Understanding Supply and Demand | Fundamental Method vs. The Order Flow Method (2023)
Summary
TLDRIn 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.
Outlines
📈 Understanding Market Cycles and Trading Strategy
This paragraph introduces Numan Ashjad, a head trader at Blackline Trading, who will discuss supply and demand from three perspectives: fundamental, order flow, and integration for finding an edge in trading. The fundamental view involves analyzing market cycles, including the accumulation, markup, distribution, and markdown phases, which represent different stages of market behavior and smart money activity. The entry point for trades is highlighted as being crucial, with the re-test of the demand zone being a favorable entry for long positions, as it is where smart money defends their positions and prevents the price from falling further.
🤑 Entry Points and Market Phases in Trading
The second paragraph delves deeper into the concept of entry points in trading, emphasizing the importance of understanding the accumulation and distribution phases to identify where smart money is buying or selling. It explains that the best entry points are during the re-tests of breakout zones or consolidation areas, rather than chasing the market during markup or markdown phases. The paragraph also illustrates how consolidation areas act as strong support and demand zones, while distribution phases create strong resistance areas, as smart money defends their positions when the price re-enters these zones.
📊 Order Flow Analysis for Advanced Trading Insights
This paragraph introduces the concept of order flow analysis, which provides a more detailed look at supply and demand dynamics by examining the interaction between buyers and sellers through limit and market orders. It explains how aggressive orders can move the market and how consolidation sessions often lack significant price movement due to the absence of such orders. The importance of analyzing the volume and contracts traded at specific price levels is highlighted, as this information can indicate the strength of support and resistance areas and the aggressiveness of market participants.
📉 Recognizing Market Imbalances and Trading Opportunities
The fourth paragraph continues the discussion on order flow, focusing on how to identify supply and demand zones by analyzing the volume and aggressiveness of orders. It uses examples to illustrate how the order flow can reveal significant market imbalances and provide insights into potential trading opportunities. The paragraph also mentions the use of cumulative Delta and volume Delta as tools to corroborate the strength of support and resistance levels, emphasizing the importance of having a structured process for analyzing these levels.
🌐 Zooming Out for a Broader Market Perspective
The final paragraph concludes the video script by emphasizing the importance of starting with a broader market perspective when analyzing supply and demand. It suggests beginning with the largest time frames, such as monthly charts, and narrowing down to smaller time frames to understand the overall market trend and how smaller time frames fit into this context. The paragraph stresses the significance of identifying strong support and resistance levels on larger time frames, as these are often where big money is positioned and can influence future market movements.
Mindmap
Keywords
💡Supply and Demand
💡Institutional Traders
💡Market Cycles
💡Accumulation Phase
💡Markup Phase
💡Distribution Phase
💡Mark Down Phase
💡Order Flow
💡Support and Resistance
💡Risk-Reward Ratio
💡Re-test
Highlights
Understanding the structure of supply and demand is crucial for improving trading system probabilities.
Numan Ashjad, Head Trader at Blackline training, discusses supply and demand from three angles: fundamental, order flow, and integrating these methods for an edge.
The market moves in cycles, beginning with the accumulation phase where smart money buys and prices consolidate.
The markup phase is characterized by the breakout of prices as retail traders chase, while smart money is already in profit.
The distribution phase involves smart money taking profits, while retail traders chase the market, leading to a potential dump.
The markdown phase is when sellers dominate and prices trend lower due to lack of buyers.
Entry points in trading should be identified as re-tests of demand zones where smart money defends their positions.
Supply zones are areas where aggressive selling occurs, and re-tests of these areas can be entry points for short trades.
Consolidation areas act as strong support and demand zones, while distribution phases create strong resistance.
Aggressive orders, not limit orders, are what move the market according to order flow analysis.
Order flow provides insights into price movements, identifying when and where aggressive buying or selling occurs.
Supply and demand zones can be spotted more accurately with order flow analysis, giving traders an edge.
Traders should look at bigger time frames to understand the overall market trend before analyzing smaller time frames.
Monthly and weekly time frames are more indicative of strong support and resistance levels due to big money positioning.
A coherent and structured process is essential for identifying support and resistance areas in trading.
The video aims to provide value by teaching traders how to analyze supply and demand for better trading decisions.
