Order Block Institutional Trading Practical Guide

The Inner Circle Traders Smart Money Concept Strategy,

Market Structure, Price Action And Top Down Technical
Analysis
Copyright ©2022 James Jecool King
All rights Reserved

No part of this publication may be reproduced, distributed or

transmitted in any form or by any means including photocopy- ing,
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prior written permission of the publisher.
Using the Institutional Order Block Theory in trading

1. Identify OBs by starting with the daily TF and moving on to the H4 TF.
Using the D1 & H4 TFs, calculate your order flow (institutional trend).

2. Create the OBs in lower TFs, such as H1 and M15, now that you have the
longterm institutional bias. Because that is where the real trend is going,
M15, the entry TF, requires entries to follow the HIGHER TF Order
Flow/Institutional bias.

3. We should wait for an RTO (Return to Order Block) before entering when
price breaches a previous OB (i.e., closes above or below an OB). Price
should test the OB again when it is broken. The Last Step Broken + Retest
(LSB + Retest) pattern is the name given to this pattern. Without waiting for
a retest, you can trade the break, but you must be cautious because the
broken OB might reappear.

We anticipate accepting trades from Source to Source using this Order Block
Concept.
i.e., engaging in a transaction amongst PEAKs. That is the goal.
4. Integration of the H4 I M15.
Bearish monthly chart. Bearish weekly chart.
Bearish on a daily basis
it indicates that the lower time frames and intraday charts H4, H1, and M15
will correct and retrace higher (i.e. making Lower Highs). Here, you should
look for buy side liquidity to sell to as you anticipate the price entering a
premium (bullish retracement of at least 50%).
Weekly charts are bullish, while daily charts are bullish for the entire month.

It denotes that intraday charts will be correcting or retracing down after 4

hours (i.e. making Higher Lows). Here, you look for sell side liquidity to
buy from as you expect the market to enter a discount (50+% bearish
retracement).

ICT INSTITUTIONAL ORDER BLOCK THEORY What is an OB?

Order blocks are used in institutional trading.
Institutions will purchase or sell in the Order Block, which is a specified
price range or candle, in opposition to the retail trend or money dump.
Institutions reserve order blocks for later trading by themselves.

The price will be hard driven in the direction of the trend after being
reversed to a previous order (The real institutional trend).
We can also refer to these order blocks as particular levels of going long or
short.

When an order block is broken or violated, it qualifies as a "breaker," which

means that the price will retest that order block. We refer to it as a failed
order block occasionally.

Note: You don't trade order blocks immediately; instead, you wait for the
price to return to that order block before making a trade.
Order Block Theory private study notes extracted from various entities
i. Bullish Order Block is one type of OB (BUB) Bearish Order Block,
second (BEB)
The OBs Order
1. Source OB
2. Breaker OB
3. Continuing OB (Classic/Traditional OB)

The Lowest Candle or Price Bar with a Down Close, the Most Range from
Open to Close, and is Close to a "Support" level are considered to be Bullish
Source OBs. This is a Trend Reversal Order Block, so the support level
might be YL, WL, ML, or ADR Low. It is the final candle, forming the
lowest price point on the chart, or a Peak Formation Low. Consequently, a
bullish SOB denotes a change in the market Order Block Theory private
study notes extracted from various entities
A bullish SOB is considered valid when a later-formed Candle or Price
Bar trades through or above the High of the Lowest Down Close Candle
or Price Bar.
Entry Techniques: You wait for price to return to the order block or
return to origin (RTO) before entering when price trades higher away
from the bullish order block and then returns to the bullish order block
candle or price bar high. THE GOAL IS TO TRANSACT FROM ONE
SOURCE TO ANOTHER.
Defining Risk: A relatively secure Stop Loss is placed at the Low of the
Bullish Order Block. When the price veers away from the bullish order
block, it is thought to be a good idea to raise the stop loss just below the 50%
mark of the order block's overall range to minimize risk.
Order Block Theory private study notes extracted from various entities
Bullish Order Block (BUB) a Down Close candle in the swing high with
the biggest range between open and close of the most recent swing.
Institutions will be taking profits in this area by selling against the trend and
bringing in fresh market participants to continue the initial positive trend.

A BUB is the previous Bearish candle to an upward advance, specifically.

The BUB is a string of institutional bullish orders (purchases) placed while
the price was declining (institutional buy when the market falls).
Bullish Breaker Block is an up close candle in the most recent swing high
before an old low is broken, which indicates bullish range. The sellers who
sold at this Low and afterwards witnessed the identical Swing High being
broken will attempt to lessen their loss. This is a bullish trade setup to take
into account when Price Returns to the Swing High.
Bearish Source Order Block The highest candle or price bar that has an up-
close, the greatest range from open to close, and is close to the resistance
level is what we mean by this. This is a Trend Reversal Order Block, and the
resistance level might be YH, WH, MH, or ADR High. It is the final candle
that creates the highest price point on the chart, or the Peak Formation High.
A bearish SOB denotes a shift from a bullish to a bearish market structure
(SMS).

