Trading Crypto Currencies With Simple Supply & Demand
What does a gymnast on a neatly stacked pile of stones have to do with trading? And how do they seemingly defy gravity?
Well, this article is all about the market being in “balance” or “equilibrium”. You may have seen me mention Price Pivot Zones (or PPZs) before. This is the term I coined for describing a simple but important function of price action.
This basic principle is often overlooked, but it occurs on every chart, on every timeframe and in every market.
What is a Price Pivot Zone?
Quite simply, a Price Pivot Zone (PPZ) is where the market has pivoted either side of a price level. The market spends a great deal of time at these zones. Sometimes the zones will repel price, sometimes price will break straight through and at other times price will consolidate just above or below.
The important point to note here is that these zones are where the highest volume of price action occurs on the chart.
Let’s take a look at an example:
In the EUR/USD 4 hour chart above , the most important (and obvious) PPZ is around the 1.2300 level. There are more buys and sells occurring at this price than anywhere else on the chart.
Now, I’m going to add some arrows. It should become apparent that the zone around the PPZ at 1.2300 often caused price to bounce and also acted as a magnet to attract price. Referring back to that gymnast, the market truly has found balance (or equilibrium) here.
Isn’t this just support and resistance?
Whereas support and resistance will connect highs or lows on the chart, Price Pivot Zones will cut through areas.
In fact support and resistance are often low volume areas on the chart, especially if the market spikes into a level and doesn’t spend long there. Price Pivot Zones are high volume areas.
Watch what happens when I add a (tick based) volume profile to the chart below (the grey shadow). We can see the low volume area coincides with support, whereas the high volume area approximately coincides with the PPZ. Just be aware of that for now as volume profile is a lesson for another day.
Don’t confuse PPZs with floor trader pivots
It’s worth mentioning that Price Pivot Zones are completely different to floor trader pivots. Floor traders pivots were originally used in the pits of the exchanges as support and resistance levels.
Whereas PPZs are based on areas of the chart where buying and selling volume is concentrated, floor trader pivots are a mathematical calculation based on the high, low, and closing price of a given time period. Both types of pivots have their merits, but be aware they are two different things!
PPZs are everywhere
The previous example showed a very obvious Price Pivot Zone on a 4 hour chart, but you’ll find them everywhere.
Here’s an example of obvious and not so obvious PPZs on the 1 hour USD/CAD. Notice how the major zone comes into play again later in the month. Also observe how the candles close above and below the line on the smaller zones.
Although I’ve drawn these zones a couple of pips wide, sometimes a wider line is warranted. These are after all, zones and not precise “to the pip” lines.
How can we use these zones?
Now, the question you’re probably asking is how can we trade these PPZs?
The answer is to use them in confluence with other trading tools and methods. So let’s see how we can use these levels in confluence with Supply and Demand zones.
In the example below, the top supply zone has good confluence with the PPZ giving a great trading opportunity. The smaller supply zone is also directly in line with the middle PPZ. Look how many times price reacts at that area.
Trading a PPZ isn’t just limited to supply and demand zones. The lower PPZ gave good confluence for a bounce off support. Again, this was a very well respected area with price bouncing off it multiple times.
Conclusion
Price Pivot Zones are a very simple, but effective tool to add to your trading toolbox and extremely powerful when used with the other concepts I teach.
We’ve only just skimmed the surface on trading strategy here, so if you would like to learn my strategy in full including the more advanced concepts, head on over to Udemy and get a 10% discount with this coupon link:
Finally, if you enjoyed this article, don’t forget to share it with the social media buttons below!
Related posts
