Fraction of MS Edge
How to draw a proper supply and demand zone and how can you use any oscillator to take trades off these zones.
Date: 02/24/2023
Below information can be utilized on all time frames and any market/ticker, you can use it based on your trading style.
Trading Style:
Scalpers - 1-2-3-5-10-15 mins and 1H
Day Traders - 5 - 15 mins and 1h
Swing Traders 1H - 4h - Daily - Weekly
How to draw a demand zone:
After a sell off or consolidation, look for a sharp move to the upside and identify the red candle that got left behind.
Demand Zone = Open/high of Red candle to the low of Red candle.
How to draw a supply zone:
After a rally or consolidation, look for a sharp move to the downside and identify the green candle that got left behind.
Supply Zone = Open of Green candle to the high of green candle.
Use a 65 min chart to mark Key levels of Support and Resistance ( This will be In addition to supply and demand zones) we have been using 3974 as our major level for the last few weeks. Even Yesterday (2/23/2023 price bounced off 3974 after huge selloff)
Once you have your supply demand Zones and key levels set on your chart then wait for the price to come back to your Zones and look for RSI divergences.
Bullish Divergence
When price reaches a demand zone with lower lows but RSI shows you higher lows.
Vice versa Look for Bearish Divergence when price approaches a supply zone.
Bearish Divergence
When price reaches a supply zone with higher highs but RSI shows you lower highs.
Please see below an example from yesterday on a lower timeframe to demonstrate how it works for scalpers/day traders.
30Min Supply was at 4028.5
When price reached at supply zone RSI on 5 min provided clean bearish divergence
5 steps to the trade.
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Identify supply and demand zones
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Mark Key levels
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Wait for price to retest the zones or Key levels
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Look for RSI Divergence
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Do not take a trade just because you see a divergence, wait for confirmation and then mark your entry , stop and Targets.
Steps to get confirmation of divergence and how to mark entry, stop and targets.
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Use divergence only at key level and supply demand zone and not anywhere else
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For a bullish div, wait for a candle to close above the candle where the div first began. Then wait for a candle to break the high of the confirmation candle. That will be your entry, your stop will be right below the confirmation candle. And your targets will be the next supply zones on the time frame you spotted the divergence. Do not use one time frame’s divergence to target different timeframes zones. .
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For bearish div, wait for a candle to close below the candle where the div first began, then wait for a candle to break below the confirmation candle. That will be your entry, your stop will be just above the high of the confirmation candle. And your targets will be next demand zones on the time frame you spotted the divergence. Do not use one time frame’s divergence to target a different time frame’s zones.
As mentioned above, you can use any combination of the timeframes, all you have to care about is to mark entry , targets and stop on the time frame you find the divergence.
These two types of divergences are used to trade the reversals from zones and key levels , there are many other ways of using RSI especially when price is in trend day and there are no signs of reversals, how do we utilize RSI to trade with trend and what are other tools that can help us identify the trend and get full benefit of the move instead of keep on buying puts on uptrend or keep on buying calls in a downtrend etc. We cover all that in our mentorship program.
Please try to utilize the above information in addition to whatever system you currently have in place and see what difference it makes in your trading.
( You will be surprised to know the difference). Good luck!
Ps
This is just 2% of our Edge. Also note that having a Supply and Demand zone on chart does not mean buy or sell by default, these zones are there for reference only to see the reaction of price based on other confirmations.