A bearish SOB is considered valid when a later-formed Candle or Price Bar

trades through or surpasses the Low of the Highest Up Close Candle or Price
Bar.

Entry Strategies: Wait for price to return to the bearish source order block
(RTOReturn to Order Block/Origin) before entering when price trades lower
away from the bearish order block and then returns to the bearish order
block candle or price bar high. THE GOAL IS TO TRANSACT FROM
ONE SOURCE TO ANOTHER.

Determining Risk: A somewhat secure Stop Loss is placed at the high of the
bearish source order block. After the price has moved away from the bearish
order block, raising the stop loss is thought to be a good way to lower risk
when necessary. This
L. TENGA12

is typically done just above the 50% mark of the order block's total range.

Bearish OB (BEB) the candle with the greatest range between open and
close in the most recent swing low is a bullish range or up-close candle.
A BEB is the final bullish candle in a downtrend and is specifically a bullish
candle or sequence of bullish candles following a bearish swing.
The BEB is a string of sell orders placed by institutions in a bearish manner
while the price was rising (institutional sell when the market rises).
Bearish Breaker Block is a A bearish range or Down Close Candle in the
most recent Swing Low before an Old High is broken is known as a bearish
breaking block. The buyers who purchase at this low and later see the same
swing low being broken will attempt to lessen the loss. This is a Bearish
Trade Setup to consider if Price Drops Back to the Swing Low.

Lower Timeframe Order Block Refinement

The first thing we must do with OBs is to reduce them as much as is

practical. Therefore, it's crucial for us to understand where the
market's momentum has originated from. meaning the places where
the institutions have already entered. Because of the fact that price
typically returns to the place where momentum first began to slow
down before continuing its movement, whether it be upward or
downward, We benefit from refining OBs down on LTF since it
tightens our AOI, allowing us to enter trades more precisely with a
tighter stop loss and typically lowering our drawdown. We will also
have the opportunity to raise the return rate on our trades, which
will improve

The examples now demonstrate OB refinement. Let's begin by

noting that this displays a 1-hour bullish OB. We then had this BOS,
which is the final downward candle before the BOS's upward
movement. So, taking the high and low, this would be our OB. So
our stop here is 10 pip. Now that we have a 15-minute perspective,
we can see what we may see when we go from a 1-hour perspective
to a 15-minute perspective. Look at the ways we might narrow our
OB and reduce our area.

This is what we can see on 1h, and while I realize there are only 3
candles, when we zoom out to 15m, we can see exactly where the
market momentum is entering. This candle in this case is also a
BOS; it represents the most recent downward movement, which on
a 15-minute chart may be 5 pip in size. In other words, 10 pip for a
1h OB

refine down to the 15m to 5 pip.

What does this signify for our stop loss and entry points now?

We can enter a trade with a stop loss that is obviously half as large,
which improves accuracy, increases return on investment (RR), and
may reduce drawdown. This is what LTF refining entails.
Therefore, the first example we'll look at is a bullish OB refinement.
This chart on the right is the 15m, while this one on the left is a 1h
on AU.
What do we have now if we zoom in on the 1 hour chart? We
experienced a peak, a pullback, and then BOS. We therefore
installed a new HH and are currently in a clean OB. So, before the
BOS, we make the final downward move.

Now, if we were to enter based only on this, we would do so at the

top and place our stop loss at the bottom, giving us 11 pip profit.

Now, if we were to look to the right and try to narrow it down, this
would be the 15m. The 1 hour OB is now visible on 15 meters. Can
we make it simpler? Where does the momentum originate from
then? Well, it is obviously coming in on this candle. We can see
how significant and substantial this candle is. We can now narrow
our 1h OB down by determining where the most recent candle was
or if it was this one here, but if we take the following candle, the
OB hasn't yet been engulfed. Let's refine it to this candle, which
effectively means taking our stop loss for the 1 hour, which was
over here at 11 pip, and refining it to 6 pip. Therefore, if we check at
where the price is, we can see that we tapped in exactly; over the
left 1 hour OB, we had to be running at
about 5.6RR, and we would be running at 11.15RR here. By simply
knowing refining and how we may be more accurate, we can see
that we have essentially doubled our return.

Can we go even further with this?

Yep. In any case, if we look at the following candle, we can see that
we have this small doji candle here, it isn't gaining any momentum,
and it hasn't yet engulfed the OB. Therefore, we can go one step
further and 1consider this to be our OB in this instance.

Do I now suggest it?

