky to distinguish a CP from a valley/peak and you have to read
price action properly. Then you are able to draw the base accordingly. You have to
pay attention to all this but the rules will cover that. You must carefully read price
action candle by candle to see the non-obvious ones.

NOT ALL BASING CANDLES ARE ARE CPs

Watch this short video showing some examples

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

The first thing you want to do is become an expert at locating such levels on any price
chart. It doesn't matter which timeframe you choose since price is fractal, whatever
structures and patterns there are on H4, you will find the same 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 consistently and methodically applied the same way
every single time, there should be no art in 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, even years!

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

The base of an imbalance can be identified by drawing two features :
1. The proximal line. The price closest to current price
2. The distal line. The price furthest away from current price
o Both prices can be easily identified on a price chart thanks to the
indicators we use, they draw price labels for both proximal and distal
lines as well as the width in pips for any level. These indicators are only
available for Metatrader 4 platform (it works with CFDs, Stocks,
Indexes, Commodities and Forex).
Find below two options to draw the base for a supply zone. There are times when you
can be flexible drawing the imbalances, but before you start being flexible you must
understand and sink in the rules for quite some time, spend a lot of time in front of the
screen and see thousands of scenarios. It's very important to understand that before
you tweak any rules, you must first master them.

There are some cases when you can adjust the proximal line:
• When there is a single candle at the base
• The candlesticks forming the base are tight and small, we can draw the
proximal line covering the lower shadows (supply) or upper shadows (demand)
See below a couple of examples for supply, the same applies to demand

Option 1: proximal line at the lowest open/close of the basing candles

Option 2: proximal line covering the lower shadows since both bodies and wicks are
very tight and small
Single candle at the base
• MOST COMMON CPs (Continuation Pattern) CANDLESTICK
FORMATIONS

These are the most common candlestick formations that can be seen on CPs
1. A single 50% basing candle
▪ Each candlestick is defined by the Open, Close, Low and High. If
the number of pips/ticks between the Open and the Close is 50%
or smaller than the whole candle range (distance from the high to
the low), it will be considered a basing candle, a pause.
▪ 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
▪ 50% candles are automatically detected by the Metatrader 4
rectangle reader indicator I created, a coloured dot will be drawn
in the middle of a 50% basing candle to distinguish it clearly from
others
 2. Several 50% candlesticks at the base, this is the most common
scenario, we usually see a few basing candles forming a base because
price creates the second leg out
3. Marubozu candlestick
▪ Marubozu candlestick pattern is a tight base candlestick with no
wicks at all or almost no wicks. They are very rare
Important note about Marubozus: we only use the Marubozu
candles that have very small bodies, not the white or black
Marubozus with very wide bodies. A wide body will never be a
pause in the market, use the logic please.
▪ They are very strong bullish/bearish signals after the break of a
HTF zone or WoW trades are playing out, common in CPs
4. Engulfing patterns
▪ Bullish and bearish engulf patterns are very common in CPs, they
are high odds formations if they are momentum engulfing patterns
and opposing imbalance is far away
Not all basing candles are CPs
WATCH VIDEO
This video shows a few examples of most common candlestick patterns found
at CPs

16th December 2015, 10:31 AM

GAPS ARE THE STRONGEST FORM OF IMBALANCE

A gap stands for an extreme imbalance, the buying or selling pressure was so
strong that orders were not filled, thus creating a gap up or down. These gaps
are blank areas with no price action within. Gaps are usually (not always) filled
short after its creation.

Gaps in price are great because they can be seen as both the structure of a
strong imbalance and the picture of confusion, fear and probably greed. You
can see them the way you want, but in reality gaps are blank areas in a price
chart where the supply/demand pressure was so strong that orders couldn't be
filled at the best price. Not every gap sends the same message. We need to
make our top down analysis first. Once this is done, we can use this
information to spot the picture of professional and non-professional traders, so
we can take a low risk, high reward, and high probability trade trading on the
side of the professional trader.

Gaps are the most obvious way to spot a non professional trader (or novice),
which is exactly who we want on the other side of our trades. Remember, if
you can’t spot professional traders, then you are not one of
them Professional and non-professional gaps offer strong opportunities when
they are presented under the right trend scenarios.

THE PROFESSIONAL GAP

Professional gaps are strong reactions to bigger timeframe imbalances or flip
zones. The gap in price can be produced by different circumstances, a news
event, institutional buying/selling pressure, or any other event. The fact is that
the professional gap usually happens when a trending bigger timeframe is in
control or there is a strong flip zone. When the gap has materialized, we'll
probably have a new lower timeframe imbalance, potentially becoming a
bigger timeframe imbalance.

THE NON-PROFESSIONAL GAP

This kind of gap usually happens near or at a bigger timeframe imbalance,
non-professional traders usually buy into bigger timeframe supply, probably
based on a lower timeframe entry, some kind of news event or a strategy based
on lagging indicators. Non-professional gaps trap those traders that are not
aware of supply and demand imbalances or what the bigger picture trend is
shouting at them, thus they often find themselves on the wrong side of the
trade.

Some thoughts to keep in mind when you spot a gap, examples are for gaps up,
the opposite applies for gaps down:
o A gap up in price, in the context of an uptrend, is a very high odds long
opportunity on a pullback to potential demand created, when there is a
significant profit margin above and no bigger timeframe supply is nearby
or in control
o A gap up in price, into bigger timeframe supply, after a strong rally in
price, and in the context of a larger bigger picture's downtrend is a LOW
odds long opportunity. It can potentially become a high odds opportunity
when it's been taken out
There is much more on gaps we could write about. Keep in mind that the
picture of the ultimate supply and demand imbalance is a gap. Instead of
looking at coloured candles on a chart, start looking a little bit deeper into price
action and begin to understand the order flow that’s going on behind the scenes
that is responsible for the creation of those candles. These basic thoughts and
ideas will likely give you an edge.

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
How to draw bases with Engulfing, Piercing and Harami
patterns
31st March 2014, 01:45 PM
In previous lessons you have learnt about extremes (valleys and peaks) as well as
continuation patterns (CP’s). All these formations have a base or price action in
common. Furthermore it is important not to confuse candlestick patterns with a
continuation pattern. The former is a Japanese price action formation, the latter is an
expression mostly used in this supply and demand strategy. A CP is made of Japanese
candle pattern, if you are using candlestick charts, all formations will actually be
made of them.

First of all, let's first define what a base is but also keep in mind that bases almost
never present themselves as textbook structures, below are features we should be
looking for when trying to locate bases (pauses).

