If you’re not from a traditional trading background and Cryptos are your first venture into technical analysis, looking at a trading chart might feel like you’re trekking through the woods without a compass.
In this article we’re going to explore how simple Supply and Demand zones can be applied to Crypto currencies and how they will help you find your bearings and map out where price is likely to turn.
Bitcoin Cash Demand Zone Example
Lets take a look at a daily chart of Bitcoin Cash vs the dollar (BCH/USD) and see what a demand zone looks like. The chart below shows the market forming 2 candles before shooting up very quickly (1).
Note the top of the zone (2) is drawn from the candle bodies and also at the exact point that price shot up and never looked back. The bottom of the zone (3) encompasses the candle wicks. Your stoploss goes below this point. Finally, we enter a long position when the market returns to our zone at (4).
Bitcoin Cash Supply Zone Example
By using supply zones, we can find areas on the chart where there is a good probability of the market falling.
The 4 hour BCH/USD chart below shows a supply zone. The market formed a small candle and fell very quickly (1). This time the bottom of the zone is drawn at the lower candle body (2) just where the market fell. The top of the zone is drawn at the wick (3) – this is where your stoploss goes.
When the market returns to the zone (4), we enter short.
Not All Cryptos Are Tradeable
Now I’ve obviously cherry picked some perfect examples for you! However, it’s important to know that not all Crypto currencies are tradeable.
Below is an example of a chart unsuitable for trading! This is a chart of Monero vs the dollar (XMR/USD). The price action is extremely “wicky” (despite being a daily chart) and although some zones worked, you are likely to get stopped out more often than not. Look for a chart that has less wicks and more solid candles.
Mapping Supply & Demand
In this chart of Ethereum below, I’ve mapped out a number of supply and demand zones. Using these zones, we can get a good idea of where the market will turn. Notice how price often just missed a zone by just a few points. Because of this, it’s important to build a degree of tolerance into your entries to allow for this.
Simple Order Flow
Let’s look at that same chart again. Can you see where the flow turns from bullish to bearish? Look at the bigger swings.
On the way up, the market makes higher highs (HH) and higher lows (HL). It continually breaks resistance (the purple lines) and retests the top side as support.
On the way down, the market forms lower highs (LH) and lower lows (LL). It continually breaks support and retests the underside as resistance.
Knowing this, we can decide to only trade demand zones when the flow is bullish and only trade supply zones when the flow is bearish.
Every so often the market will throw a curveball. The last swing is a higher high, but it still fell away from supply and the bearish flow may still continue.
We’ve only just scraped the tip of the iceberg when it comes to reading supply and demand, market flow and price action!
The great thing about my strategy is that it works in both BULL and BEAR markets. As we know, markets are bi-directional and “HODL”ing shouldn’t be your only option!