No, not really. We still have the low that we used to mark our OB,
so we can still account for the low. However, the idea still holds
true: we precisely pinpointed where the upward movement started.
We would be looking at 3.5 pips and our trade would run just short
19% in one candle if we could narrow it down to this candle. This
demonstrates the power of refinement and the need of monitoring
market trends. Let's move on to another EU case now. Looking at
EU once more, we could see the 1 hour on the left and the 15
minutes on the right. As you can see, we made an impetuous move
up above structure commencing on the first. Thus, we now have
aOB to work with. We have this final downward movement before
the upward movement, however the subsequent candle lacked
momentum and failed to engulf the OB.

So, choose which candle to use ultimately depends on personal

preference. We will thus refine this since it is the final step in the
consolidation process before the growth. We can see that we BOS,
pulled back, tapped in, and then continued upward. Now, if we
calculate the distance between the high and low, we are looking at
17.6 pip and 2.8RR.
What do we have now, 15m? Before expanding out of this
consolidation area, we have the final downward move with this
substantial wick. We tapped back in after that, but we can still go
more specific with this. The stop loss would be 14 pip if we simply
assumed that we entered with a limit order when the price came
back in, but we can still narrow it down even further.
Since we haven't yet demonstrated any real momentum, we can take
this candle and turn our attention to the following one. As we can
see, the next candle is when we actually broke out of this range, so
the momentum entered on this candle.

Therefore, this enables us to lower our stop loss from 14 pip to as

little as 6 pip.

Of course, there are a few minor adjustments that need to be made,

but for now, let's stick with this. We can see that we tapped in
precisely, but we should now move to the upside. As a result, our
profit increased from 4.8RR with the previous candle OB to

10.3RR after refining it to 6 pips. We can now see the effectiveness

of this adjustment, albeit placing entries blindly without
confirmation when the price changes would obviously be
problematic.

We will now discuss how to wait for additional information. As

soon as the price tapers in on a 1h or 15m OB into the OB, we can
drop to an LTF like 5m or 1m or even 30s, and what we are looking
for is essentially priced to taper in just like this and then show us the
BOS. We want to see it on a LTF, just like we do here, where we
know the pricing is BOS. Therefore, we want to see a lovely
impulse up that looks like this. We can see that the structure above
was broken because we had this LL, LH, a BOS, and, let's just say,
an HTF POI or OB.

Therefore, after tapping in, we want to view the LTF BOS, which
will then generate an OB on the LTF. So instead of making riskier
entry with the one tap and then go, this offers us far more
confirmation. We are anticipating the price's move, and once we get
this BOS, we can enter without a doubt. We have a really tight stop
loss, which is how we can enter a trade with a stop loss of just one,
two, or three pip and yet have a fairly strong return on investment
(RR).

The following example is much the same as the previous one, but I
want to emphasize this notion as much as I can because it is so
potent. As a result, the relocation was launched from this point after
1 hour. We already have the final downward move, but we can
easily reduce it to this candle. This results in an OB of 15.8 pip.
Once we started moving, we could set our entrance and get tagged
in on this candle. We would now require a stop loss that was at least
15.7 pip high. As a result, we can see that after being tapped in
once, twice, and again, we pushed off. However, after coming back
in to push lower, we then pushed off and BOS. Now that we have
established that 15.7 pips is a very large stop loss size, let's examine
how we may reduce it on the 15m.

Now that this move is just on the 15m, we can see that this is the
last down move, which is represented by the doji. This is the final
downward movement because the momentum entered on the
following candles, which also broke above this high. Therefore, it is
likely that the price will return to this area and possibly decrease to
this point. However, it may arrive at this point and then continue.
So, let's wait and see. So let's begin. Here, we also created some
liquidity using this lows. We can now see that we did indeed wick
in, indicating that news was likely to blame. However, news is
merely a tool used by powerful institutions to enter the market and
drive prices lower in order to mitigate any sell positions I may have
before stacking orders and moving forward. Therefore, if we were
to position our entry on the 15m OB, we would be considering that
entry. We can see that we were able to decrease our stop loss
amount from 1h, which was 15pips, to 15m, which is 5pips because
we have a 5 pip stop loss. Therefore, we reduced our stop loss by 10
pips, which will ultimately result in much greater RR on trades.
Therefore, we can see that from this point onwards, 11RR are
visible, and on the hour, 3RR are present. We are currently
examining a sell example on AU, thus we are searching for bearish
OB refinement. Now, this move down was very impulsive and
broke a lot of structure. As a result, we would have an OB up here
that we could examine.