A base consist of:

1. A single 50% candle
2. Up to 6 50% candle’s (not more)
3. A Marubozu candle (very rare formation, a tight base with no wicks or almost
not wicks at all). There are a few different Marubozu candles, the white and
black Marubozu are giant. We only will take into consideration the small
Marubozu type
4. A series of 50% basing candles and non 50% candles
WHAT IS A DISTAL LINE AND A PROXIMAL LINE?
An area of supply or demand is not just a single price/line (like classic
support/resistance), but a zone/area composed of a number of pips. The highest part of
that (rectangle) is the distal line, that is, the highest price in the zone. The lowest part
of that rectangle is the proximal line, which is the lowest and the closest to current
price.
• The closer we are to the a supply area, the better for selling and/or exiting your
long positions
• The closer we are to the a demand area, the better for buying and/or exiting
your short positions
We use these patterns to draw based: engulfing patterns, piercing patterns,
haramis, morning/evening stars and marubozu patterns (read below). High wave
candles, wicky candles, failed ERC candles are not used to draw demand areas. We
need a clear base and pause in the market.

As guideline, the cleaner (not many wicks) a base looks the stronger it is. We want to
see tight price action, with explosive moves. However keep the reality of the markets
in mind – this is more an exception than the rule.

IMPORTANT: There are times when zones will have no basing candle at all or even
an ERC candle. They are not as common but they can still be valid zones nevertheless.
We must read price action and score the zone (consolidation away, 2:1 imbalance
etc), together with a top down analysis in order to evaluate its tradability.
There are unfortunately many different looks and shapes for basing zones. These
looks will vary depending on which markets you are trading. There are differences
between Forex candlesticks patterns and Shares, Equities, Commodities. There are
rules for scoring a base or a CP which is already covered in this lesson. This lesson
will focus on three very well known candlestick patterns which are very common in
supply and demand, those patterns being valleys, peaks and CP patterns.

NOTE: In order for us to draw a base we don't include the highs (wicks) of basing
candles to draw a demand zone or the lows (tails) for a supply zone.

Later on when you have gained enough experience with a lot of screen time you may
decide to draw the level wider if the level is not too wide to have a bigger area to
ensure that you get filled in a trade but for now we have to keep it by the rules laid
out.

I am sure that this website is not the first point you come into contact with trading and
you should have read some books before, You will have noticed that reality never
really keeps lining up with things mentioned in books. Formations and candles that
look so nice and easy to read in books seem completely different on a chart that you
look at every time you open your trading platform. Unfortunately the reality of
markets is that they hardly provide us with the perfect looking candle, formation or
for this matter a base every single time, in fact, they almost never do. There are many
nuances we need to take into account so you better get familiar with this harsh reality.

In order to draw a correct base we first need to learn how to read price action candle
by candle. Luckily there are a few well known candlestick patterns that can
consistently provide high odds trading opportunities but as mentioned before they
come in varying different shapes and sizes.

Find below the most common candlestick patterns we will be using to draw our bases
that are the launching pad for imbalances. These formations are slightly different in
Forex and Stocks, please make sure you read about these formations, google them and
learn their nuances.

A candlestick pattern is useless if its location is not correct, where it happens is

the most important variable.
• Engulfing (two candlesticks formation). Last candle closes below/above
previous candles’s open/close.
• Piercing (two candlesticks formation). We could say the piercing pattern is a
failed Engulfing pattern, price fails to close above/below previous candle's
open close by a few ticks. Bearish piercing is also known as 'dark cloud cover'
• Haramis. (two candlesticks formation). One bullish/bearish candle and then
basing candle
• Spinning tops (more than one candlestick). The candles have a small real
body. The upper and lower shadow are almost equal
• Morning stars (bullish) and Evening stars (bearish). They are both a three
candlestick pattern. Morning stars have a strong bearish ERC candle, then a
small basing candle followed by a bullish ERC candle
• Dojis (single candlestick). Same open and close price
If I had to choose one pattern or candle that has the most significance it would be
the Bullish and Bearish Engulfing patterns, as they are the building blocks of
potential future trend, which you will realize in future lessons.

WATCH THIS VIDEO

This short video shows you a few examples of the most common candlesticks you can
find at imbalances. The video does not discuss the validity of imbalances, it focuses
only on the candlestick formations, nothing else.

IMPORTANT NOTICE: I didn't invent these candlesticks names, they were chosen
a long time ago by those who created and translated these patterns from Japanese, you
can call these patterns haramis, piercing, Tetris, or XYZ, it doesn't really matter. They
are all part of peaks and valleys, swing highs and lows, and pauses (CPs), that's all we
want and need to know. You can call these patterns any name, that will not affect your
trading decisions or understanding of the rules, it's just irrelevant. We just need to
understand what is going on at these swings, their names won't change what is going
or what could possibly happen at those formations. My mother will still be my mother
no matter how I call her, the same applies to these patterns. Do not get obsessed with
these candlestick patterns, you must understand what is going on at
valleys/peaks and CPs, that's all, you must understand the logic behind it. If the
definition of these candlestick patterns slightly differ from what you've learnt or
understood so far, please don't lose any sleep over it, it's just irrelevant. Be flexible
and try to understand the logic and dynamics in these patterns, and what is even more
important, where these candlesticks are happening.

In this lesson we will be focusing on the three most common candle patterns we see
on a base, these are “Engulfing patterns, Piercing patterns and Haramis”
WHAT IS AN ENGULFING PATTERN?
What are engulfing bars? The engulfing bar formation consists of at least two candles,
where the second candle completely engulfs the previous one. Second candle closes
below/above previous candles’s open/close. The signal that the engulfing bar
formation provides is, depending on whether the second bar is bearish or bullish,
either a reversal or a continuation.

