Transcription
Every trader learns supply and demand, but most traders still lose money using it. And the reason is always the same. The drawing zones on anything that looks like a zone without actually filtering the ones that you need to be focusing on.
In this video, I'm going to show you the exact criteria that I use to identify high probability areas of demand and supply. Every zone has to pass these specific four criteria. If it misses even one, I do not touch it. These are the exact rules I use consistently and the exact rules I teach my students. By the end of this video, you'll be able to look at any chart and immediately know whether a zone is worth trading or not.
Before I get into the criteria, I want to show you exactly where most supply and demand traders fail. Because if you understand the problem, it's a lot easier to understand the solution. Most traders, they just see an area of consolidation like this and they're like, "Yeah, it caused a big move down. Let me enter my short position here. Target lower prices." And sometimes it works, but most of the times you get absolutely cooked. Don't draw zones without any evidence that this is actually a good area to use. Not every consolidation, not every low to high, high to low is going to be a good area to use. The four criteria filters I'm about to show you is going to eliminate any doubts. Gets rid of the weak zones, focuses on the good zones only, and that's the difference.
One of the most important filters that a lot of traders skip completely is it has to be responsible for causing a external break of structure. By that, I mean when we have structure like this, I need an area of supply that was responsible for actually breaking this low here. If we had something like this, this area of supply is not valid. Why? Because it hasn't broke external structure. If we had something like this, area of supply is not valid. Why? Because it didn't break any external structure. My external structure is currently this high to this low, and this was previous external structure. So, it has to be responsible for breaking external structure if you want to choose the best zones.
For example, here we had a low and we can see when we candle closed below it here. So, we need to find an area of supply that was actually responsible for breaking this low. Now, this is quite cool here. So, if we draw this area here, where a lot of traders would mark the area of supply, to me this would be invalid. You might ask why? Then, wasn't it responsible for breaking the structure? No, because if we go back, okay, where did we first take the low? We first took the low and that includes a wick as well we took the low. We first took the low actually here. Okay? You can see boom, this wick took the low. So, I need to find an area of supply responsible for taking this low. This area of supply that was formed after here was not responsible for breaking this external structure because we broke this low first, then we formed this area of supply. So, this one is why it becomes invalidated and I would not use this one. However, if I go up, boom boom boom, we have this area of supply here, which did what? It actually broke this low here. So, this one is always going to be 10 times better than this one here.
Step two, everybody's favorite word, liquidity. What do I mean by that? Well, in an uptrend, if I have an area of demand like this, this would be valid and good to use. Why? Because we know that lows are liquidity in an uptrend and what do we have? We had a low here that price can sweep and then come into. So, we want a low above our areas of demand and in a downtrend, we have two possible areas of supply, this one and this one. But, I could not use this one. I can use this one. Why? Because this one here, when coming into it, we have not swept any liquidity. This one here, we have swept liquidity. Which one? Boom. This high here. Remember in a downtrend, highs are all liquidity. So, I need to sweep some sort of liquidity before coming into our supply, otherwise it is not valid. And this is so crucial. It can't just be random lows. Let me explain. Let's say we have an area of demand here. Okay. This is not liquidity. A lot of people would see this low resting above this demand zone, assume this is liquidity, look for a long, we're like, we swept liquidity in here, and get stopped out. Why? Because that liquidity has to break the high it came from. So, it has to of course have that mini break of structure. Which high did this low this liquidity come from? This high. You can see we did not break it. So, this is not valid liquidity. Only when we break it, it can be a wick or a close, this then becomes valid liquidity, and now I can say sweep coming to here, push higher. So, guess what? It's the exact same in a downtrend. As we pull back into this area of supply here, I cannot call this liquidity yet. I cannot call this liquidity yet until what? Until we break this low here. This, and none of these highs are valid liquidity. Okay, they've not given me that break of the low. Only when we do here, boom, we call this sort of mini break of structure, I like to call it. What was the highest point between this low and where we got that mini break of structure? This high here. This becomes my liquidity, and now I can look for a sweep in this area of supply, and boom. Otherwise, I can't use this area of supply as it has no liquidity.
So, for example, we go back to our chart here, you can see we had this area of supply, and we had this area of supply. And obviously, we're always going with the trend, the downtrend only looking for supply, uptrend only looking for buys, and you can clearly see we are in the downtrend, so I'm only looking for supply. And what do we notice about this liquidity before this liquidity? If we come into this liquidity here, this zone here, have we swept any liquidity before doing so? No. So, guess what? This isn't a valid area. Well, this liquidity here, have we swept any liquidity? Yes. This high here is valid liquidity. Why? Because can you see we got that mini breaker structure here. Low high low low. This actually broke this low. So, if again, if this did not break this low, we cannot call that liquidity. Once it took the low it came from, boom, this high becomes liquidity. I can look for price to sweep here and here cuz now we have that criteria of an external break structure and liquidity.
