The following article aims to provide:
- Information on Enhancer #1: The strength of the initial move
- A better way of looking for your next level to trade
Before you can evaluate a level in order to determine its suitability and expected strength, you obviously need to locate the candidate level first. This first trade Enhancer helps with both tasks. It will guide you towards finding the next level to trade and at the same time it will serve as the first indication of whether the level is strong enough and suitable for your next trade. This is just the first of four main enhancers and a few supplementary ones. They all fit nicely together and can be integrated into nearly any trading plan which is based on prudent attitude and valid logic.
While reading this first Enhancer article, please keep in mind that not all answers can be provided in one place. In order to start connecting the pieces of the puzzle you will have to read until the end of the material, and then you might find it useful to revisit the articles once again as they will make much more sense the second time, especially if this is your first exposure to this kind of information. Also, before trying to find the next level to trade, any traders that are new to the concept of Supply and Demand levels should understand that at first glance there might appear to be Supply and Demand levels everywhere, on every chart and on every timeframe, not only in Forex but in any market.
Our aim is to find the levels that have promising potential and are capable of causing predictable market reactions which we can use in order to significantly improve the probabilities of our trades
Although this could be considered true from a specific point of view, it is far from the kind of levels we are looking for as Supply and Demand traders. Our aim is to find the levels that have promising potential and are capable of causing predictable market reactions which we can use in order to significantly improve the probabilities of our trades. This means that although the untrained eye might initially see levels everywhere, very few of them will actually pass our filtering and match our minimum requirements in order to offer stacked probabilities as a result.
This first enhancer, the strength of the initial move, will help you see through the fog and guide you towards a proper level (which you can then evaluate further by using the rest of the enhancers). The main idea is that in order to find a strong Supply and Demand level, you must first look for the strong move on your charts and then follow it to its origins (which is where the strongest levels can be found). A strong market move can only be caused by a great imbalance between the Supply and the Demand near a specific area (not to be confused with market volume). This imbalance between buy and sell orders creates the strong move we see on our charts as the strong side pushes price in one direction. Whatever the reason might have been for this imbalance (news, institutional trading, technical, fundamental or other reasons), the important thing is that there was an imbalance and a strong move as a result of this imbalance. If we first find this strong move then we can follow it back to its origins and look nearby for a possible level to trade, if it meets our requirements.
The whole concept is based on the fact that strong Supply and Demand imbalances cause strong market moves. If there was no strong move then there was no strong imbalance, meaning Supply and Demand were relatively equal to one another, taking turns and moving price up and down in a gradual manner, leaving behind all kinds of patterns and no significant unsatisfied Supply or unsatisfied Demand for us to use. But if the move was strong then it means the imbalance was great and so the chances of having unsatisfied Supply or Demand remaining in that area are high. Also, as you will read later on, it doesn't matter if the same unsatisfied orders remain there because it is mostly the renewed institutional interest around those levels that will create any future imbalance for us to trade.
As traders, if we can properly identify areas were either Supply significantly exceeds Demand, or Demand significantly exceeds Supply, then we don't need much else in order to stack the probabilities on our side by choosing the right side of the trade at the right time.
Finding a proper candidate level to evaluate is actually not that hard once you get the basic concepts and apply them properly. We already know that the best levels exist near the origins of strong market moves, so we look for the strong move first and then we follow the move back to its origins, where the imbalance between Supply and Demand was, and where unsatisfied market forces are likely to exist. If we find a possible level we then evaluate it further by using the rest of the enhancers (explained in separate articles). So, just because we found what appears to be a strong market move and we followed it to its origins, it does not necessarily mean that unsatisfied Supply or Demand exists there in any quantity capable of affecting the market price in any meaningful and predictable way for us to use. The origin of the strong move will only guide us to areas of potential interest so that we can look for levels to examine further by using the rest of the enhancers.
