Unlocking Institutional Supply and Demand Trading
A Comprehensive Guide
If you can master supply and demand, you will be able to trade in the direction of large institutions finding big reward trades while banking consistent profits alongside
In This article, we will delve into the vital points about institutional supply and demand that most traders overlook or do not even know. First, to take advantage of the market, you must first understand why prices move in a given direction.
Most traders believe moves to the downside are because there are more sellers than buyers, and vice versa. But that is incorrect.
Table of Contents
- What is supply and demand?
- How to read institutional order flow
- How to mechanically draw the supply and demand zones
- How to find high-probability institutional zones
- How to enter and exit the market for maximum profits
What is supply and demand?
Traders are mostly emotional, and in the heat of these emotions, decisions are made when millions of traders come together in the game of uncertainty and fair greed (forex trading). Currency exchange rates move up and down due to supply and demand by market speculators. No trade can take place unless both the buyer and the seller agree on a price, and this drives the price of currency pairs, where
buyers bring demand ( applying upward pressure on prices) while sellers provide supply (applying downward pressure on prices).
The market continues to run in complete exhaustion throughout the day, where buyers and sellers seek the best possible prices to buy or sell, leading to demand and supply zones being created.
How to read institutional order flow:
This is a heavily manipulated process in the financial markets.
This represents the block of orders at various price levels in the market; these orders are limit orders as buyers and sellers wait for the price to get to their level (passive buyers and sellers). The market cannot move until aggressive sellers step in to drive prices in either direction.
The interplay between passive and aggressive orders leads to what we know as order flow.
How do we spot order flows?
At the price of 1.1530, an institution wants to buy 10,000 lots, but there are only 103 sell orders at that price; therefore, the price of the market will shoot up until all 10,000 lots are filled.
Here is how this looks on a candlestick chart.
The market will continue moving to the upside until all the orders are filled, then it will balance back in the previous direction, seeking more liquidity. The institutions will defend their entry levels as the price comes back there; hence, the buying pressure will continue after “retracements.”
Buying at the cheapest possible price (the institutional entry price) is what we should wait for.
How to mechanically draw the supply and demand zones
There are three different types of demand and supply zones. But the first two are the most effective ones.
A range-created zone is when price clearly initiates out of a range, while a pivot zone is where there is a pivot in price caused by 1 or 2 candles. Study this diagram to understand how to mechanically draw supply and demand zones.
A range zone on a lower timeframe can be transformed into a pivot zone on a higher timeframe. It is best to master any of these zones, as it best guarantees good results instead of chopping between zones. Examples are the inside bar on a range zone and Wicks on a pivot
How to find High-probability institutional zones
Not all supply and demand zones are institutional supply and demand zones. For a zone to be called an institutional zone, it must fulfill the following conditions:
- Break of structure: The zone must lead to a break of structure; the stronger the structure broken, the stronger the zone. A zone that leads to the break of a swing structure is stronger than a zone that breaks an internal structure.
Therefore, an institutional zone must lead to a breakdown of structure.
2. Flip Zone: In this zone, there must be an interaction between supply and demand until one overpowers the other for the zone to be considered an institutional zone, as illustrated in the diagrams below.
In this zone, supply is in control and tries to make lower lows, but demand steps in to drive the market.
Note: You must see the interaction between demand and supply first for the zone to qualify as a flip zone.
3. Sweep zones: These are areas where liquids are swept and taken as they are created. Sweep zones are important because institutions need opposing liquidity to minimize slippage when they enter and exit the markets.
There are usually a lot of limit orders below sweep zones and institutions need those limit orders to make a massive move to the upside. making a sweep zone a valid institutional zone in the market.
4. Stacked with higher timeframe zones; If the zone is stacked with other high timeframes it increases the probability of the move and the also increases the success rate.
5. Unmitigated zone; If a zone is fresh that means it is unmitigated and it is still a valid zone to consider, because a mitigated zone has already filled orders and price tapping back into that zone might signal a price reversal and not continuation.
How to find High probability institutional zones:
Combining all the different conditions to spot an institutional zone is your best shot at finding a high probability institutional zone as these conditions simplifies the process and increases your success rate of trading in the direction of the institutions.
How to enter and exit the market for Maximum profits:
Set a limit order at the start of the zone while placing your stop loss at the end of the zone ( Depending on the direction of your trade). You can also use candlestick pattern formation at the zone in combination with a fixed R method.
You can learn more about financial trading from this e-book for almost free
