Levels of Supply/Demand Imbalance..

This is the first article in the series of concepts that I promised in my last post. It might look like spoon-feeding at the start as I want to explain everything I use as detailed as possible so that it gives a clear idea about how I see the market and how I identify low risk and decent reward opportunities. And let me say that again, every single point that I am going to write in this series is important and don’t underestimate the .power of simplicity.

So what are these supply/demand levels? Are they same as support and resistance levels?

Yes. They are almost the same. But I would like to call it with a different name so that I can differentiate how I pick levels from the chart to deal with markets, which is a bit different to what a lot of other traders do. I never take levels from the future like Fibonacci retracements and extensions, pivot calculations of S/R etc. as I strongly believe that the future in the market cannot be predicted. I am not saying that they don’t work. They might work for you. But the absence of rational reasoning about anything in trading doesn’t suit my personality and my way of trading with tight stops. Enough of this BS. So what are they?

The price point that had initiated the move, which has broken the last pivot point is what I call a supply/demand imbalance level.

The pivot point can be a swing high, or swing low, or the high/low in a single candle retracement (which I call as trap levels). I repeat I don’t consider each and every swing high/low as a supply/demand imbalance level.

That’s it. Now lets look at some charts to spot those levels.

1.Swing highs and Swing lows as the levels:-

I explained long back how I identify swing highs and lows. If you miss that, feel free to read that first before moving forward in this article here.

Now that you know how to identify the swing highs and lows on the chart, it’s time to filter which of them can create a huge imbalance in the next test so that we can use them either to take an entry or to scale out the already existing position. Have a look at the following chart.

levels_1 The image is self-explanatory and feel free to comment if you have any doubt regarding that. There are other levels(trap levels) in this chart that do not swing highs and lows, which can cause some imbalance in the future, I didn’t mark them intentionally as the primary purpose in this chart is to identify only swing highs and lows that have the potential to create a good imbalance in the future on the first interaction.

  1. Trap levels as imbalance levels:-

I call single candle pullbacks as trap levels. A trap level on 5min. the chart might appear like a swing high or a swing low in 1min. chart. And a trap level on 1min might not appear at all on 5min chart. Let’s look at the following chart to make that clear.

Again, I only marked trap levels in this chart. Didn’t mark the swing highs and swing lows for the explanatory purpose. The market moved one or two candles against the swing, and then it had broken that pivot trapping those who took trades against the swing. I marked them with the black lines in the above image.

And obviously, a swing high/low has more potential to reverse than a trap level. Because that level will be visible on a lot of other timeframes. I mean, a swing low in 1min. the chart will appear at least as a trap level in 2min, 3min, 4min, 5min and so on… So all the traders trading those timeframes will be interested in that level. But whereas a trap level in the 1min chart will disappear after a few increments in a timeframe. That makes the swing highs a bit powerful than the trap levels.

The converse is also true. The level from a higher timeframe will be seen on all the timeframes below that. Like the level from hourly is seen on all the charts from 1min-hourly and greater. So that makes the level from a higher timeframes chart more powerful than that from the lower timeframes as it is accessible to a lot of traders trading different timeframes.

But remember, I don’t blindly place a limit order once the level is identified. I wait until the price reaches that level, interacts with it, defines a location to place my stop, and then I work my entry as close to the stop as possible before the take-off. I take the blind entries sometimes when the market is too quick and the bias is extremely strong, which is very rare, and which I don’t recommend to the beginners.

Let me explain exactly how I use them for entries

In a trending market, .

Levels from the higher timeframe – I use them for TTF trend reversal trades(constructing the S/R structure) on the first interaction. ie. BOF, TST when the trend is weak. Also for BPB trades when the market is entering into the new framework of support and resistance.
Levels from the lower timeframe – I use them while I am looking for a pullback and complex pullback trades in TTF trend on the first interaction. Not for CT trades. Never!!
Levels from the trading timeframe – For trend definition in TTF. Series of demand levels is an uptrend. Series of supply levels is a downtrend.
3.Range Boundaries:-

Apart from these, you already know how I define the range boundaries and when I’ll call it a range basically. So I am not going into that again in this article. If you miss that, you can read it here.

These are the three types(and only ) of supply/demand levels I use in my trading. If the level is below the current market price, it is a demand level. If it is above, it is a supply level.

Understanding the concept of these levels forms the basis of my trading philosophy. You can see there is nothing complex in finding these levels. No complicated calculations like Fibonacci, pivot points of S/R and all. Everything is straight forward and from the market data. And it is well known that the market respects its own levels.

The philosophy is the heart, liver and every damn thing you can name of my trading. It is there in the pre-trade analysis, at the time of entry, when setting the targets, during the trade management and even during the post-trade review. I will talk in detail about it in my next article. I thought of starting this series with the philosophy itself, but there is a word ‘supply/demand level’ in it. So I wanted to clear the confusion about my nomenclature.

Hope I made everything clear about the types of levels I use. And you can mention your doubts if you have any in the comment section and I will try to reply as soon as I can.

P.S 1- I intentionally removed timeframes from the charts as all these PA concepts are timeframe independent. I am not a fan of intraday timeframe dependencies.

P.S 2- The nomenclature I use in this blog is exclusively for my trading. It might differ from what other traders use.