Engulfing patterns like all candlestick patterns have many different looks and as
a rule of thumb an engulfing pattern is defined as a candle that closes higher
than the previous candle’s body high (bullish engulf) or lower than the previous
candle’s body low (bearish engulf). If it closes above the high rather than above
the body or below the low rather than below the body, then the engulfing pattern
will even be stronger. The candle that engulfs the prior candle shouldn't be a
50% candle.
• We need at least one candle at the base. If the pattern is located at a higher
Timeframe Supply/Demand Zone makes gives this pattern an even higher
probability of success
• As mentioned above, the ERC candle needs to engulf (close above) the
previous candle's body. The shadows (tails and wicks don’t need to be engulfed
but if that happens as well then even better). Of course the opposite is true for a
bearish engulfing pattern
• More than one candle can be engulfed, however one is the minimum
requirement
• If the proceeding candle has a tight base and is not a 50% candle gives the
pattern more odds
• As highlighted before the engulfing candle should be an ERC candle not a 50%
candle with a solid body
You can find more information on these patterns by getting a copy of one of
the many Steve Nison's books on candlestick patterns. Be careful though, you
can get lost among so many different formations, you might fall into a trap, in a
never-ending loop where obsession will kick in and you will see reversal patterns
everywhere on the charts. We just need a few so don't panic

Engulfing patterns are very common on CP´s (Continuation Patterns), as well as

Marubozu candles (tight non-50% bases with no wicks or almost no wicks)
HOW TO DRAW ENGULFING PATTERNS IN A MECHANICAL WAY
Bullish engulfing pattern taken as an example
1. Locate a basing area where price has created a good imbalance
2. Find a bullish ERC candle that closes above basing bars
3. Bullish candle must close above previous candle's open/close (candle's body)
4. If there are several candles at the base with similar open/closes around the same
price area then the engulf could cover all of them
5. If one of those basing candles is at a different "height", above the previous
basing engulfed candle then skip them and only take into account the ones at
the same level
6. The proximal line will be right at the open/close of the first engulfed candle or
further back in time if there is no candle closing above/below the first engulfed
candle's range
7. The distal line will be at the lowest low of the engulfing pattern (no matter how
many candles there are on the left)
8. The engulfed candle can be either a 50% candle or a non 50% candle
Once you find a basing candle or an engulfing candle closing above/below previous
candle's high/low (depending whether it's demand or supply), we should stop looking
for bases and draw our proximal line. Once price breaks and closes away from the
basing area the new basing candle won't be considered as part of the base since it's at a
different height.
HOW TO USE THE ENGULFING AND PIERCING PATTERNS
1. They are the building blocks of a trend
2. They usually happen at the end of an uptrend/downtrend
3. Engulfs can also be momentum candlestick formations, when that happens a
new trend will be under way
4. Engulfs usually happen at higher timeframe supply and demand zones
5. They can happen at flip zones and previous SR/SD zones that are being
revisited. Engulfs are very common on CPs as well. When we see engulfs at
flip zones, price might be getting ready for a bigger retracement or even a
reversal
6. Don't use engulfs in the middle of nowhere, these patterns are good reversal
candlestick patterns but they need to be at bigger timeframe zones for higher
probability trading
We will look at piercing pattern a bit further below.
PIERCING PATTERNS

These two patterns are similar to the engulfing pattern covered above, the main
difference is that the new candle never closes above/below the previous candle's body.
The dark cloud cover is also a reversal pattern. We could say the piercing pattern is a
failed Engulfing pattern, price fails to close above/below previous candles open close
by a few ticks. Bearish piercing is also known as 'dark cloud cover'

The Piercing Pattern = Dark Cloud Cover

• Piercing pattern = demand reversal pattern
• Dark Cloud Cover = supply reversal pattern
HARAMIS

Haramis are candlestick patterns in which a large candlestick is followed by a smaller

candlestick whose body is located within the vertical range of the larger body.
Haramis can be bullish or bearish and can be a sign of a potential reversal of the
current trend.

Tweaking and extending the proximal/distal lines of a level

There are times when the proximal and distal lines of a base can be tweaked, for
instance when there is a single basing candle (not a wide one) or we have several low
volatility candles at the base without long wicks.

Remember you can be flexible as long as you always keep the same risk, the wider the
level the smaller the lot size, the narrower the bigger the lot size. Experience will tell
you when you should be extending the proximal lines and cover the upper of lower
shadows. As long as you use the same risk per trade it will be fine.

Check out the short 5 minutes video below which explains when it's advisable to add
the wicks to the base of a potential zone Read the full content in this link
22nd April 2016, 07:15 AM
Find below a couple of scenarios on how to draw the based for imbalances based on
the three main candlestick patterns we use. These are just two scenarios. Rember that
basing will happen in many different shapes, you have have up to 6 candles at the
base, shorter/longer wicks, multiple candlestick formations, etc. Each base is different
and as such it should be treated indepenently.
• Engulfing patterns
• Piercing patterns
• Haramis

ENGULFING PATTERN
PIERCING PATTERN
HARAMI

17th January 2017, 10:39 AM

HOW TO DRAW BASES THAT HAVE A SINGLE CANDLE AT THE BASE

When bases are made of a single candle, there are two options we can use to draw
them:

1. Using the closest open/close of the basing candle

2. Using the upper/lower shadows (wicks) of the basing candle. Use this option when
the candle is not very wide and it's not a failed ERC candle

Both options are valid. Price often reacts to the wicks, think of them like a magnetic
field having a range of attraction or an aura.

Be flexible. Experience and screen time will tell you when you can draw one or the
other, or just choose one option and always draw the single candle bases the same
way. Remember that making zones wider will affect the risk reward and profit margin
of any trade you plan at those areas.
This rule also applies to scenarios with more than a single candle at the base, however
candles bodies must be tight and upper/lower shadows should not be very big, always
avoid failed ERC candlles

The minimum RR is measured from the level's proximal line. If the level is made
of a single candle at the base we are allowed to take the upper and lower wicks of the
basing candle, however the 2:1 imbalance will be measured from he highest
open/close at demand, and the lowest open/close at supply. In example below
(AUDUSD W) the RR is measured from proximal line option #1, optionally the level
can be drawn wider covering the upper wick.
How to draw trendlines methodically
9th May 2016, 02:00 PM
You are probably aware that there are multiple ways to draw trendlines, the one at Set
and Forget is just one of many methodologies to draw them. Drawing trendlines is not
and should not be an art. Obviously it takes a while to master this any methodology. It
would be an art if everyone had their own unique way of drawing trendlines or you
didn't have strict rules on how to draw them. There is no perfect way to draw
trendlines and it seems that no one out there can agree on the best way to draw them,
but here at Set and Forget we do have very specific rules draw them methodically and
mechanically.

Any rules set should be as methodical and mechanical as possible, rules should also
be objective, that is, anyone out there having learnt the same rules should be able to
draw them the same way. This does not happen always, why? Because trendlines
connects swing lows and swing highs as well as pauses in the markets, these swings
are made of price action like any other pattern. Why am I saying this? If you are not
good at reading price action, you will probably start thinking that trendlines can be
drawn in different ways, but it is not the case. There are scenarios where drawing
trendlines will be very difficult due to lack of clear impulses, compressed price action
or even swing lows (valleys) that also look like a pause (CP). There is a full lesson on
how to distinguish this 'hybrid' price action (read the lesson here it contains some
hours of videos).

