4-Institutional S&D Zones

Summary

This script discusses identifying high-probability supply and demand zones in trading. It emphasizes the need to filter out zones that aren't worth trading and focuses on those with significant market impact, such as those that break market structure or overpower other zones. The importance of market structure, liquidity, and confluence in validating zones is highlighted, with the goal of finding zones with institutional backing for more reliable trading opportunities.

Takeaways

• 📈 Supply and demand zones are ubiquitous in the market, reflecting constant shifts in market balance.
• 📊 Price reactions to these zones vary; some show significant movement while others may be less responsive.
• 🔍 Market structure is crucial for determining the direction of price trends and identifying high-probability trading zones.
• 🌐 Multi-time frame analysis adds depth to understanding price movements and overall market narrative.
• 💹 Premium versus discount analysis helps in identifying well-priced levels for buying or selling.
• 💡 Key concepts like liquidity, inducement, and mitigation will be explored in future lessons to further refine trading strategies.
• 🔑 Institutional zones are those validated by significant market movements, such as breaking price structures.
• 🔄 Zone flips, where supply turns to demand or vice versa, indicate significant shifts in market control and are high-probability areas.
• 🏦 The presence of institutional backing is inferred when a zone breaks significant market structure or overpowers another zone.
• 📋 Confluence of factors like market structure, liquidity, and order flow are 'nice to haves' but not strict requirements for trading decisions.

Q & A

What are supply and demand zones and why are they significant in trading?

Supply and demand zones are areas on a candlestick chart that represent significant levels of buying or selling pressure. They are significant because they indicate where large amounts of orders were exchanged, potentially influenced by institutional investors, and can predict future price movements.

Why do supply and demand zones appear everywhere on a chart?

Supply and demand zones appear everywhere because imbalances between supply and demand are constantly shifting in the market. If there were no such imbalances, prices would not move and would remain stagnant.

How can traders filter out low-quality supply and demand zones?

Traders can filter out low-quality zones by looking for zones with specific characteristics that increase the probability of a significant price reaction, such as market structure, premium versus discount pricing, liquidity, mitigations, and alignment with the current order flow.

What role does market structure play in identifying high-quality supply and demand zones?

Market structure helps in determining the direction of price movement, indicating whether the market is in a bullish or bearish phase. It helps traders manage their expectations of how far a move from a zone is likely to reach, thus increasing the probability of trading from zones that cause large moves.

Why is it important to consider premium versus discount when trading supply and demand zones?

Considering premium versus discount helps traders to identify well-priced levels for entering trades. Buying from demand zones at discount prices and selling from supply zones at premium prices can increase the success rate and overall reward-to-risk ratios of trades.

What is the concept of liquidity in the context of supply and demand zones?

Liquidity in the context of supply and demand zones refers to whether a zone has swept through significant liquidity or if it has inducement. Zones that have interacted with more liquidity or have inducement are likely to be more significant and have a higher probability of causing price reactions.

What is a mitigation and how does it affect the strength of a supply and demand zone?

A mitigation occurs when a supply or demand zone is partially or fully filled, reducing its strength. An unmitigated zone is completely fresh and has not had any orders filled, making it potentially stronger. Zones that are part of a chain of mitigations can also increase the probability of a price reaction.

How can traders determine if a supply and demand zone is with or against the current order flow of the market?

Traders can determine if a zone is with or against the current order flow by analyzing the overall market trend and the position of the zone relative to that trend. Zones that align with the current order flow are more likely to be significant and have a higher probability of causing price reactions.

What are the two core methods to validate whether a supply and demand zone is an institutional zone?

The two core methods are: 1) The zone led to a move that broke market structure, indicating a significant imbalance between supply and demand. 2) The zone managed to overpower and take out another zone, causing a flip from supply to demand or vice versa.

Why is breaking market structure significant when validating supply and demand zones?

Breaking market structure is significant because it indicates that a zone has caused a substantial price movement that overcame previous resistance or support levels. This suggests that the zone had a significant impact on the market and is more likely to have institutional backing.

What is a supply to demand flip and why is it important in trading?

A supply to demand flip occurs when a previously dominant supply zone is overpowered by demand, causing the zone to fail and control to shift to demand. This is important because it indicates a significant change in market sentiment and can lead to substantial price movements.

Outlines

00:00

📈 Understanding Supply and Demand Zones

The paragraph discusses the concept of supply and demand zones in trading. It explains that these zones are ubiquitous in the market and are essential for price movement. The speaker acknowledges the challenge of identifying which zones will be effective for trading, as not all zones will produce significant reactions. The paragraph introduces the idea of using market structure to filter out less promising zones and to identify zones with a higher probability of significant price reactions. It also mentions the importance of institutional backing for these zones, suggesting that zones without such backing are less reliable for trading.