However, as we looked at the price action, we pulled back and then

we bos again, creating another OB. Because we already have bos, it
doesn't necessarily follow that the price needs to increase to the first
OB.
This might therefore be applied at a later time. The last bullish
candle before the downward movement is the bearish OB because
we are in this position. Now, if we were to consider entering, our
limit order would have been tagged in at this point, and our stop loss
would have needed to be 12 pip. The low that is currently present or
just below it is a nice target for us to be aiming towards. Therefore,
we are examining 5RR to the low.
However, if we shift our focus to the 15m once more, we can notice
the same movement as in the 1h, but we can narrow it down.
Order Block
How To Find And Trade
OrderBlocks
The idea of order blocks, made popular by youtube trader ICT, has gained a
lot of attention in recent years, and many people now have questions about
what they are and how to utilize them when trading.
In other words, order blocks are basically different types of supply and
demand zones.

However, they have a MUCH greater chance of bringing about a reversal

than typical zones do. They also develop significantly differently than
regular S & D zones; instead of starting from the typical two or three candle
base, they only begin to form from a tight range consolidation.

Since order blocks are a concept that most traders are unfamiliar with, in this
post I'll give you a thorough explanation of what they are, how to see them
on a chart, and how to use them in your trading. Order blocks will be a fantastic setup
you may add to your trading toolbox towards the end. So let's examine order blocks and their
formation.

Order blocks: What Are They and How Do They Form?

A block order, from which they receive their name, is a particular kind of
supply and demand zone that develops when a bank enters the market to
purchase or sell, creating an order block.
If you are familiar with order flow trading, you have likely heard of block
orders.

These are specific orders to purchase or sell that banks frequently utilize to
get into transactions, close off trades, and take profits. Banks avoid upsetting
prices when they have a sizable position to fill because doing so could cause
a significant move and force them to execute their transactions at lower
prices, which would diminish their profits.
Block orders are used to divide their locations into smaller, more
manageable chunks in order to avoid this.
This is how it goes:
Consider a scenario in which JP Morgan wishes to purchase 200 million
euros at 50 million dollars.

Of course JP Morgan can't place this order; there aren't enough buyers. If
they purchase now, when only 50 million shares are being sold, only 50
million of their position will be filled; the remaining 150 million shares will
be filled at ever-rising prices, reducing their overall profit and giving them a
lot of trouble.

In order to divide the position into manageable pieces, they decide to employ
a block arrangement.
They can place their position without significantly upsetting the price by
dividing it into, say, 20 million chucks.
For instance, the 50 million being sold would be matched with their first order of 20 million. Due to
the fact that the sell orders are still greater than the buy orders (20 million vs. 50 million), this
wouldn't result in a quick up-move or price disruption. Then, they can enter their next chunk after
waiting for the orders to pick up again.

A supply or demand zone, specifically a zone from a tight range consolidation, emerges million order,
then another, and so on.

Typical order-block zones look like this; are they familiar to you?
If you look closely, you can see the zone that develops when the price breaks
free from a consolidation in a narrow range.
Order-block causes these consolidations because of the way it functions.
When they wish to take a large position without affecting the price, banks
utilize order-blocks. They achieve the same result as placing a single large
position without really entering the market by placing a number of tiny
positions around identical values.

A narrow range consolidation forms when banks take a lot of similar

positions at comparable prices; each position establishes a high (or low, if
they're shorting), of the consolidation.
Here is a quick summary of order blocks before we continue:
Supply and demand zones are order blocks, however they are of a distinct
kind.
They develop as a result of banks purchasing or selling using block orders,
which divide a large position (such as a trade) into many smaller positions to
make it simpler for banks to purchase or sell without raising the price.
Order Block Theory private study notes extracted from various entities

The zones themselves are comparable to typical supply and demand zones
architecturally. However, they only appear when price diverges from a base
formed by a tight range consolidation. This is so that a consolidation with a
narrow range can be created by utilizing a block order to enter a large
position while simultaneously putting smaller positions at comparable
prices.

The Difference Between Order Blocks And Regular Supply And Demand
Zones
The question is, how do order blocks differ from the typical zones we see
form all the time given that we know they are supply and demand zones but
of a different type?
There are actually two main differences...
First, order blocks are substantially more likely than typical supply and
demand zones to result in a reversal.
And this is true regardless of where or when they occur, i.e. whether they
show up after a protracted rise or decrease, which raises the likelihood that
normal zones may cause a reversal.

Because block orders are only used by banks when they have particularly
large positions to fill, the zones are produced when they buy or sell using
them. The banks certainly don't want pricing to move past where they
purchased or sold, which is the S or D zone, if they are placing a large
position.

The zone has a high likelihood of creating a reversal because the banks
wouldn't take such a large stake unless they were absolutely certain that the
price was moving in the desired direction.
The appearance of order block zones is the other distinction.
Order blocks generally resemble regular supply and demand zones because,
like all zones, they develop from a sudden spike or decrease away from a
base.