However, if you are just starting or coming from other strategies, you will probably
struggle with drawing trendlines. The obvious trendlines are just obvious, but
sometimes they are not so obvious because the swings that the trendline need to
connect are made of unclear price action that could become much clearer if you read
price action slowly, if you read every single candle that makes the swing you want to
connect the trendline with. You must speak out loud and read every candlestick in
order to get the right answer, otherwise you will probably be making quite a few
mistakes. Read each and every candle out loud like "rally, base, drop, base, rally...." if
you happen to find an area where candlesticks are not that clear, you might have
found one of those unclear scenarios mentioned above. Skip or ignore that, ask other
senior members for advice on how to read it. You are part of a community, make use
of it and ask please.

Reading price action is key to understanding supply and demand and drawing
trendlines. It takes time and some skills to make reading price action second nature.
Do not despair, it's just the way it is in any field of life.
WHAT IS THE PURPOSE OF DRAWING TRENDLINES?
1. Identifying potential reversals. We don't need an opposing zone eliminated in
order to draw a trendline, trendlines can also be used as confluences. If an
opposing zone is eliminated then we'll have the trendline will have helped us to
identify a new trend as explained in the Trend lesson
2. Connecting the last two bullish or bearish impulses on every timeframe of
our sequence
3. Learning as soon as possible when opposing impulses are being created on
timeframe X, if that happens we must lean on timeframes higher than the one
where we start seeing opposing impulses. If the trend is down and bearish
impulses are being created, what would you think if the next impulse is bullish
and stronger than the last bearish impulse? Wouldn't you think the market
dynamics for that timeframe are changing? Exactly. That's the reason why the
trendlines are drawn like this and why we use a sequence of three timeframes
and the realignment concept (you will learn about these concepts later in further
lessons)
4. The break of a trendline with a full OHCL will create a potential
imbalance. Read more about it on the lesson on how an imbalance is created
5. Using trendlines in combination with multiple timeframe analysis and the
sequence can give you the exact point where a new trade setup can occur.
6. Trendlines can signal the the continuation of a trend if respected, or a reversal
or a bigger pullback to bigger timeframes if broken
We'll need at least two touches of the trend line connecting the latest two obvious
valleys and peaks (swing lows and swing highs), the more touches the TL has the
more structured, mature and powerful the trendline and trend will be.

The attachments below explain a methodical and objective rules set that will allow
any trader to draw trendlines the same way. By doing so we'll all be looking a the
charts with the same eyes and drawing the same trendlines.

Examples below describe how to draw bullish trendlines, the exact opposite
would also apply to bearish trendlines. These rules have been tested over a long
period of time and account for hundreds if not thousands of hours of back test and
forward test, I did not come up with them because I thought it was a nice way of
drawing trendlines or I was bored
RULES TO DRAW A BULLISH TRENDLINE CONNECTING THE LAST
TWO VALLEYS
• Always connect the latest two valleys to draw a bullish trendline
• There is no criteria for a "1st peak" other than meeting the definition of a peak.
A bullish trendline isn't a trendline just because two valleys are present. The
second valley's high must be higher than the first valley's high and the first
valley's low must always be lower than the second valley's low forming a W
tilted to the left
• Second valley’s second leg (impulse 2) has to make a higher than first valley’s
second leg at P1.
• Once price makes a higher high than P1, Valley #2 will be confirmed.
• Draw a bullish trendline by connecting last valley (V2), go down and left and
connect it with previous Valley at V1.
• Valley 2 should never make a lower low than Valley #1. Valley #3 should
never make a lower low than Valley #2
• If price makes a new new Valley, we’ll need to adjust the trendline and connect
Valley #2 and #3, we must always update trendlines and connect the latest two
valleys.
CONTINUATION PATTERNS (CP) CAN’T BE USED TO CONNECT A
TRENDLINE. OVER-EXTENSION
• Continuation Patterns (CPs) won’t be used to connect trendlines. We will only
use valleys and peaks.
• It’s possible to see CPs before a new valley is printed (CP1). They will be
irrelevant to drawing trendlines since we are not allowed to use them to connect
trendlines.
• We’ll only use CPs to draw a more aggressive trendline when 3 or more
consecutive CPs have been created (CP 2, 3 and 4) creating over-extension

WHEN OVER-EXTENSION IS RESETTED

• If price has been printing 3 or more consecutive CPs, we’ll consider that
timeframe as over-extended
• If after a series of consecutive CPs price creates a new valley, over-extension
will be resetted and we’ll be allowed to draw a new trendline connecting latest
two original valley V2 and the new valley resetting over-extension (V3)
AUDUSD D1 OVER-EXTENSION RESET
Find below an example for an over-extension reset.
• Aggressive trendline in red could be drawn after three consecutive CPs.
• Over-extension is resetted when there is a new valley, the reset happened at the
new D1 valley at #4. The valid trendline is now the blue one.
The video below shows step by step how to draw and use trendlines to assess trade
direction with supply and demand levels.

There are many different ways to draw a trendline, far too many I would say and they
are all probably good for those who have mastered those methods. However if you ask
any two traders to draw a trendline, you will probably see them drawing trendlines
very differently.

We can’t lean on subjectivity in our trading plan because it’s all about capital
preservation, we can’t depend on subjectivity to risk our hard earned money.

HOW TO DRAW A TRENDLINE?

• Connect the latest two obvious valleys (swing lows) and peaks (swing highs).
These valleys and peaks must be clear and obvious, it they are not, consider
them as pauses. If they are not clear, basing should be unclear and poor and
 removal would be expected anyway. As you gain more experience reading
price action, you will see valleys and peaks that you could not see before
• Update the trendline every time there is a new valley or peak
• Each timeframe has its own trendline independent from other timeframes and
this is where subjectivity comes in in other methodologies
• Continuation Patterns (CPs) will not be used to connect trendlines unless
there are 3 or more (over-extension)
• Never ever cut through candles. That is, the trendlines cannot go through
wicks or candlestick bodies, you must connect the latest peaks and/or valleys
meticulously making sure you are not cutting through the candles, neither
wicks nor candlestick bodies
HOW TO DRAW A BULLISH TRENDLINE?
• Locate current price and the highest high closest to current price
• Move down and left and locate the last clear valley. That will be our first valley
• Continue to move down and left, and stop when you see another valley lower
than previous valley, that will be our second valley
• Connect the two valleys with a bullish trendline
• Update the trendline every time there is a new valley whose second leg out
makes a higher high than the upper valley’s second leg high
HOW TO DRAW A BEARISH TRENDLINE?
• Locate current price and the lowest low closest to current price
• Move up and left and locate the last clear peak. That will be our first peak
• Continue to move up and stop when you see another peak higher than previous
peak, that will be our second peak
• Connect the two peaks with a bearish trendline
• Update the trendline every time there is a new peak whose second leg out
makes a lower low than the upper peaks ’s second leg low
WATCH VIDEO BELOW

17th January 2017, 10:01 AM

EXAMPLES ON HOW TO DRAW TRENDLINES

We must connect the last obvious valleys and peaks. How do obvious ones look like?
Obvious ones are obvious As simple as that. If it's not obvious then consider it a
pause.