05:03

🔍 Filtering Supply and Demand Zones

This section delves into the process of filtering supply and demand zones to identify high-quality zones for trading. The speaker emphasizes the importance of market structure in determining the direction of price movement and how it can be used to select zones that are more likely to result in profitable trades. The concept of premium versus discount is introduced as a way to assess the value of a trading level. The paragraph also mentions other factors such as liquidity, mitigations, and the alignment of a zone with the current market order flow that will be explored in future lessons to further refine the selection of promising trading zones.

10:05

🚀 Validating Institutional Zones

The final paragraph focuses on the validation of supply and demand zones, specifically 'institutional zones,' which are areas where significant market imbalances have occurred. The speaker outlines two core methods for validating these zones: 1) Zones that lead to a price movement that breaks market structure, indicating a strong reaction and potential for further movement. 2) Zones that cause another strong zone to fail, known as a 'flip,' which suggests that significant market forces are at play. The paragraph concludes by stating that these two methods are crucial for identifying zones with a high probability of significant price movements and that these zones are of particular interest for trading.

Keywords

💡Supply and Demand Zones

Supply and Demand Zones refer to areas on a price chart where the balance between buying and selling pressure is significant. These zones are identified by observing past price action and can indicate potential support and resistance levels. In the video, the speaker discusses how these zones are ubiquitous in the market and are essential for understanding price movement. The concept is central to the theme as it helps in identifying areas where price may react or consolidate.

💡Candlestick Charts

Candlestick Charts are a popular method of displaying price movements of a security, derivative, or currency. Each 'candle' represents a specific time period and shows the opening, closing, highest, and lowest prices for that period. The video mentions drawing supply and demand zones on these charts to analyze market behavior, making it a key tool for visualizing the zones discussed.

💡Market Structure

Market Structure in the context of the video refers to the pattern or framework that emerges from the price movements, which can indicate bullish or bearish trends. It is used to predict the direction of price and to determine whether the market is in a pro-trend run or a counter-trend pullback phase. The speaker emphasizes its importance in filtering out less significant supply and demand zones.

💡Confluence

Confluence in trading terms refers to the meeting point of multiple technical analysis signals or indicators. It suggests a higher probability of a significant price move. In the video, the speaker mentions using confluence to increase the effectiveness of trading decisions by combining various factors to validate supply and demand zones.

💡Liquidity

Liquidity in financial markets refers to the ease with which an asset can be bought or sold without affecting its price. The video script hints at future lessons discussing how a supply and demand zone's interaction with liquidity can influence its significance, suggesting that zones clearing liquidity may have a higher probability of causing price reactions.

💡Mitigations

Mitigations in the context of the video likely refer to the reduction of the significance of a supply or demand zone as the market price interacts with it. A zone that is 'unmitigated' is fresh and hasn't seen much trading activity, which might make it more significant. The speaker mentions this concept as a filter to identify high-quality zones.

💡Institutional Zones

Institutional Zones are supply and demand zones that the speaker suggests are created by significant market participants, like institutions, and therefore have a higher probability of leading to substantial price movements. The video's theme revolves around identifying these zones as they are considered more reliable for trading decisions.

💡Break of Structure

A 'Break of Structure' occurs when the price moves beyond a previously established level of support or resistance, indicating a potential change in trend direction. The video emphasizes looking for supply and demand zones that have caused such a break as a validation of their significance.

💡Flips

Flips refer to a change in control from a supply zone to a demand zone (or vice versa), indicating a significant shift in market sentiment. The video describes this as a situation where one zone overpowers another, causing it to fail, which is considered a strong signal for trading decisions.

💡Risk Reward Ratio

Risk Reward Ratio is a concept used in trading to measure the potential risk of a trade against the potential reward. The video mentions using supply and demand zones to increase this ratio, implying that traders should look for zones that offer a higher potential profit relative to the risk taken.

💡Counter-trend Pullback Phase

A Counter-trend Pullback Phase is a temporary price movement in the opposite direction of the dominant trend. The video discusses using market structure to identify such phases to better time trades, as they can provide opportunities to enter trades in the direction of the dominant trend at more favorable prices.

Highlights

Supply and demand zones are everywhere in the market, reflecting constant imbalances.

Price movement is driven by shifting balances between supply and demand.

Most zones will form some degree of reaction when price returns.

Some zones may not react, indicating a need for filtering.

Filtering out poor quality zones is essential for professional trading.

Market structure is a key tool for analyzing supply and demand zones.

Market structure helps in determining the direction of price and managing expectations.

Multi-time frame analysis adds a new dimension to price analysis.

Premium versus discount concept helps in identifying well-priced levels.

Liquidity and inducement are important factors to consider in future lessons.

Mitigations and chains can increase the probability of a zone's significance.

Current order flow is a critical factor in trading from supply and demand zones.