Transcripts
if you can understand the structure of
supply and demand and learn how
institutional Traders use supply and
demand to initiate and close their
positions you can significantly increase
the probability of your trading system
hi everyone my name is Numan ashjad and
I am a head Trader at Blackline training
and in this video we are going to
discuss the topic of supply and demand
we're gonna discuss a topic from three
angles we will look at the fundamental
way to look at supply and demand we will
also look at supply and demand from
order flow point of view
and in the last we will cover how you
can integrate supply and demand and
these methods to find your Edge
with that being said let's have a deep
dive so first of all we are going to
look at supply and demand from a
traditional point of view what I mean is
that when we usually look at at some
bullish candles and at bearish candles
what we do is that we try to draw lines
support and resistance and basically
based on those lines we make our trading
decisions but let's first of all try to
understand the structure of the market
why exactly the market moves in Cycles
so with that being said let's look at
the first cycle of the market which is
called the accumulation phase an
accumulation phase is a phase of the
market where smart money basically buys
the market right the price usually
consolidates within a certain range and
does not really break out of that range
right the price goes up gets rejected
comes down gets bought up and then just
stays in a very very tight consolidation
range that range is where smart man
money basically keeps on buying keeps on
buying keeps on buying before the the
the price starts breaking out right so
that is the first cycle of the market
now the second phase of the market the
second cycle of the market is called the
markup phase this is the phase where the
price starts trending higher right as we
have discussed before the accumulation
phase is where the smart money bought on
the prices now that is basically where
price is breaking out of the out of that
range right this is where usually retail
Traders start chasing the price right
but smart money is already in the
positions and is actually making money
on that move right
the third phase of the market is called
distribution phase this is where smart
money actually start Distributing right
so the price moved from here
consolidation here
and is trading higher right now folks
basically start Distributing start
taking profits of on their positions and
this is where usually the retail money
also to say the dump money
uh starts chasing
right
and the last phase of the market is
called mark down phase that is a phase
where basically you do not have any
buyers left
buyers are not willing to buy any more
because those prices are considered too
expensive and sellers take over and the
price starts trading lower
so to sum up we have concluded we have
learned that there are four phases of
the market we have the accumulation
phase of the market right where folks
buy stuff we have a markup phase where
basically the price starts trending we
have the distribution phase where
basically folks start
taking profits off the table and then we
have the markdown phase where sellers
take over right now in the context of
supply and demand what do these phases
mean
so enough in the context of four phases
four cycles that we have discussed so
far which are which are accumulation
which are marked up distribution and
marked down we can summarize all those
phases in this one picture right if you
look if you guys look at this picture
assuming that here is your accumulation
phase then you have markup or so to say
rally then you have another accumulation
and then you have a rally but the
question always is what is the entry
point where guy where you guys should
take a position right so the entry point
is not here why why the entry point is
not here because this is the spot where
your risk revote for their trade is the
least right because the price has
already moved folks actually bought here
and then they are sort of selling here
or taking some profits off the table so
you do not want to be the guy who comes
you know and and just start chasing and
and and takes stupid trades
the highest risk reward for a trade in
this scenario will be the re-test of the
demand Zone and the idea of the re-test
of the demand zone is that when the
price does come back to this area the
the big money the smart folks who who
actually move the market they will
defend their positions right they will
not let the price break that area and
start trending lower in fact they will
they will hold the price very very
strongly of this Zone and in fact will
even buy more or also so to say called
defend their positions right so that is
a perfect entry for going long so that
this is something which we will call or
which actually in a fundamental on
bigger on bigger scope is called the
demand Zone
right
now let's look at the supply Zone let's
assume that the market is trending down
where is our entry right now we take
exactly the same same concept that we
discussed in previous slides here we
have our accumulation right where big
folks actually uh sold a lot where they
built heavy positions Market started
dropping like node tomorrow and it
started consolidating again now again
this is not your area to chase right why
because again all those folks who
actually built their positions up here
they are in the process of taking money
they are they're in the process of
taking profits off the table so the
entry Position will again be the re-test
of this area
why because again we assume not only
Zoom but with with the such let's say
with the massive probability we do know
that big folk smart money they will
defend their positions and defending
their positions mean that they will not
let the price break that area so that is
the area for
your entry for the trade right and then
what is the next area for taking profits
now you you use your certain strategies
your certain mattresses your risk reward
and how you know on what time frames you
are trading and whatnot and basically
adjust your trade depending on those
mattresses
so what we have learned so far from this
scenario is that consolidation areas
they act as a strong support and demand
areas and the same and similarly and the
um the distribution phases act as strong
resistance areas and why the the major