P.S 3:- I didn’t decide on the name of this category yet. So I welcome any suggestions for naming this series :).

User says:
When gone through the material, I felt it like the updated procedure for drawing the market structure (HTF) which you made, is applied on TTF and LTF, along with the trap, for better trade management. I had noted some intermediate lines in your FB posts and picked some wild guess. And whole things seems something logical about the levels. But if we go for every level on every time frame, the chart will get crowded with lines and levels everywhere. So we have to decide upon which levels to be chosen at which time frame. So I just summarize my understanding as follows.
Let abbreviate supply/demand imbalance level as SD Level.

  1. For TST, BOF and BPB entries -> HTF SD Levels (which will be same as HTF Support/Resistance (Market Structure))
  2. For PB and BPB entries -> LTF SD Levels (level previously determined on TTF and zoomed in )
  3. For Exits -> TTF SD Levels
  4. Every SD Levels will be valid only for their first interaction (virgin levels) and every virgin level interaction may create a new SD level or invalidate the current SD Level.

Am I got it correct?

Perfect. We don’t need to make the charts messy… we will only draw those lines that are necessary at that point .. a few lines above and below is good enough. And regarding lines from TTF, you don’t need to draw them. You can get those from the LTF itself.

User says:
All the S/D levels you described above can be found on the one chart (eg., a 3min TTF). Do you, therefore, need to use HTF (5min) and LTF (1min) charts? Was just curious if you thought you would be just as successful if you only used the one chart to identify your S/D levels and take BOF/TST/BPB/PB/CPB entries and exits.

Of course, you can see the levels from one timeframe in all the timeframes lower than that. I mentioned that point as well. But the problem is, if you identify levels from a single chart, let us say, 5min. , and keep on looking for BOFs, TSTs, you will end up in taking a lot of CT trades which is a disaster in the long run. The point of using a higher timeframe here is, you restrict yourself from taking CT trades within those higher timeframe structural framework when the market is trending and that saves a lot of psychological and financial capital in the trending markets. I used to trade only 5min charts before when I was following the concepts of Al Brooks and some candlestick patterns (very long back), but looking a timeframe above for finding the levels for reversal trades, and a timeframe below for finding levels for with trend trades allowed me to read more about the market participants. Even now, while trading very thick markets like ES, I try to avoid LTF as it is not that volatile and 5min chart gives me enough information to deal with the markets. And when you are trading 3min. as TTF, it is advisable to use a timeframe that is at least a multiple of 8 as HTF that allows you to find the levels for reversal trades. So there is no point in using 3min. as TTF and 5min. as HTF.

There is no way you could have identified that level from 5min. chart alone. Using an LTF lets you anticipate the possible price point around which the pullback might end. Once that is identified, our job will just sit and wait until the price reaches there. My way of trading is all about anticipating in advance what market might do in the near future and taking chances when it is behaving as I anticipated.
I hope I cleared your doubt of using multiple timeframes. I am not saying that it cannot be traded directly from a single chart of something. I am just saying that it will be handy if you can see what other traders cannot see

User says:
Just curious to know that in the chart you posted above, would you take long trades on the TST of all the levels 1, 2, 3, and 4 (shown by me in the above pic) or only at level 4?

While looking for PBs, I mostly avoid TST type entries as they end up in BE or losers most of the time, unless the bias is too strong and the pullback is too weak.
1) At level one, I would have looked for a weak retest of the level, after the failure, which I didn’t get. So I would have skipped the setup here.
2) Yep. Looking at the weakness, I would have attempted along there, which ended up as a small loser. Look how quickly it was sold after breaking the high of that second candle in the circled region. If I can spot that in the live, I will scratch the trade around BE. Or else, I will take a loss on this.
3) Looking at the depth of the pullback, I will be wary of taking TST type entries again, and I might skip this one.
4) As it is a second attempt failure, I would have taken it, but not with a limit order. As I mentioned, this PB has already caused enough frustration to the bulls who look for early entries with the limit orders like me. So I prefer to play with stop orders after two or more scratches or losers in setup, as they come with better odds of success.

User says:
I believe you mentioned once about Smart Trader from Nifty Nirvana blog, he’s using also levels of prior days close, high and low and today’s open. I looked at some historic data and price seems to respects these levels quite often. What do you think about this method? (to be honest, I’d like to hear sth more, than “if it works for you – use that :D)

Haha. I like that line. I’d like to hear something more than if it works for you- use that. First of all, thanks for the appreciating words. 🙂
A lot of people use those previous days high and low. But I am not a fan of using close. Every horizontal line that I draw on my chart must have some potential to reverse a weak swing (Minor S/R levels) or a weak trend (HTF S/R levels). I personally find that previous day highs and lows are good for taking profits, but not in initiating CT trades. I tried them long back, and my trading stats around those levels were not satisfactory. So I just passed on them. But I keep an eye on them while taking profits.
And regarding that type of trading of smart trader, I really can’t trade like that as I use tight stops and I like to enter earlier than the retail traders who look for a trigger to enter.
Conclusion:- I know you hate to hear these words. 😀 Just try and decide. I like to scale out my positions at previous day’s highs and lows, but I don’t take CT trades there. So those lines don’t deserve space in my charts