Confluence of factors increases the strike rate and risk-reward ratio.

Market structure is considered 'king' in trading analysis.

Two core methods are used to validate supply and demand zones as institutional zones.

Zones that lead to a move breaking structure are significant.

The strength of the structure a zone breaks indicates its significance.

Supply to demand flips and vice versa are significant events in the market.

Combining a structure break with a flip indicates a high probability zone.

Big money stepping into the market often causes zones to flip and structures to break.

Transcripts

So, now we've seen how supply and demand zones are created and how we draw them on

candlestick charts. However, as you've probably seen when you try to draw them yourself, supply

and demand zones are literally going to be everywhere. You know, if you draw on every

single zone, your chart is going to be an absolute shit show and you're going to see

some zones play out and you're going to see a lot that don't really seem to work that

well, which I understand can be a little bit disheartening. But if you think about it,

supply and demand zones are literally everywhere in the market. They're supposed to be. And why

are they everywhere? Well, if there weren't constantly imbalances between supply and demand,

then price wouldn't ever move, right? It would just be stuck in a range or it would just be

stood still because, well, the market must just deem that it is at a fixed and constant

fair value. But in reality, what the market deems to be fair value, that is shifting every

second of every day. So that balance between supply and demand is shifting constantly.

Now, nearly every single zone, when price returns to it, not always, but it will generally form

some degree of a reaction when price returns to that zone. So you will usually see price

pause or maybe you just form a small bounce as those orders are exchanged between hands.

And of course, in some circumstances, price will literally just smash straight through it and you

won't see any reaction. But what we can do to filter out those zones or filter out a lot of them

that are most likely not going to be worth the risk of trading, what can we do to try and filter

out those poor quality zones? Because we don't just want to enter a position and risk our

high-end capital just on any old zone that was created that doesn't have a lot of money behind

it that doesn't have that institutional backing. Because obviously that's not professional

trading, right? That's just gambling. Well, there are certain confidences that we can look for to

increase the probability of the zones having a large reaction or causing a large move.

And one that we've looked at in depth so far is market structure. So we've now seen how we can use

market structure to very effectively give us a bias on the direction of price. So structure

tells us whether we are bullish or bearish. We know then whether we are trading that pro-trend run

or are we currently in that counter-trend pullback phase, right? And then of course,

when we start to look at multi-time frame analysis, they're really bringing in that new dimension to

price to really help us nail down what the overall narrative is. So market structure is a very

important tool that we can use in our analysis to really help us make sure that we are trading on

the right side of the market. And that will increase the probability of the zones that

we're looking to trade from, causing the type of large moves that we actually want to position

ourselves in, right? Again, might sound like a broken record, but market structure will

help us to manage our expectations of how far the move from that zone is likely to reach

before price then may start to pull back or even reverse, okay? So it gives us a massive edge with

our trade management too. So again, that's why I personally believe that market structure is king.

But then we looked at the concept of premium versus discount. Pretty simple one, right? It

just helps us to see if we're looking to trade at a level that is well-priced. So if we think

about bringing supply and demand into this, we can look to buy from demand zones that are in those

discount prices, and we can look to sell from those supply zones up in those premium prices

to really kind of help, again, to increase our strike rate and to increase our overall

reward to risk ratios. Now, there are some other very key concepts which we have not discussed

or looked at yet, which we will look at in depth in future lessons such as liquidity. So what you'll

learn soon is we look to see, did the zone sweep liquidity and does the zone have inducement?

Again, if you haven't got to those lessons, don't worry. You don't need to know what this is. We'll

cover this in depth in the future. Another one is mitigations. So we want to see, is the zone

unmitigated? And whenever I say that, I personally mean, is it a completely fresh zone? Okay, so

nothing's tapped into it yet. Nothing has filled up any of the orders. It's completely fresh. It's

completely unmitigated. And then the other aspect to that is, is that zone part of a demand or

supply chain? So what you'll see is zones kind of tap into each other and they continue, and you

kind of see the series of mitigations, which we call chains. Again, we'll get into this in more

depth, but that can increase the probability of the zone you're looking from. And then finally,

is the zone we are trading from, is it with or against the current order flow of the market?

And again, we'll get into a bit more depth than that in future lessons. So don't worry about those

grey ones too much for now. But what I want you to realise with this list that we've just gone through

is all of those are great confluence that we should be using to make sure that we are trading

with as high as a strike rate and as high as a risk reward ratio as possible. But these confluence

is what I call, they're nice to haves. They're really nice to haves, but they're not necessarily

a super strict requirement that you have to have it no matter what. So what I mean by that is that

if you made some of these or all of these a strict requirement, then you would only ever

buy from demand zones that were with a trend and that had to be in a discount, because in theory,

those should be high probability. But then on the flip side, that also means that you would

never sell from a supply zone in cheap discount prices that was also maybe against the trend,

because in theory, that should be really low probability. So when you get later on the course

and we go in the trade plan module and we talk about all of this, it's going to be very dependent

on each individual trader on how you want to trade, what makes sense to you, how aggressive you want

to be, what you have success with, what's easy in psychology, et cetera, et cetera, et cetera.