Order blocks, in contrast to regular zones, always result from price moving
away from a tight range consolidation, as you can also see above. Because
when banks employ a block order to enter their holdings into the market, that
structure is what results.

Each position is entered into with a block order at a comparable price,

causing the highs (or lows, as the case may be) of the consolidation to
develop at roughly equal prices to one another.
This results in a tight range consolidation on the chart, as you can see above.
Therefore, all you have to do to find order block zones is seek for a small
tight range consolidation. They only originate from banks that use block
orders, thus there MUST be a zone at the source..

How To Find Order Blocks And Use Them In Your Trading

Order-blocks work best when used as a high probability setup to watch for in
addition to your primary trading technique.
Order block zones don't form frequently, therefore using them as a single
tactic isn't really an option.

However, if you use them as a setup, they can provide you high probability
trade signals that you can use to supplement your primary trading technique
with in order to make more money. I employ them in my trading in this
manner. My main trading approach is based on supply and demand, and I
also keep an eye out for two or three setups in addition.

In my book, I discuss order blocks, pin bars, and the reversal pattern.
As a result of the diversification they offer to my primary trading approach,
they enable me to increase profits while reducing overall risk.
How do you locate order blocks to employ in your trade, then?
Order blocks are basically supply and demand zones, just a lot more
uncommon form, hence trading the zones works exactly like trading them
normally::

You mark a zone on the chart...

Wait for the price to enter before giving a confirmation indication, such as a
pin bar, an engulfing candle, or a candle with a wide range.

Put a stop on the opposite side of the zone and watch to see whether the
price goes away. Simple.
Though a little more challenging, finding the zones is still straightforward
with with practice.
The most important thing to keep in mind is to search for a zone that
develops from a tight range,
or when the market fluctuates between two close prices, creating a
consolidation. These
consolidations ONLY result from block orders placed by banks, hence there
needs to be an order
block at the source to establish a supply or demand zone.
Let's look at few instances...
So, here is how a normal order-block zone appears.
L. TENGA23

A strong advance away from a consolidat n of a narrow range creates this

demand zone. Before breaking higher and forming the order block, the price
oscillates between 1.21600 and 1.22000.
Pay attention to how tight it is and how this consolidation seems.
Unlike other consolidations, this one does not involve sharp price
fluctuations that terminate at various prices. The price is constrained to this
extremely narrow range that resembles a rectangle since the swings are tiny
and roughly end at the same spots.

To locate order blocks, you must seek for certain types of consolidation.

Another one is presented here, taken from the 15-minute chart.

Look at the consolidation once more; it is compact and nearly rectangular in
shape. We know that these can only occur when banks use block orders, thus
the source must have an order block zone..

Rarely will the consolidation occur at a swing low or high rather than after a
move.

Draw the order block zone from the most recent swing low/high up to the
consolidation when you see this. It will then be a valid zone. In our situation,
a rise, which is a demand zone, is created when the banks take a position and
use a block order to put the remaining positions at a somewhat higher price..

Introduction to Supply and Demand

What is Supply and Demand?
According to the supply and demand theory, when a commodity is in large
supply and low demand, excess is created, which lowers the price.
A commodity will become scarce if there is a low supply and a strong
demand, which will raise the price.

When there is a huge supply of one currency pair and a low demand for it on
the Forex market, prices will decline. Prices will increase if there is an
excess demand for a currency pair and an insufficient supply.

For instance, investors start buying safe haven currencies to preserve their
investments when there is fear and uncertainty and they minimize their
exposure to the equity markets. Due to the great demand from investors to
purchase Japanese yen, the yen's price will rise as a result of the high
demand.
Another illustration is when the Federal Reserve, or Fed, decides to raise
interest rates. Due to the interest yield, this will draw investors to the US
dollar. Buying high-interest-rate currencies and selling low-interest-rate
currencies is referred to as the carry trade.

A general idea known as supply and demand is used to describe everything

that may be traded.
We must first define supply and demand zones and comprehend how prices
change on the chart before moving on to the primary approach.

Supply Zones
Above the current price, there is a supply zone where there is a lot of selling
activity. When demand and supply are equal, pricing declines when unsold
orders are satisfied.

Demand Zones
A price range below the going rate where there is a lot of interest from
buyers is called a demand zone. Buyers outnumber sellers at the level of
demand, driving prices upward when pending orders are filled.
Understand Market Balance-Imbalance in Forex

Balance, imbalance, balance, imbalance, etc., is the fundamental pattern of

the forex market. The market fluctuates between the predetermined excesses
until it trades either above the high excess (breaking through the resistance
level) or below the low excess (breakout below the support level).