reason is that the major hypothesis the
major assumption behind this is that
smart when he moves the market and when
whenever the price retracts those areas
they come in hard to defend their
positions right so this is the general
way so to say to look at the the
fundamentals of supply and demand now
let's take this to the next step and
let's try to look at certain examples
right so this is the first example of
price breaking the breaking the demand
Zone exactly what we discussed in the
previous slides we have a lot of
consolidation or so to say accumulation
going on right
smart money comes in heavy heavy heavy
and look at a big big buying orders
going in here and and and we are getting
a very very bullish candle right once
once why the concept is that this price
is too low this is not really the fair
value of the market because this is
considered too cheap by the buyers
we also create a massive massive demand
slash consolidation here and price
breaks out right once it breaks out now
we are accepting higher prices and again
are consolidating here
right now let's look at the same exact
example but from the supply side we have
a lot of consolidation going on here
right some big news heads or the big
guys come and all those folks who are
actually driving the price here they're
they are not building their positions
here they have built their positions in
this area right and this is again the
marked down phase of the market where
these guys are actually profitable so
what the rate here what the retail folks
will do they will come in here and try
to chase a move right
which is actually again not the best
area to get involved because this is
where your risk to reward for a trade is
the least
what will be the best area to get
involved again either the re-test
of the breakout zone or consolidation
and a continuation move lower
so let's quickly summarize what we have
learned so far we have learned so far
that if we look at the traditional way
of supply and demand there are four
major cycles that the market goes
through there's an accumulation phase
where the smart money actually
accumulates the prices then there is a
markup phase when the prices actually go
higher that's where the retail change is
but smart money actually does not
initiate the position in that markup
rally they actually already are in
profit slash start taking profits off
the table then we have a distribution
phase that's where they start offloading
and that's where again a retail starts
chasing and then finally we have the
markdown phase where sellers actually
come in hot and take over the buyers so
the traditional way to look at the
market the traditional way to look at
support and demand this is how basically
you go in now let's look at the supply
and demand from an order flow point of
view and to understand that let's look
at an example the concept of line demand
again is exactly the same price moves
higher when you have a lot of buys when
you have a lot of buyers coming in very
very strong and the price starts moving
lower when you have a lot of sell orders
or basically when the market
participants think that the price is too
expensive now how we can see that in the
order flow let's try to understand that
with an example so here you have
um a price shot of s p 500. in the
middle you have a price ladder on the
right side you have the ask or basically
the sellers and on the left hand side
you have the buyers
[Music]
now this is how a traditional order flow
ladder will look like right all these
folks
are
limit order guys what are the limit
order guys it means that they are
willing to sell or they are willing to
buy but they are willing to wait until
the price comes to their level and then
their order gets filled
right the same on the buyer's side they
are very patient buyers they are not
going to get aggressive they will wait
until the price comes to their entry
point and then their order get filled
order flow supply and demand or in
general overflow trading it's it's only
it's basically the interaction of buyers
and sellers but under the lens of limit
orders and aggressive orders
the idea is that aggressive odors move
the market these limit orders are not
going to move the market and also when
you usually see in a whenever we have
choppy sessions whenever we have
consolidation sessions or rain-bound
sessions and the price really does not
go anywhere why because you don't have
aggressive orders you basically have the
folks who are literally just sitting
there waiting for the price to come to
their entry point and then their order
gets filled right now coming back to how
we can spot supply and demand under the
order flow right so looking at this is
how the structure of the of the of the
ladder is now let's say that an
Institutional Traders
and a portfolio manager a hedge fund a
hedge fund manager get some sort of
information and or wants to put on a
hedge position or whatnot wants to get
filled instantly on a thousand Lots
right and now what that guy is gonna do
that's a question right is that guy
you're going to put a limit order which
means okay by the way fill me I will
wait here or is that guy going to go
very very aggressive putting a market
order and say fill me right now I don't
care about the price right now what
happens that these guys who who want to
get filled as soon as as possible they
do not Place limit orders they play
something called Market orders also to
say they are the aggressive buyers and
what happens looking back at this
picture
as those aggressive orders come in they
have to get matched with the sellers
right what's the what's a supply out
there which can be which can get
absorbed right so if we have thousand
Lots but here let's say our 100 here 100
here 200 here all of these guys gonna
get eaten right all of that Supply is
gonna get absorbed
and what you see basically that the
price moving very very quickly to the
higher level so you will see something
similar to that now
the the point is that this sort of
information you do not get you do not
really get these sort of insights by
looking at traditional candles right you
will not really able to see oh by the
way at what price or how the price move
moved or what was the aggressiveness of
the move or you know what what actually
happened when the price moved from point
A to point B
but if you look at these insights if you
look at the order flow this is going to
give you a lot more information you
