The last few years has seen an explosion of interest in the supply and demand trading methodology taught by Sam Seiden.
Many have taken Sam’s rule set for trading supply and demand zones and then added additional things to personally tailor supply and demand to their own private needs, what I want to take a look at today is what makes supply and demand trading so popular among traders ?
A few years ago price action at support and resistance was all the rage, everybody was trading the markets using this but then supply and demand came along and it seemed like a switch occurred. The people failing to make money using support and resistance suddenly found comfort trading supply and demand.
Now, instead of having to draw dead accurate support and resistance levels (which is impossible) they can draw rectangles which they can use to define a place where the market will or wont do something, as you’ll find out later drawing zones through the use of rectangles is the sole reason supply and demand trading has become so popular.
The Rise Of Supply And Demand Trading
Sam Seiden first entered the trading scene with his supply and demand videos posted to the FX street website.
The earliest of these videos dates back to 2008 where he claims to have called the bottom in the S&P500 index.
He says supply and demand trading was born out of the time he used to work at the Chicago Mercantile Exchange where his job was to place trades on the behalf of institutions i.e banks and hedge funds. His time as an order processor allowed him to see where and when large trades came into the market though the use of the order-book, it was from this that he was able to devise what we now know today as the supply and demand trading method.
He claims the large institutions buy when the markets are falling and sell when the markets are rising, this is something I can agree with as it makes sense in the context of how the market works.
Unfortuantley something I can’t agree with is Sam’s theory on why the market bounces in the opposite direction when it reaches a supply or demand zone.
Sam seems to think the reason the market reacts the way is does when it enters these zones is due to the large banks and institutions leaving pending order to either buy or sell at the zone ready for when the market returns.
Whilst I don’t want to spend too much time bashing Sam Seiden and his trading method its obvious to anyone who’s been trading for long time that pending orders cannot move the market when triggered. Since Sam’s whole premise of the supply and demand trading method is based on this it obvious to see his way of trading supply and demand is inherently flawed, if you want to learn how to really trade supply and demand with concepts which make sense then check out this article.
The Attraction Of Rectangles
One of the main components of trading supply and demand is the use of rectangle to mark out the zones.
You may not know it yet but these rectangles are the primary reason so many people are attracted to trading supply and demand in the first place.
Using support and resistance to determine where the market is likely to reverse is a flawed strategy for many traders due to its reliance on the level being drawn exactly correct. Whilst there are many different ways to draw support and resistance levels, the most common method that everyone knows is to draw the levels through old swing highs ( for resistance ) and old swing lows ( for support).
The problem people have is what price points do you draw the support and resistance levels from ?
We know to draw them through swing highs and lows but, do we draw them from the lows and highs of the swing ? or do we draw them through the middle of the swings ?
This is the primary problem with support and resistance which is solved by supply and demand trading.
In supply and demand trading you have an AREA in which the market can reverse.
In support and resistance trading you have a LINE which the market must hit in order to reverse.
Having an area in which the market can reverse means two things:
If the market breaks past the area you know the reversal is over and its more likely the market will continue to move in the direction of the break.
As long as the market stays within the area it still has the potential to reverse.
If you draw a support or resistance level on your charts, the only way for you to know if the market has broken the level is if it moves far beyond the level itself.
If you were trading the resistance above its impossible for you to know at this point if the resistance level has been broken, or is still causing a reversal.
The market has moved past the level but the price action is still showing signs of a reversal therefore which one is it ?
Is it a reversal or has the market broken the level ?
With supply and demand zones your able to determine when the zone has been broken, the market will break either the high or low of the zone, when it does you know with a high degree of certainty the market is likely to keep moving in the direction of the break.
Take a look at the supply zone drawn in the image above.
In the previous example we wouldn’t know if a reversal was taking place or not, but when a supply zone is drawn we know as long as the market stays within the zone there’s a chance the market could still move in lower.
The main reason supply and demand trading has overtaken support and resistance trading as the most popular trading strategy is down the zones removing an element of discretion found when trading support and resistance levels.
People don’t like ambiguity, they want certainty. Levels of support and resistance area ambiguous due to the fact that they need to be drawn absolutely perfect, if they were drawn perfectly every reversal would hit the level then move in the opposite direction, but its impossible for them to be drawn exactly as there is no standard definition as to how they should be marked.
Supply and demand zones solve this ambiguity problem because of the way zones themselves give the market an area to reverse in. Drawing supply and demand zones is easy, there is very little variation between how each trader draws the zones on their charts, if the trader does happen to draw them incorrectly it’s still not a big deal as the market has a much bigger area to reverse in when compared to support and resistance levels.
We must thank Sam Seiden for creating the supply and demand method.
Not only did he create a Superior method of trading than what was available at the time i.e ( price action at support and resistance ) he also gave traders a strategy which if understood correctly has the ability to generate a significant amount of profits from the market.
The key to having a complete understanding of a trading strategy is to figure out why it works the way it does.
If supply and demand zones were marked using a horizontal line rather than an area, its likely the traders using it would achieve the same results as support and resistance traders. The ambiguity that comes from having a line the market must hit in order to reverse would remain therefore the same problem exists, “how do you know if the market has reversed or the level has been broken”
Really it’s not the theory that supply and demand trading is based on which makes it better than trading price action at support and resistance levels, it’s the zones bringing a level of certainty to trading that didn’t exist before.
This is the real reason why supply and demand trading is so popular.