Now let's clarify a few more things regarding this first enhancer. To start from the obvious, what looks as a strong move on one timeframe might be a small move on another. The move must be significant on the specific timeframe where you can see your candidate level clearly. If for example you found what appeared to be a strong move and followed it to its origins but you cannot see anything that looks like a proper level, then you might have to switch to the next higher timeframe in order to see a better representation of the level. If that is the case, then make sure that the move you found still appears significant on that new timeframe. The timeframe in which you view your level most clearly is also the timeframe you should use for your evaluation, so the move must appear significant on that same timeframe. If it doesn't, then you followed a weak or insignificant move and thus the candidate level you found is not a proper level to trade. It might work or it might not, as any other level, but the probabilities of it working are much lower than what we aim for as Supply and Demand traders. Stacking the probabilities on your side means making sure all enhancer requirements are met to the degree possible in each trade.
Stacking the probabilities on your side means making sure all enhancer requirements are met to the degree possible in each trade
Another thing to have in mind is that the strong moves might appear at any part of the chart, they don't have to be near what you might consider a top or a bottom, whether daily, weekly, or relative to a pattern. What appears to be a top in one timeframe might actually be the upper part of a bottom basing pattern if seen on a higher timeframe. So don't discard or accept a strong move and its originating level based on where it appears to be located initially. This is where the second enhancer comes in to help you determine if your level is properly placed in regards to the higher timeframes, i.e. the "big picture". As you would expect, Demand levels work best when located low while Supply levels work best when located high as seen on the higher timeframes, i.e. the big picture applicable to a specific trade. In any case as far as the first enhancer is concerned, you should be looking for the strong significant initial move in order to follow it to its origins to look for levels worthy of further evaluation by using the rest of the enhancers.
But what exactly is a strong move? Does it have to be a specific number of pips? Does it have to be continuous lengthy candles one after the other? The simple answer is no. A strong move can be any number of pips as long as that number of pips is significant to your timeframe. You cannot consider a 20 pip move strong on a 15 min timeframe, it is just too common and insignificant to have any predictable effect with meaningful probabilities. A move that lasted 20 pips before returning to the level was based on a small imbalance between Supply and Demand at the originating level. If the imbalance was large enough then the move would have lasted longer, otherwise either the initial force (Supply or Demand) was too weak, or an opposing force of similar or larger size appeared nearby and stopped the move. In either case the imbalance was only temporary and thus the move didn't last. This kind of small temporary imbalance does not leave any significant unsatisfied Supply or Demand behind for us to use in the future. We want to choose levels that can produce meaningful reactions in a predictable way with some degree of accuracy, otherwise it might become harder for us to achieve consistent results.
Please also have in mind that the candles do not need to be continuous (i.e. same color all they way), there might be a few small retracements within the move without reducing its significance at all. But you need to use critical thinking: if for example there are too many retracements within the "strong" move, then the move might not be as strong as you think it is. Have in mind that this too depends on the timeframe you use, i.e. what can appear as multiple retracements on one timeframe might appear as a single straight move on a higher timeframe. Again, you need to determine this on the same timeframe you use when you can view your candidate level clearly. Don't use one timeframe for viewing the level and another for determining the strength of the move. Also, it is equally important to understand the concept of "how far did price get before returning" to your candidate level. The further price managed to get before returning, the better the chances for your level to work as expected despite the longer time that was probably required for it to return (more on this in another article). If price is returning towards a candidate level then you can see how far price managed to travel before the trend reversed. The trend obviously is more likely to include retracements than the initial strong move, so this is to be expected. We ideally like the initial move to have very few and very small retracements, but the trend that follows the initial move will most likely have more retracements in it, which is normal.
As with all other enhancers, this one too applies to all timeframes (although you will find that some timeframes are more suitable to your own style of trading than others). But you must always be aware of the higher timeframes (especially the ones just above the timeframe you are using for a specific trade). There might be contradicting forces undermining the strength of your candidate level, so you must be aware of the location and distance of your level in relation to opposing forces (levels), and also within the big picture as seen on higher timeframes (explained in more detail in the next enhancer article).