would be able to spot the moves before
the move actually happen
now there is another example this is a
traditional way to look at supply and
demand right here you have your uh
traditional let's say line which you
draw as your support and here you have
your traditional line which you draw as
a resistance
but what are these candles showcasing
you nothing the only thing it is
showcasing you these are showcasing you
the price has moved higher and what
these are showcasing you are is that the
price has moved lower
but they are not really giving you any
information uh about how it moved how
how it moved higher where did the orders
get absorbed and where the exhaustion
kicked in there is no information on
that
but if you look at this chart from an
order flow point of view there's a lot
of information here right if we let's
just analyze the first candle look at
where the volume got traded and how many
contracts got traded look at here how
volume got traded and how many contracts
got traded and so on and so forth until
the resistance area where sellers come
in hot and look at this imbalance and
also
the aggressiveness of that imbalance now
this gives you a lot more information
that okay sellers have come in hard and
this is not just a pullback but that is
rather a sort of Christmas tree that the
price is going and to dump
so this will give you much more
information and insights and also the
confidence to take a short position
versus this versus this chart right and
also if you look at the Delta which is
basically the difference between between
the aggressive and buy-in sell orders
you see a massive imbalance being
created in these areas
so this sort of the structure gives you
way more information when you're looking
at supply and demand so looking at just
looking just looking at this chart what
I can draw from here is that okay let's
say let's assume that this is a chart
from you this is the chart from
yesterday what I can conclude okay but
by the way at this price level
2 000 contracts got traded and there
were aggressive sell loaders
at this price level
1300 contracts got traded and they are
they were aggressive buy orders so for
the next session when the price does
come to this point of reference I would
already know that yesterday that amount
of sellers came in very very hard so
this becomes a very very strong
resistance Point slash the reference
point for the session
now unless heavy heavy demand comes in
before that before we actually reach to
that point that has been established as
a very very strong resistance and that
hypothetically is being or has been
established as a very very strong
support right now you can also
collaborate that by looking at different
mattresses such as cumulative Delta such
a volume Delta and and so on and so
forth so let's sum this up let's sum up
the order flow way to look at supply and
demand the order for what we have
learned so far is that overflow way does
give you an edge when it comes to
looking at supply and demand by looking
at how many contracts traded at what
price where aggressiveness kicked in
where sellers kicked in where buyers
kicked in and with heavy volume and
heavy activity heavy price activity
those areas can become very very strong
influence points strong support strong
resistance points moving forward for the
next sessions now let's go to the next
step and let's try to answer the last
question for this session which is how
we can find those areas so in order to
find those areas you always have to look
from a bigger point of view what do I
mean by a bigger point of view I think
this chart gives you a very very strong
feeling what exactly we mean by that
terminology
we have a market could move lower but if
you look at them monthly time frame if
you look at a bigger time frame it might
actually be trending higher
right
for example here is an here is a perfect
example of a daily time frame where the
trend is bullish however if you look at
the micro time frame or so to say hourly
time frame Market has been ranging
coming down consolidating going a bit
higher and so on and so forth
so how you can find the Zone again
always start by looking at the bigger
picture and when we will when we look at
when we say look at the bigger picture
we always start by monthlies right you
start looking at the monthlies you
narrow it down to the date to the
weeklies
then to the dailies
then to the four hour charts then to the
hourly charts and then to the five
minute chart
and the again the reasoning behind such
a sort of metric is that the higher the
the the big time frame levels are the
more strong those levels are because
again the concept assumption is that big
money is basically is positioned on
those levels be it monthly levels or
beat weekly or daily levels those are
those areas or strong support and
resistance moving forward for any stock
or any commodity that you're trading so
do not just open your chart and start
drawing lines on the five minute always
start looking from the bigger picture
try to understand what exactly the trend
of the market is are we are we in a
bullish Trend or are we in a bearish
trend and how then small time frames
play a role and fit into that bigger
context so with that being said let's
summarize this topic in this video we
learned that there are two major ways
you guys can look at supply and demand
you can look at a traditional way of
supply and demand where you look at the
big players you look at the accumulation
phase of the market you guys look at the
distribution phase of the market and try
to see where smart money has opened and
closed their position and what are the
big consolidation areas because those
big consolidation areas act as a strong
resistance or support the second way
that we discussed is that you guys can
look at the order flow way the order
flow way gives you more insights into
what exactly has happened with the in a
specific candle if the candle is bullish
where exactly the volume has taken place
and if the candle is bearish where
exactly most contracts were traded the
most important thing for you is to have
a coherent and a structured process how
you guys actually draw and come up with
the support and resistance areas I hope
this video provided a lot of value to
you guys and if you guys like this video
go ahead and hit the like button and
thank you so much for watching I will
see you guys in the next video
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