Now, another important step is mitigation. What do I mean by that? We want to buy and sell in fresh areas. Think of an area of demand or supply like a fuel tank, okay? So, this is a nice fresh fuel tank with that liquidity. Every time price comes into here and fills up that fuel, collects that orders, pushes higher, guess what? There is now no fuel anything left for price to come into and bounce. So, I need my area to be less I like to keep it simple less than 50% mitigated. So, if we go into this area of demand here, right? And when I draw my box, I can see this middle white line is 50%. This is fine. This is fine. This is fine. This boom, this area of demand is now done. I cannot use it. It's the exact same thing when we talk about areas of supply. If I draw this area here, what do we notice? Fresh. I can still use it. However, if I was looking for my area of demand, I marked it, it caused a break of structure, it had liquidity in it. Guess what? I will not use this. Why? More than 50% All these orders have been filled, lower probability of getting a sweep and rip. It's actually more probability of coming into where and shifting structure. So again, going back to our example where we had our nice area of supply here. Why is this valid? We can see price holding liquidity and guess what? Still fresh. This 50% dash line completely untapped. Price has not come back into this zone, I am more than happy to use this.
Our final step is something everyone's heard before, premium and discount. How does this work? Well, when I have supplies, for example, I might have multiple. And I have a break of structure here. Okay, my premium discount is always from my external low to my external high. So my external low to my external high is here. If I pull up my discount premium tab Now I only want to enter zones when I'm selling, ideally in premium and buys in discount. So let's say we had this valid area of supply here, I would not use this. Why? Because this is in discount. So I would rather use an area in premium, one of these two as that will be higher probability. And of course, the exact same when buying. And of course, the exact same when buying. Here we break structure. So my external low is here to here. Now if I'm marking up potential areas of demand, we have this one here and we have this one here. However, simple quick criteria check is drawing my discount and premium. This first one here is in premium. I want to be buying in discount only, so below 50% I can get rid of that and I can purely focus on this area of demand here.
When all four criteria are aligned, it caused an external break of structure, we have liquidity resting above or below, the zone is unmitigated and it isn't premium or discount. This is an extremely high probability zone. This is a zone worth risking your money for. Let me show you all four criteria shown on this exact chart with this exact supply zone called live in front of all of my members, and here's exactly why.
So, the first thing I saw was the trend, and we clearly broke structure here. So, I was clearly looking for sales in areas of supply below this high. Now, what area was responsible for taking this low? We already established that this was formed after the low, so I could not use this one. However, when I work my way above, do do do do do we had this nice area here. External break structure. Done. Step two was, of course, liquidity. Did we have any liquidity resting below it? Yes. Low, high, lower low. We had this mini break of structure here I like to call it. And we left this beautiful high up here. Step two done. We are sweeping liquidity before coming into here. Step three, is it fresh or mitigated? Look at this. Completely fresh. Price has not returned into it. Step three. Done. Step four, as we play price out. Boom. So, this is now my new external low. If I draw my fib from here to here, this is well within discount, hence I would not use this area of supply here. In um premium, sorry. This is well within premium. I would not use my supply here. This is in discount. I want to be buying selling in premium. This supply we said wasn't responsible for causing external break structure, so we get rid of that. And instead, we focus on this supply zone here. You can place your stop loss above. Target lower prices. I mean, just look at that. Price came into here, respected the area of supply, and completely dumped to take profit. Whereas, if you took your sales in this area of supply, you got cooked. If you took your sales in this area of supply, you got cooked.
Here's what I want you to understand. These four criteria is not complicated. You can apply them to any chart in about 2 minutes when you know exactly what you're looking for. Traders who are inconsistent with supply and demand are inconsistent because the concept doesn't work, but inconsistent because they're trading every zone except these specific ones which only pass the criteria. Narrow your criteria, trade less, win more. The traders I work with one-on-one, this is one of the first things we fix. Because once you stop drawing random zones and only the ones that fit these four boxes, the noise gets smaller and the win rate goes higher.
So, if you've been trading supply and demand and still inconsistent and want to apply for the one-on-one mentorship, the link is in the description below. If you did like this video, appreciate any likes and subscribes as always. Any questions you have, feel free to drop in the comment section below. Apart from that, I'll catch you in the next one.