Let's draw step by step trendlines connecting the latest two valleys and peaks using
AUDUSD weekly chart as an example. After applying the rules by connecting the
latest two obvious valleys and peaks, the AUDUSD W chart ends up like this.

STEP 1:
• #1 and #2 are connected by a bearish W trendline, the break of this TL creates
demand at #4
• Green trendline cannot be drawn because peak #2 cannot be connected with
peak #5. Why? #5 didn't make a lower low than the lowest low made by peak
#2

STEP 2:
 • Peaks #1 and #2 are connected by a bearish W trendline, each peak is made of a
bearish engulfing pattern. The break of this TL creates demand at #3.
• #4 is the long entry at the retest of new W DZ.

STEP 3:
• Valleys #1 and #2 are connected by a bullish W trendline, each valley is made
of a bullish engulfing pattern. The break of this TL creates supply at #3.
• Supply at #3 is a fresh level, price had never retested it, whereas demand at #1
is considered to be tested.
STEP 4:
• Peaks #1 and #2 are connected by a bearish W trendline. The break of this
bearish TL creates W demand at #3.
• Both W SZ at #1 and W DZ at #3 are fresh since price has never retested those
imbalances.
AUDUSD WEEKLY CHART -- END RESULT --
After connecting the last two obvious valleys and peaks on AUDUSD weekly chart,
we end up with 3 demand levels at #1, #2 and #4, and one supply level at #3
When a potential imbalance is confirmed as a zone?
30th April 2014, 10:50 AM
Before we begin this lesson I want to warn you that in this lesson you will come
across topics and references that have not been taught yet and will only make sense to
you if you have completed the lessons later in the course. Unfortunately it is not
possible to teach each topic in full sequence. I therefore have marked topics which are
taught in later lessons with this symbol * so that you feel reassured and not confused.

As you might remember from the introduction section of the classroom I have stated
that you need to go through the lessons and the course several times to completely
absorb the material, this is one of the reasons.

So if you have just started out please do not get confused and try to absorb the regular
topics and do not focus on the marked lessons as they could confuse you. Later on
when you have finished the course in its entirety and you go for the second round
things will become very clear to you. Finally – do not trade live until you have
grasped everything even the marked sections in its entirety. When trading on demo do
not get disheartened when things do not work out because the marked sections are
needed for the full picture!

An impulse, bullish or bearish, is merely a potential supply or demand zone. All

imbalances are made of impulses but not all impulses are necessarily an imbalance.
These impulses sometimes might also be referred to as an unconfirmed supply or
demand zones. The concept of differentiating between imbalances and valid
supply/demand zone is unique in set and forget's methodology.

In this lesson you will learn how to confirm an impulse as a valid supply or demand
zone (imbalance).

IMPORTANT: I want to make the following statement absolutely clear to you.

Having a confirmed imbalance does not necessarily mean that we can use it to plan a
trade! In other words, under no circumstances should you place a trade just by the
information you have received so far alone and basing your analysis on a single
timeframe. In further lessons you will start putting more pieces of the puzzle together,
one of these missing pieces is the tradability of a level.
A POTENTIAL IMBALANCE IS CREATED UNDER TWO SCENARIOS

Both a potential imbalance and an imbalance itself are made of impulses, bearish or
bullish impulses.

Every imbalance is made of an impulse, but not all impulses become

necessarily an imbalance.
For this reason, all impulses remain as potential as long as they do not
accomplish anything. These accomplishments are very simple, there are only
two:
1. A potential imbalance takes an opposing imbalance out
and / or
2. A potential imbalance is created if price breaks a trendline with one
or more full OCHL candles. This trendline must connect the latest 2
peaks/valleys or 3 or more consecutive CPs (Continuation Pattern)
Both scenarios can happen at the same time, which is why I am using the
AND/OR Boolean statement in the rule above. As long as only one criteria is
met the imbalance will be confirmed.

Please also note that in a further lesson you will learn how to draw valid
trendlines, which should help you with criteria 2.
o An imbalance that takes an opposing zone out is stronger than one
that only breaks a trendline
o An imbalance that takes an opposing zone out and breaks a trendline is
stronger than one that just broke a trendline
Imbalances can be differentiated in the following way:
o Potential (Peak, Valley, CP): all of them are potential imbalances,
nothing more nothing less, an area where you could draw potential areas
of interest
o Confirmed demand supply zone: imbalance that broke trendline or
took an opposing zone out. It's confirmed, a top down analysis and
scoring is needed
o Tradeable demand supply zone: the imbalance will be tradable once
it's being scored, this includes multiple frame analysis and the core
realignment rule
1. AN OPPOSING IMBALANCE IS TAKEN OUT
It's crucial to understand this principle as it is the core rule of the methodology.
Let's use an analogy so it can help you to better understand this key concept.

Think for a moment of an imbalance as 2 middleweight boxers in a boxing

ring. The combat starts, who wins? The one that punches his opponent 10 times
on the head or the one that knocks him out for 10 or more seconds? Obviously
it is the one that knocks his opponent out.

Higher probability supply and demand zones work the same way, only when
demand (middleweight boxer #1) knocks supply out - KO - (middleweight
boxer #2), can we consider that demand has been validated. Why? Because the
buying power of the imbalance managed to absorb the opposing supply's
selling power. It's a game of power, the one who wins has a higher probability
of holding if the trend goes in its direction.

* Now imagine middleweight boxer #1 (daily imbalance zone) actually fights a

heavyweight boxer #2 (weekly supply/demand zone) what do you think now of
Boxer #1? He is tough as a cookie and strong as hell, otherwise he would not
have been able to knock out the heavy weight boxer. The likelihood of
this happening with one punch however is slim.