Balance Area

Equal amounts of buying and selling are present when the market is
balanced, as seen by the aforementioned chart. A distribution is produced as
the price oscillates sideways within a range.
Unbalanced Region

The market will move in the direction of the dominant participants when
buyers or sellers are in charge. Market movement will be downward if
sellers are in charge and upward if buyers are in charge.

Let's go on to the chart and examine how these important ideas might be
used there to have a better understanding of the idea of balance and
imbalance.

The blue arrows in the following chart indicate places of equilibrium. Due to
the comfort level of both buyers and sellers in this price range, these
balanced locations have simultaneous buying and selling activity. Take note
of the horizontal price movement..

Price exits the region with huge candles when the market shifts from a
balanced state to an imbalanced state. This illustrates the imbalance, which
occurs when one player outperforms the other. When sellers outnumbered
buyers on the chart's left, prices fell like a stone over a cliff.

The market then enters a balanced position as it waits for the price to go in
one of two directions: upward or downward. The cost increased, the area is
balanced, etc.
The price started plummeting quickly on the right side of the chart and then
kept descending with little candles. This demonstrates that market players
are looking for a fair price to allow for balanced rotations.

This describes the market's general cycle: balance, imbalance, balance,

imbalance, etc. We put a lot of effort into identifying these areas of balance
in supply and demand strategies. We aim to place our order in these
locations in order to benefit from the imbalance that causes the price to
move in a particular direction, making a profit in the process.

How to Identify Supply and Demand Zones

After determining the current price, we gaze to the left until we spot a
significant, forceful shift either up or down.
How to do it is as follows: ▪ Identify Current Price

▪ Look to the Left to find ERC in last drop or rally

We need to locate an ERC-type candle for this stage. ERC stands for
Extended Range Candle and refers to a candle with a big body but little to no
wicks. Here is an example of an ERC type of candle.:
▪ Origin of the Move
Once we have determined that the candles are of the ERC kind and the price
has either dropped or risen, we must now determine where the move
originated.
The foundation of our supply or demand zone will be this genesis. Let's
examine an illustration::

In this illustration, we begin with the present price and search to the left for a
decline or a rise in price that has at least one ERC type of candle. Once an
ERC is located, the cause of the downward shift is located. A base is what
we refer to as the origin.
To draw the zone, we need the basis.
We need to learn how to draw our supply and demand zones now that we
understand how to recognize supply and demand zones.

The Various Supply and Demand Zone Structures

Reversal and continuation patterns are the two categories of structures or
patterns that we must learn.
Reversal patterns:
Chart patterns known as reversal patterns are created when a trend reverses
from up to down or from down to up. There are two of them:
• Drop-base-Rally: In this structure, price is moving downward, causing a
price drop, a base structure, and then an upward price rally.
•Rally-base-Drop: In this formation, price rallied up and forms a base structure before experiencing a
significant downside price drop..

These powerful
reversal patterns are generally respected by price.
Repeating patterns:
These pricing schemes include:
• Drop-base-Drop: The price falls, creates a base, and then drops again.
▪Rally-base-Rally: The price moves upward, develops a base structure, and then resumes going
higher..
 Within the trend are these
continuation patterns. Since price frequently tests and penetrates these
structures, they are typically weak trading areas.
Because they have higher success rates than continuation patterns, we solely
pay attention to reversal patterns.
How to Draw Supply and Demand Zones
How to Draw Supply Zones

We must check up and left from the current price to discover powerful
bearish candles with huge bodies in order to appropriately identify a supply
zone. The price's departure from the base is depicted in the chart below.
Price began to rise from the left of the chart in a great uptrend, pausing
briefly to form a nice base structure with three candles. Then, when price
fell, long bearish candles formed, confirming a significant market imbalance
near this supply zone. We refer to this arrangement as a rally-base-drop.
We can profit from price retracements as it continues to move back up
toward this supply zone by positioning our trades there. Observe how the
price reverses upward and downward as it moves toward the supply zone
without crossing its proximal line. This indicates that a lot of orders that
haven't been filled are piled up all over this supply zone.

We must now determine whether or not the basis structure is reliable. In

order to properly choose the optimal supply zone to trace your lines through,
the base's structure is essential. To be regarded an excellent base structure to
trade, we should ideally select a base with fewer than six candles..
The zone is then drawn using two horizontal lines as the final step (distal and
proximal lines). At the base of the basing bodies, omitting the tails, the
proximal line is close to the current price. Above the base candles, including
their tails, is where the distal line is positioned.
How to Draw Demand Zones

A nice price advance, a cluster of bullish candles, and a base with less than
six candles are all indicators of a demand zone. The price sank down, paused
for a little while to construct a consolidation structure (base: 1 candle), and
then surged up from the base with extremely long bullish candles to create a
demand zone, as shown in the chart below..
So knwo that we know how to place both lines, let’s go through an example:

We have one candle at the basing structure in the supply zone. The distal line
should be placed at the base's highest wick in order to properly draw the
supply zone. The proximal line is then set, as indicated in the chart above, at
the base's low point.

