Something which supply and demand traders will have undoubtedly noticed in their time trading the zones is the way the market will fail to break past some zones even after being touched multiple times. Supply and demand teaches say the reason this occurs is because the pending orders which are supposedly placed at the zone by the banks have not been depleted by the first or second touch into the zone.
Today I’ll show you the real reason why some supply and demand zones have a tendency to cause the market to reverse multiple times upon being touched and why the banks will never place pending orders at supply and demand zones when they want to enter the market.
The Reason Why Some Zones Don’t Break After Multiple Touches
If a the market is failing to break past a supply or demand zone it can mean one of two things:
The banks are using the zone to either place trades or take profits.
When the banks are placing trades they are rarely able to get their entire position placed all at once due to a lack of buy or sell orders being present in the market. So what they must do is after getting what trades they can placed using the orders available they have to make the price move up and down in order to generate enough orders to fill the rest of their positions.
When this process of generating orders is underway the banks will not want the market to move past the point where they have placed their first trade.
In other words, if a bank has placed a buy trade and is now making the price drop in an effort to drum up enough sell orders to get another buy trade placed, they will not want the price to fall below the price where they have entered their first buy trade as it could cause them to lose money.
To stop this from occurring the banks will get their second trade placed as close as possible to the price of their first buy trade. By doing this they stop the market from being able to drop below the location of their first trade whilst also knowing they’ll be able to make the same amount of profit from their second trade as they’ll make on the first trade.
Here’s an example I found of this process taking place.
First we had a supply zone form due to the banks placing sell trades. The buy orders which were in coming into the market at the time of the banks placing the sell trade was not enough to get all their whole sell position placed which means they must make the market move back up to get enough people to buy so they have enough orders to fill the rest of their sell positions.
When the price moves back up to the supply zone the banks place another sell trade using the buy orders coming into the market from the traders buying on the move into the zone. It would be at this point where supply and demand teaches would say its a bad idea to trade another move into the zone because all the sell orders which were said to be placed by the banks at the supply zone when it was created have been consumed from the previous movement.
Another drop take place because 0f the banks placing their second sell trade. They still haven’t be able to get all of their sell position placed which means they need to make the price rise again to create more buy orders. The price advances back into the supply zone, the banks place their final sell trades and the market completely reverses.
You can see how each of the banks sell trades were placed at a very similar price. There is only a 33 pip difference between the price where they placed their first sell trade and the price at which they entered their second sell trade. When the main reversal gets underway each of these trades go into roughly the same amount of profit-making it easier for the banks to determine how many sell orders they might need to take profits off these sell positions.
Why The Banks Won’t Place Pending Orders At Supply And Demand Zones
In order for the banks to place close or take profits off trades they need the opposite kind of order coming into the market. If a bank wanted to place a buy trade they need other traders to be selling. The amount of orders coming into the market determines how much profit the bank is able to take off a trade or how big a trade they are able to place.
If the bank was to use a pending order to enter a buy trade placed ahead of time then it’s not possible for them to know if there will be enough sell orders coming into the market to get the pending order to buy placed.
If the banks wanted to place a buy trade upon the market returning to the demand zone above they wouldn’t know the size of the buy trade they can place until the market had entered the zone. When it enters the zone the bank will look at the order book and see how many sell orders are currently coming into the market and then decide on the size of the buy trade they’re going to place.
When they’ve decide on the size of the trade they will use a market order to get the trade placed,
If they had placed a pending order to buy at the zone soon after it formed they wouldn’t have been able to determine the size of the buy trade because there’s no way for them to know how many sell orders will be coming into the market when the price drops back into the demand zone.
In the event of the banks pending buy order being too big what will happen upon the order being executed is part of the banks pending order will be filled using the sell orders that are coming into the market, then the price will move up because all the sell orders are gone and it will continue to move up until enough sell orders are found for the remainder of the banks pending buy order to placed.
This causes the banks to have lots of different buy trades placed at increasingly worse prices. Had they just used a market order to enter a buy trade when the price entered the demand zone this wouldn’t have occurred because they would have known exactly how many sell orders were coming into the market and could have placed a buy trade which they know for sure will be filled at one price.
Hopefully you can now see why the banks do not place pending orders at supply and demand zones and why some zone have a tendency to cause the market to reverse multiple times. Knowing which zones this is likely to take place on is quite challenging but I don’t believe it happens frequently enough for it to affect the profits made from trading supply and demand zones themselves.
Thanks for reading please leave any questions in the comment section below.