An important note about this concept:

o Price making a higher high or a lower low does not validate a
zone. An imbalance also needs to take out an opposing zone, unless it's
an all time highs/lows scenarios where there are not opposing zones to
be taken out.
o A zone is taken out within an opposing higher time frame zone. If
there is a H4 demand zone that took out an opposing H4 supply but that
H4 supply is within a D1 SZ or bigger timeframe SZ, the removal of the
zone does not make the demand zone tradable, it’s way too high and
we’ll need the D1 supply to be taken out instead. The same applies with
a D1 demand zone having removed an opposing D1 supply zone but that
supply zone is located within a WK supply zone. Price is fractal, the
same rules apply to all timeframes and sequence combinations.
FOOTSIE UK 100 INDEX
Weekly SZ #1 was taken out by W DZ at #3 by a couple of ticks at #2.

Imbalances can be overshot by as little as 1 pip or tick, creating opposing imbalances.

2. POTENTIAL IMBALANCE BREAKS A TRENDLINE WITH A FULL OHCL
CANDLE

An imbalance (potential supply/demand zone) is also confirmed as valid demand or

supply if it causes the break of a trend line with one or more full OHCL candles. All
an OHCL candle means is that for a trendline to be considered broken the "entire"
candle must be on the other side of the line, without touching the trendline. All of its
parts. Not some parts on one side and other parts on the other side.
An opposing zone does NOT need to be taken out in order to validate an imbalance
that breaks a trendline with a full OHCL candle.
Let's use an example to illustrate this scenario. Price moves down creating supply
zones while taking out demand zones (remember the first criteria) we will have a clear
downtrend by drawing a down trend line (which you will learn in a further lesson).

If price for some reason, known or unknown to us, breaks this trend line it signifies
that “something” in market dynamics has changed otherwise it would not have done
so. In this example “something” means that sellers are losing steam, price starts to
rally for no apparent reason. Why is this happening? You do not know and you do not
have to know. It could be that sellers take profits or buyers could see prices as
favorable as a result of a news event etc. If the TL is broken a new confirmed demand
zone is created. If the scenario above had played in an uptrend a new demand zone
would had been created.

A break of a trend line normally happens when a Higher time frame supply or demand
zone is tested for the first time or even a second time, which is why we don't trade
against HTF zones until they have been removed.

So the rules are:

• When a Trendline is broken, the imbalance that caused the break of the
TL will be automatically validated as a valid demand/supply zone even if
an opposing level has not been removed. Will it automatically be a tradable
zone? No! Only by learning concepts taught in later lessons such as “Multiple
timeframe analysis” together with the Sequence and Realignment rules as well
as tradability rules
• * This new level will be tradable as long as an opposing HTF zone is not being
tested and gains control. That is, if an ascending WK TL is broken and a
bearish engulfing pattern is confirmed as supply (it broke the TL), it will be
tradable as long as a HTF MN demand zone does not gain control
• *A level created after a TL break is valid as long as it does not reach an
opposing level and that opposing level takes control without being taken out
 * Potentialimbalances won't be considered valid zones to be taken into account
for trend analysis, we want real SD zones to be taken out not just potential
zones that have not complied with core rules #1 and #2"

THE LIFE OF A POTENTIAL IMBALANCE

Supply and demand imbalances are made of impulses but not all impulses
become imbalances.
Every impulse will be tagged as potential unless they accomplish something 1)
breaking a TL, 2) Revoming opposing zone or 3) Printing all time highs or lows and
consolidating away.
• A potential zone (supply or demand) is where price is in relative equilibrium.
Price ranges, moving up and down in the same area
• When price moves away from the zone and achieves something, (in the case of
our rules this would be either the break of a trendline with consolidation away
or the break of an opposing zone with consolidation away) we have an
imbalance; a valid zone. This may be because a lot of one sided orders come
into the market and drive the price up or down, or, because the other side of the
market has withdrawn its opposing orders, paving the way for easy access. Or
both.
• Orders remain in the area of the (e.g. demand) zone once price has left due to
orderflow dynamics, i.e. demand orders are still present. If it is a tradeable zone
(2:1 etc, the scoring lesson goes deeping on this matter) there will theoretically
be lots of orders. When price travels back to that area (as potential supply) it
has to overcome the now opposing zone in order to break through completely
and become valid supply.
• The first time price hits a good zone it is likely to retrace (pushed back) due to
the waiting orders described above and because traders also enter the market
here. This knowledge is used to base various trade setups. Sometimes price hits
a zone several times, penetrating it deeper and deeper, but does not 'take it out'
or eliminate it completely. If you have seen Space Invaders, this is like where
one of your bases is under attack, it gets smaller and smaller each time.
• When price has completely penetrated the zone, by just one pip or more, the
zone is considered to be eliminated. Meaning that the opposing orders have
been fully consumed. You now have a new supply zone.
AUDUSD WEEKLY CHART
• Weekly demand at #1 created after the breaking bearish trendline connecting
last two peaks.
• Weekly imbalances at #2 #3 created once previous trendlines connecting last
two peaks and valleys were broken.
EURUSD DAILY CHART
Daily demand at #1 created once the bearish trendline is broken. Daily supply at #2
caused the break of bullish trendline and removing D1 DZ at

Watch this 10 minutes video for a more detailed and visual explanation of the
core rules

Tradeable versus non-tradable zones

A valid zone at any given timeframe is only tradable if it complies with the multiple
timeframe analysis and the Sequence rules
• A valid H4 demand zone that took out valid H4 supply zone will be valid if it
follows the Sequence rules. We're always talking about higher probability
setups
• That valid H4 DZ could be created right underneath a valid D1 supply zone and
WK supply zone, with a clear weekly downtrend. What do you think is going to
happen to a small H4 DZ against a WW/MN supply zone in a downtrend? It
will have very low odds and will most likely be easily removed
 • If the trendline break happens when a bigger TF zone than current TF gains
control, this new imbalance will be considered a WoW trade

30th April 2014, 11:23 AM

New potential imbalance is created when the opposing zone is taken out
Ambuja Cement Indian NSE Stock, new Weekly Demand zone created after removing
opposing tested Weekly supply zone
#3

