Understanding Supply and Demand | Fundamental Method vs. The Order Flow Method (2023)

Summary

In this educational video, Numan Ashjad, Head Trader at Blackline Training, explores the concept of supply and demand from both a traditional and order flow perspective. He explains the market's four phases: accumulation, markup, distribution, and markdown, highlighting how smart money operates within these cycles. Ashjad then delves into order flow analysis, demonstrating how aggressive orders can indicate market movements and provide insights into support and resistance levels. He emphasizes the importance of a structured approach to identifying these levels and encourages traders to analyze the market from a broader time frame for better trading decisions.

Takeaways

• 📈 Understanding the structure of supply and demand and how institutional traders use it is crucial for improving trading systems.
• 🔍 The market moves in cycles, including accumulation, markup, distribution, and markdown phases, which are key to identifying trading opportunities.
• 💡 Accumulation phase is where smart money buys, and prices consolidate, indicating a potential upcoming breakout.
• 📊 Markup phase is characterized by a price trend higher, often initiated after the accumulation phase by smart money.
• 📉 Distribution phase is where smart money starts taking profits, and retail traders often chase the price, which can lead to a price drop.
• 🚫 Mark down phase is when there are no buyers left, and sellers dominate, causing the price to trend lower.
• 🛑 Entry points for trades should be carefully chosen, often at the re-test of demand or supply zones, not at the breakout points.
• 🔑 Consolidation areas act as strong support or resistance levels, as they are where smart money has significant positions.
• 👀 Order flow analysis provides insights into the aggressiveness of buyers and sellers, which can predict price movements more accurately than traditional candlestick charts.
• 📚 Delta analysis, which measures the difference between aggressive buy and sell orders, can reveal significant imbalances indicating potential price direction.
• 🌐 Always start by looking at the bigger picture, from monthly to smaller time frames, to understand the overall market trend and identify strong support and resistance levels.

Q & A

What are the four phases of the market cycle as described in the script?

The four phases of the market cycle are the accumulation phase, where smart money buys; the markup phase, where the price trends higher; the distribution phase, where smart money starts taking profits; and the markdown phase, where sellers take over and the price trends lower.

What is the significance of the accumulation phase in the context of supply and demand?

The accumulation phase is significant because it is where smart money buys the market, often leading to a price consolidation within a certain range. This phase is characterized by the price being rejected at higher levels and then being bought up again, indicating a strong underlying demand.

How do retail traders typically behave during the markup phase?

During the markup phase, retail traders often start chasing the price, as they see the market trending higher. However, smart money is usually already in position and making profits from the move, rather than initiating new positions.

What is the role of the distribution phase in a market cycle?

The distribution phase is where smart money starts distributing or taking profits off their positions. This phase often sees the price moving higher, but it is also where retail money, or 'dumb money,' starts chasing the market, which can lead to a potential reversal.

What is the concept of a re-test of the demand zone in trading?

A re-test of the demand zone is when the price returns to an area where there was previously strong buying pressure. The idea is that smart money will defend their positions and not let the price break below this area, making it a potential entry point for long positions.

How do aggressive orders impact the market according to the order flow perspective?

Aggressive orders, such as market orders, can significantly impact the market by quickly absorbing the available supply or demand, leading to rapid price movements. These orders are often placed by institutional traders who need to get filled immediately and are willing to pay the current market price.

What is the importance of looking at the bigger picture when identifying support and resistance areas?

Looking at the bigger picture is important because higher time frame levels, such as monthly or weekly, are often more significant and represent where big money is positioned. These levels tend to act as strong support or resistance areas, influencing the market's direction in lower time frames.

Why are consolidation areas considered strong support or demand areas?

Consolidation areas are considered strong support or demand areas because they represent levels where smart money has accumulated positions. When the price retests these areas, it is expected that smart money will defend their positions, making it difficult for the price to break below these levels.

What is the role of the markup phase in relation to smart money and retail traders?

In the markup phase, smart money is typically already in profit and may start taking profits off the table, while retail traders may be entering the market, chasing the trend. This phase is not ideal for initiating new positions by smart money but is a time for profit-taking.

How can the order flow analysis provide insights into market movements?

Order flow analysis provides insights into market movements by showing where and how many contracts were traded at specific price levels. It reveals the aggressiveness of buyers and sellers, the volume of trades, and can indicate potential support and resistance levels, giving traders a more informed perspective on market dynamics.

What is the significance of the re-test of the supply zone in a down-trending market?

The re-test of the supply zone in a down-trending market is significant because it represents an area where smart money has previously sold heavily. If the price retests this area, it is expected that smart money will defend their positions, making it a potential entry point for short positions.