A demand zone with three candles at the base was formed as the price
moved lower. The distal line should be drawn at the base's lowest wick in
order to properly represent the demand zone. The proximal line is then
positioned at the base candles' tallest body. By making your stop larger than
it should be if you choose to include both the high and low of the wicks, you
have increased your risk.
Your chances of having your order filled at the market price are reduced if
you choose to include only the highest wicks for the supply zone and only
the lowest wicks for the demand zone.
Again, you must consider your risk tolerance and your chances of profit
while designing supply and demand zones.

How to Trade Supply and Demand

We sell at supply zones and we acquire at demand zones. This tactic is

rather simple to implement. You only need to find new supply and
demand zones to trade in. When the price returns to your supply or
demand zone, wait for your orders to be triggered by placing your limit
orders at the proximal line and your stop loss orders at the distal line..

Here are some examples:

In this chart, we have two demand zones and one supply zone.

For the supply zone, the price rose, paused for a little while, and then sank
with large candles. As a result, there is a significant imbalance at this
pricing. We mark our zone, place our order, and then we wait for the price to
change before retesting our zone. Our sell orders were successful after the
price returned again.
When the price left the supply zone, it simultaneously formed two demand
zones on the way up to retest the supply zone. Price increased and then
stopped, forming zones that resembled a rally-baserally. We selected these
two zones for our buy orders. Our buy orders were activated each time the
price tested one of our demand zones. Watch how these areas draw the price
like a magnet.
In this graph, the price fell and responded to a demand zone that was in
opposition on the left side of the chart by rising and generating a new
demand zone. At this price, we put our buy order and awaited the price to
return and retest the demand zone. Price returned, prompted our order, and
increased..

Price spiked upward, stopped to form a base, then dropped. We mark the
area of supply, put a sell order, and then wait for the price to stabilize. The
candle's tail pierced the supply zone when price retested it, which is why we
only placed one sell order. This indicates that the supply zone has been
exhausted, and it is unlikely that another sell order will be successful..

The price in this chart produced a rally-base-rally. Rally-base-rally and drop-

base-drop zones are typically avoided since they are found within trends and
are where trades go wrong most frequently. Our preference is to concentrate
on the structures that emerge at the reversal (drop-base-rally and rally-base-
drop). These trading platforms are incredibly dependable and robust.

The price pattern produced a rally-base-rally structure. In order to trigger our

purchase order, we drew our demand zone and waited for the price to test it.
Price did return, test the zone, and rally as expected.

If you are unsure whether the zone will result in a profitable trade, you may
choose to wait to place your order until the price tests the zone and provides
you with some bullish or bearish proof. In this manner, you may lower the
likelihood that you would place a loss trade.
Once more, we favor structures at reversal points over those within trend structures since they are
strong and have a greater probability of succeeding.
We have another structure that is within the trend in this instance. Since
these structures aren't very robust, as we indicated in the prior example, we
wanted to demonstrate this trading setup.
However, if they are towards the start of the trend, you can still trade them.
Here, the base is close to the point of reversal. Due to this, this area could be
traded.

If the drop-base-drop was further down the trend, however, we wouldn't take
it into consideration because the trend could change at any time, causing the
price to pass through the zone and continue rising.

How to Recognize the Demand and Supply Curve

By examining the current price and locating the closest supply and demand
zones that are in control, we can determine the curve.
The curve is defined as the separation between the two supply and demand
zones' proximal lines.

We locate the current price on the chart below, and we scan up and down to
find the closest supply and demand zones that are in control..
After drawing the zones, it is obvious that the pricing is close to the demand
zone. On the curve, the price is said to be low.

We only buy when the price is low on the curve.

The price is close to the supply zone in the control in the example that
follows. Since the price is high on the curve in this case, we only consider
selling..

We trade in the direction of the current trend when the price is situated half
way between the supply and demand zones.
The pricing is said to be at balance. Here's an illustration::

Price is situated halfway along the curve, as seen on the graph. It is known
as the equilibrium where buyers and sellers are equal.

Price typically stays sideways in this region of the curve until one player
outperforms the other.
If buyers outnumber sellers, the price will rise upward on the curve in an
upward trend.
If sellers outnumber buyers, the price will fall lower on the curve in a
downward trend.
Why Is It Vital to Recognize the Curve?
The victors and losers can be distinguished based on this.

Professional traders are aware that they must sell to individual investors who
are eager to profit from an uptrend when the price is high on the curve.
Retail traders then join the bandwagon and begin submitting buy orders.

Professional traders short the market and drive prices lower by taking
advantage of the strong liquidity supplied by retail traders.