30th April 2014, 11:34 AM

A new imbalance in created when a Trendline is broken
• If the new imbalance causes the break of a trendline with at least one full
OHCL candle, it will automatically be considered a brand new zone
• All an OHCL candle means is that for a trendline to be considered broken the
"entire" candle must be on the other side of the line, without touching the
trendline. All of its parts. Not some parts on one side and other parts on the
other side.
• If the trendline break happens when a bigger TF zone than current TF gains
control, this new imbalance will be considered a WoW trade
• There is no need for the opposing zone to be taken out if we have hit a bigger
timeframe zone than our entry timeframe
#APPLE MONTHLY DEMAND
New monthly demand created on Apple once the bearish trendline has been broken by
one or more full OHCL candles consolidating away. The six candles contained within
the circle at [2] are the consolidation away needed to confirm the monthly demand at
the origin of the move at [1].
EURUSD DAILY CHART
Daily demand [1] is created once the bearish trendline [3] is broken with at least one
OHCL candle, those inside the circle at [5], there are more than 10 candles that are on
the other side of the trendline. Daily supply [2] is created when there is at least one
OHCL candle closing outside the trendline at [4], the candles inside circle at [6] and
those created lower are the OHCL candles needed to confirm supply. Daily supply [2]
is also responsible for eliminating tested demand at [1].
#4
5th February 2015, 01:27 PM
VALIDATION OF POTENTIAL IMBALANCES AT ALL TIME HIGHS AND
LOWS

There are times when there are no opposing zones to be taken out because price is
making all time highs or lows. Under these circumstances, potential imbalances
obtaining a high score with the main odds enhancers described in the lesson on how to
score a level will be automatically confirmed as imbalances.

Remember it's mandatory to have consolidation away for an impulse to become an

imbalance.
• Consolidating away with at least 1 full OHCL candle. Consolidation away is
mandatory otherwise the impulse will be considered as a balance and not an
imbalance
Scoring is critical to validate potential imbalances. Look for these features to trade
validated imbalances at all time highs/lows scenarios:
• A minimum of 2:1 imbalance, more than 2R will be much better
• Good base. Stay away from wicky bases or too many candles at the base
structure
• Watch candle closes on Monthly and Weekly charts. Professionals love
fishing at all time lows/highs because they know many breakout traders will be
trading the breakout. These traders are what they need to fill institutions' orders
that were lurking in the dark. Ideally wait for at least a brand new MN/WK
imbalance which close above all time highs/lows
#MO ALTRIA US STOCK WEEKLY CHART AT ALL TIME HIGHS
All time highs scenario on Altria Group Stock. New weekly demand validated
automatically after creating a 2:1 imbalance and consolidating away with a full OHCL
candle circled in red at #2. Once the W candle at [2] closes on Friday, W DZ [1] will
be confirmed and validated as a tradable demand level.
DOW JONES INDEX WEEKLY CHART AT ALL TIME HIGHS
Both weekly Continuation Patterns (rally base rally, or pause) are made monthly
uptrend and breaking all time highs. In all time high scenarios there is no supply to be
taken out, demand levels are confirmed once new impulses consolidate away and
provide a minimum 2:1 RR imbalance like those at [1] and [2].
UK FOOTSIE INDEX WEEKLY CHART AT ALL TIME HIGHS
UK Footsie Weekly chart. Weekly supply [1] was taken out by weekly demand [2]
when it overshot it at [4]. New weekly demand [2] consolidated away with several full
OHCL candles at [4] and retraced to [2] again for an entry.

This is an all time high scenario, there is nothing to be removed above [4] therefore W
demand [3] is validated once it creates a 2:1 RR impulse and consolidates away.
The Chain, integrating imbalances and trendline breaks
24th January 2017, 09:49 PM
As described in a previous lesson a potential imbalance is created once

• An opposing imbalance is taken out

• A trendline is broken with one or more full OCHL candles, refer to
previous lesson for more information.

The idea behind drawing a trendline by connecting the last two valleys and
peaks is to connect the latest two impulses (bullish or bearish). If we start seeing
impulses in the opposite direction then the dynamics for that timeframe in particular
will probably be changing and we should lean on a bigger timeframe before we start
trading in the same direction where the last impulses happened, these concepts are
the core of the realignment rules that can be read further in the Classroom lessons.

By drawing the trendlines as explained in the trendline lesson, we are making sure
that we'll be connecting the latest impulses in any direction, bullish or bearish. We
must do the same for every timeframe in our sequence in order to apply the
realignment rules, a single timeframe is not enough to make a trading decision.

By combining the two core concepts on how imbalances are created (trendline break
and opposing zones being removed) we will start seeing how these impulses start
losing steam and give birth to opposing imbalances that create an opposing force
(impulse) against the last two obvious impulses.

PRACTICE AND PRACTICE: it's very important that you put these rules into
practice so that you gain confidence in the methodology. Reading analysis submitted
by other supply and demand traders helps a bit but the accomplishments in your
learning process will only happen when you do your homework and your brain starts
to create habits and patterns based on these rules.

THE CHAIN

There is a relationship between the trendline break connecting the last two impulses
and when an imbalance is created. We will be referring to this relationship as the
Chain from now on. This chain connects both core concepts and provide us with a
very objective methodology to locate potential tradable imbalances on any price
chart and timeframe.

In the following examples you will see how this chain is formed. These rules apply
to any market and timeframe, these two core concepts and rules provide us with
mechanical rules to locate potential imbalances to lean on on our trading. It's very
important to bear in mind that all these imbalances have the potential status. A
potential imbalance will be validated once we apply the realignment rules (more
about this concept in a further lesson), score the levels and put these levels into
context in a bigger picture trend made of at least three timeframes.

DOLLAR INDEX WEEKLY CHAIN

• Demand at #1 is taken out by supply at #6

• Bearish TL connecting peak at #6 and previous peak creates a new demand
zone at #5
• Demand #5 is taken out by supply at #7
• Bullish TL connecting #10 and #11 creates a new supply level at #8 which is
taken out by DZ #3
• Demand at #2 is created when previous bearish TL is broken

FACEBOOK US STOCK D1 CHAIN

• D1 SZ #1 is taken out by D1 DZ #4
• D1 DZ #5 is responsible for breaking previous D1 bearish TL connecting the
last two peaks
• D1 SZ #2 breaks previous bullish TL. Higher highs have to be covered at the
extreme of the previous TL break
• D1 SZ #3 takes out opposing tested D1 DZ #4
• D1 DZ #6 breaks bearish TL right at a previous D1 DZ #5 which has held a
few retest
• D1 DZ #7 was created after taking D1 SZ #3 out
AUDNZD 3 MONTHS CHAIN

The supply and demand chain is fractal, it works on any timeframe as long as we
apply the trendline rules connecting the last two valleys and peaks. Below an
example for a 3 months chain where new imbalances are created one the 3 months
trendlines are broken