And that will come with time, experience and testing. There's a million different ways in which

you can use these concepts. But again, we'll get into that later. The main point I'm really

just trying to make here is there's going to be a lot of things you're going to be learning

that are going to help you to hopefully be trading from high probability supply and demand zones.

But really, there are just two core methods that we use to validate whether a supply and demand zone

is one that we call an institutional zone. So this is kind of my way of just saying

supply and demand zones are everywhere. We've learned how to draw them and identify them,

but we don't want that many zones. We want to use a filter where we can spot what we call

institutional zones, those strong zones where we have a lot more conviction that big money

stepped in when that zone was created. And like I said, that whole list of confluences help us

do that. But there are two core ones that either one has to be present for it to be a valid zone.

Otherwise, I don't even look to trade from it. I don't even draw it on. So I personally view

these two methods that we're about to look at in my plan as a minimum requirement,

and I would advise that you do this also. So what are these two methods? Well,

because we want to find the zones where there was a drastic imbalance between supply and demand,

so that when price does return to it, the probability of that big money stepping in again

is a lot higher. And those are the areas that we want to trade from. So what can we do to

try and validate which zones are going to be the strongest, the most significant, and therefore

have the highest probability of causing a strong move? Well, the main idea, as you can see here,

is to find a zone that achieved something significant in the market. So another simple

way to think about this, I've just said a lot of words that are going over your heads,

which is fair enough. If you're looking at supply and demand zone and you're going to draw it on,

just ask yourself, what did this achieve? When this zone was formed and when price moved out

of that range to create a zone, what did that movement go on to do? You want it to achieve

something significant. And the more significant things it did, in theory, the stronger that zone

should be. So hopefully this will make it a bit more simple, but the first and main way that we

look at to validate that a zone is an institutional zone is we want to look for ones that led to a move

that broke structure. So we want to find where did that demand come into the market that led to

price being able to break structures to the upside to break a high and form a higher high.

Likewise, we want to find where did that supply come into the market that led to price being able

to break structures to the downside to break a low and form a lower low. Now we know that there

are three different types of structure, swing, internal, and fractal. So a boss, an I boss,

or a choc. The more significant a level of structure that a zone breaks, then the more

significant that that zone will likely be. So what that means is swing structure is obviously

the most significant. Internal structure is less significant than swing structure,

and obviously fractal structure is the weakest of the three. We want to look for the zones. So if

a zone breaks swing structure, that should be stronger than a zone that only broke a fractal

higher low. Hopefully that makes sense. All three of those zones can be trainable, but it's the

swing zones, the ones that break swing structure, they're going to hold the most weight and have

the highest probability of leading to that next large swing moves. And those are the swing runs

that we want to catch and position ourselves in. So that's the first main way in which we can

validate the significance of a supply demand zone in the market. And that's by concentrating

on ones which cause the break of structure. And to be honest with you, really this is pretty much

the main way in which I will always validate a zone. Did it break any form of structure? As

long as it at least broke a fractal high, then I'm interested in it. But ideally, the stronger the

structure it breaks, the better the zone should be. Now, the second main way in which we use to

validate institutional zones is doing something and achieving something very significant in the

market is if a zone manages to overpower and take out another zone causing that zone to fail.

Okay. So we call these flips. So a supply to demand flip where we have a supply zones that's

in control, but then demand overpowers that supply zone and takes control. Okay. So supply

flips the demand. So we call it a supply to demand flip, which is the example you can see on the

screen. And the opposite of that would be where demand flips to supply. Okay. And don't worry,

we'll go into this in loads more depth in the future lessons. But when you find a zone that

combines both methods, so not only does it cause a break of structure, but it also causes another

strong zone to fail in the process. So you get a structure break and a flip. That is when you have

a high probability zone. Again, when you compare those two reasons with all of the other confluence,

we're going to use market structure, liquidity, blah, blah, blah, blah. Okay. So for price to

either break structure or take out another zone, generally we can assume that it's taken institutional

backing. So big money has had to step into the market there in order to cause the zone to flip

and to cause the structure to break. Right. So they're the two methods, the main methods that

we use to filter out all of those supply and demand zones on your charts to try and find

the footprints of where big money has stepped into the market. So it's our job to spot those

and then try to capitalize on future moves from those zones or we will sometimes call these zones

points of interest, POIs. Okay. It's an area in what we're interested in. Okay. So yeah, over the

next two lessons, we're going to look at each of these two methods in depth.