Retail traders believe that the market should be shorted when they observe a
sharp price decline. Once more, experienced traders seize the chance to buy
as price reaches low areas of the curve, indicating a nice bullish reversal to
the upside.
Because of this, it's critical to recognize the curve before making any orders.
Typically, we purchase when the price is low on the curve and at the demand
zone, and we sell when the price is high on the curve and at the supply zone.
We trade with the dominant trend when the price is in equilibrium.

Odd Enhancers to Locate Zones of High Probability

Let's now talk about the four key odd enhancers that will enable us to filter
our zones and select only the supply and demand areas with the highest
likelihood of success.
To get at a final score, we will assign a point to each odd enhancer.
A total score of 10 indicates that we should put a limit order and wait for the
price to reach our entry target.
We will utilize a market order to place the trade if the final score is between
8 and 9. A final score of less than 8 merely indicates that there is no
transaction.

Odd Enhancer 1# Strength of the Move

Good supply and demand zones have a strong move out of the zones. Here
we are looking at how the price left the zone.
Did the price leave with strong large candles or many small candles?

We will score this from 0 to 2 point maximum.

Here’s an example: price left the supply zone with strong bearish candles to
the downside and the score is 2.
Look at how the price departed from the zone. This area received a score of
0 due of the small candles on the price exit. Now see how the price moved
through the supply zone and then retraced back up.

Trading weak zones is not advised since the price will ignore them and
continue on.

Odd enhancer 2# Time Spent at the Zone

The second odd enhancer that we look at is the time that price spends at
zone. Good zones have between 1 to 6 candles in the base. Beyond 6 candles
the zone might be weak and therefore, resulting in a losing trade.
Odd Enhancer 3# Fresh Levels
The third odd enhancer is to check whether the zone is fresh or not.
A fresh zone is a zone that has not been tested by price. As price keeps
coming back and testing the zone, the probability that this zone will work
decreases.
After a second retracement to the zone, it is better not to consider it because
there might not be enough supply to push the price lower again.

Here’s an example:
Price tested the supply zone during the first retracement and proceeded
downward; the same thing happened during the second and third
retracements. Price broke above the supply zone after the third retracement
because there was no longer any supply there.

Observe that with each retracement, the price moves farther towards the
supply zone. This is a reliable indicator of whether the zone is still in effect.

Odd Enhancer 4# Reward-to-Risk

The last odd enhancer is the reward-to-risk ratio. We need at least a ratio of
1:2 to consider the zone as valid for trades.

Examples
A supply zone on the graph below has a score of 10 out of 10. Using
enormous ERC-style candles, Price produced a lovely drop-base-drop
pattern. This demonstrates the power of the supply zone. If price retraces
back up and tests the supply zone, we have a wonderful reward-to-risk ratio
of more than 1:3, which gives us a good winning opportunity.

If we receive a score of 10/10, we will place a limit order at the supply

zone's proximal line and a stop loss order at the distal line. and watch for a
rise in the price to retrace.

Indeed, price went back up and hit our limit order and went down.
The supply zone in the following example has a rating of 8.5/10. Since the
score is between 8 and 9, we have two options: wait for price to retest the
zone before placing our order, or wait for price to enter the zone and then
reverse back out of it.

The possibility of success is minimal in this case because we have a score

below 10, and the price has already tested the supply zone, therefore it may
break above the supply zone.
We hold off on placing our entry until we have price confirmation for this
reason.
Price did move through the zone and try the area with more supply since it
has a better chance of succeeding. For this reason, trading reversal patterns
should be our primary focus rather than continuation patterns.

Let's now examine a trade opportunity when we only have control over one
zone. We spot a supply zone above the present price on the monthly chart.
We lack a distinct demand zone to draw our zone around in this scenario. We
are limited to using the supply zone and trading with the trend as long as the
price keeps setting new lows.
We draw our weekly supply and demand zones on the weekly chart as seen
in the chart below. From the weekly demand zone, the price has created a
nice rally and is currently moving into the weekly supply zone.

This supply zone is regarded as being particularly potent. The strength of the
migration out of the supply zone indicates that there are many unfulfilled
orders in this zone.

Overall, the trend is downward. Lower highs and lower lows have been
made by price, confirming the downtrend movement.
We now switch to the daily chart, where we will put our trade into action. In
order to put our limit order and take profit, we locate the daily supply and
demand zones near the current price.

The price is getting close to the daily and weekly supply areas. We anticipate
that the price will test these overlapping zones before descending to test the
zone for daily demand.
Our sell limit order is positioned at the daily supply zone's nearest line. The
stop order is positioned above the daily supply zone's distal line.
Price tested the overlapping supply zones on the daily chart and moved
down to test the demand zone as shown in the chart below.