• Supply #3 is created once previous bullish TL has been broken, strong

reaction towards 3M DZ at #1
• Demand #1 is the one created when previous bearish TL is broken, it's the
pullback from previous 3M SZ at #3
• Supply #4 is created after previous bullish TL is broken, a level on top of level
• Demand #2 is a fresh and original 3M DZ created after previous bearish TL
break
MOTOROLA WEEKLY CHAIN

• Supply #6 took DZ #1 out, SZ #6 was taken out by DZ #2, strong rally and
price retested DZ #2 strongly
• There was a second retest of DZ #2 at #8 which causes the break of previous
bearish trendline and SZ #7 that broke previous bullish TL
• DZ #3 is created by the break of bearish TL and the removal of SZ #7, retested
a few weeks later. Lower lows have to be covered
• DZ #4 is confirmed automatically since it's an all time high scenario, price
did not pull back and kept on rallying creating another DZ at #5 to which price
did pullback after 6 weeks
USDCAD DAILY CHAIN

• D1 SZ #1 took out by D1 DZ #2
• D1 DZ #3 taken is create by removing a D1 SZ not seen on the chart (it didn't
fit), it's been taken out by D1 SZ #4
• D1 DZ #5 took out D1 SZ #4 and D1 SZ #6 took out D1 DZ #5
• Price dropped strongly and took creating D1 SZ #7 which took out tested D1
DZ #2
• D1 WoW long created at #8 after breaking last D1 bearish TL and taking out
D1 SZ #7
AUDCAD WEEKLY CHAIN

• W DZ #1 created when bearish TL was broken

• W SZ 2 took W DZ#1 out
• W DZ #3 broke bearish TL and was eliminated by W SZ #5
• W DZ #7 removed W SZ #5 at #6 by a couple of ticks
• W DZ #8 is valid as per the WoW rules, it's the impulse at the origin of the
move
• W DZ #9 is demand at the origin of the previous bearish TL break as per the
WoW rules

GBPCAD D1 CHAIN

• Using trendlines connecting the last two valleys/peaks or latest three

continuation patterns allow us to locate new imbalances.
• Firs trendline on the left at [4] is an aggressive trendline connecting four
continuation patterns (drawn as red ellipses). New demand created at [1],
being respected with two retests.
• On the way up, a new supply was created at [2] after solidly breaking the
trendline with one or more OCHL candles. This very strong supply at [2] has
been eliminated by imbalance at [3].
• The longer term picture is bullish, which is why new demand zones are being
respected and supply being eliminated.
SGDJPY WEEKLY CHAIN

• Supply [1] was created once bullish trendline was solidly broken, demand [2]
was responsible of eliminating supply [1]. Once demand [2] was eliminated
supply [3] was created.
• Second middle bullish trendline was broken creating new supply at [4]. Very
strong bullish impulse ended up eliminating supply [4] therefore demand [5]
was confirmed.
The Interchange zone and the continuation patterns
26th January 2017, 08:29 AM
The Interchange zone is the price area created at the intersection of any two
candles, this zone is made of the lower and upper shadows (wicks) of any two
candles on the chart. It's often to see interchange zones where candlesticks have no
shadows or very tight shadows.

Interchange zones can help us identify continuation patterns. In order to identify CPs
we need to apply a multiplier fractal factor in our sequence otherwise the CPs won't
be identified. It's very important that you use the timeframe sequences used in the
strategy because those timeframes are use a very common fractal multiplier.

These interchange zones and CPs are very common when a big timeframe imbalance
or confluence gains control, it's exactly the moment where CPs are formed. A bigger
timeframe gains control, big investors start filling their orders (accumulation and
distribution stages), two or more ERC candles are created and right at the
interchange of those ERC candles the CPs are usually created. By looking at the
charts this way, it will help you tremendously to locate continuation patterns and
plan trades at these imbalances. The interchange zones work best with two ERCs.

By choosing the right timeframes, we will be able to spot continuation patterns easily
by looking at any two candlesticks on any timeframe of our sequence:

• A Weekly CP on a Monthly interchange zone

• A Daily CP on a Weekly interchange zone
• A H4 CP on a Daily interchange zone.
• A Monthly CP on a 3 months interchange zone

The length of these shadows will tell us a lot about one timeframe lower and
what kind of candlestick formations will will find in that lower timeframe.

These are the combinations of shadows that work best to find interchange zones.
These scenarios refer to a combination of two consecutive candles

• Small or tight shadows

• Small upper shadow, no lower shadow
• Small lower shadow, no upper shadow
• Medium upper shadow, no lower shadow
• Medium lower shadow, no upper shadow

The interchange areas in blue have valid shadow formations, upper and lower wicks
are small, tight or one of the extremes have no shadow. The ones in red have very
long shadows, these areas are usually valleys or peaks in lower timeframes.
FACEBOOK WEEKLY / DAILY INTERCHANGE ZONE

The weekly interchange area is usually made of a one timeframe lower D1 CP if the
upper and lower weeks of the bullish candles are not too big. W interchange at #1 is
made of a D1 CP demand at #2
USDCAD MONTHLY / WEEKLY INTERCHANGE ZONE

• Monthly interchange areas at #1, #7 and #4

• #2 and #3 and CPs nested at the Monthly interchange at #1. #1 has tight and
small upper and lower shadows, it's common to see one timeframe lower CPs
in these formations and when price is starting to rally
• Sometimes failed ERC candles are created instead of a tight CP, like at #6.
This one is a failed ERC candle (almost a 50% candle) created at M
interchange #7
• Weekly CP at #5 is created at the Monthly interchange at #4 right before the
Monthly CP breaks out

GOLD DAILY / H4 INTERCHANGE ZONE

• D1 interchange #1 with small shadows is made of a H4 CP SZ at #4. First

retest worked out pretty well
• D1 interchange #2 is made of H4 CP DZ at #5, similar scenario with #3 and
#6
NZDCAD WEEKLY / DAILY INTERCHANGE ZONE

• Weekly interchange zone at #1 contains a D1 CP DZ at #2 created right after

the Weekly bullish engulfing pattern
• Price is reacting to M 20 EMA and W DZ zone to the left. These interchange
zones (CPs) are common in a bigger picture trend and when a HTF imbalance
or confluence gains control.

COCOA MONTHLY / WEEKLY INTERCHANGE ZONE

• Weekly CP supply #1 at monthly interchange area #2 with a clear monthly

downtrend.
ADOBE US STOCK WEEKLY / DAILY INTERCHANGE ZONE

• Daily continuation pattern #1 nested at weekly interchange area #2