I've run into this misunderstanding numerous times during my trading career, and I'll be the first to admit, I made the same error when I started with Supply and Demand (S&D).
So, what's the deal?
S&D isn't just a trading strategy; it's also a theory on why prices move and how the forex market functions.
It's our compass, our guide to deciphering the market's behavior.
Here's the theory:
Banks engineer supply and demand zones through substantial trading activity, then strategically manipulate prices to revisit these zones and fill their remaining orders. This calculated maneuver is what ultimately triggers the reversals we observe within these zones.
Makes sense, doesn't it?
But here's the problem:
Many traders misapply the theory of supply and demand to everything in the market. Once they start trading S&D, they start to believe every tick and twitch on the chart somehow comes from
the zones.
They discard:
Support & resistance levels
Psychological levels
Swing structure
Order flow
If these traders see a reversal that doesn't originate from a zone on their current timeframe, they'll conveniently jump to another timeframe, trying to find a zone that fits their narrative.
Ever found yourself doing this?
Trust me, I've been there!
I used to think every single market move was driven by supply and demand. If I saw a reversal, I'd stubbornly search for a zone to explain it – even if it wasn't on my current chart. Sometimes, I'd even go down the rabbit hole of smaller timeframes, hoping to find any elusive zone that would justify the reversal.
Sound familiar?
But experience taught me a hard lesson:
This isn't accurate.
This approach is overly simplistic.
While S&D zones play a significant role in influencing price movement, they're not the sole cause of every reversal. Other technical and fundamental factors can also trigger reversals, often coinciding with S&D zones and creating the false impression that the zone itself was responsible for the change in direction.
A prime example of this is psychological levels...
At first glance, the reversal appears to be triggered by the supply zone.
Most S&D traders would nod in agreement because, well, they naturally assume all price movement originates from zones.
But hold on a second and look again...
Price reversals are influenced by a confluence of factors, not just S&D zones.
Notice the 1.25500 psychological level and the resistance level just below? They're both aligning with the supply zone, suggesting a convergence of potential triggers for the reversal.
Depending on their preferred tools and strategies, different traders would attribute the reversal to different factors:
S&D traders: Might argue the supply zone was the primary catalyst.
Technical traders: Might point to the psychological or resistance level as the key trigger.
So, the million-dollar question remains:
Which factor was the dominant force behind this reversal?
Truthfully, pinpointing the exact cause of a reversal isn't always possible.
We can't say with absolute certainty which technical factor was the primary trigger, as there's no concrete evidence to support any single theory. It's all speculation based on different trading approaches and interpretations. However, we can make educated deductions by systematically eliminating less likely possibilities.
Let's begin with the supply zone.
In the world of Supply and Demand trading, older zones are less likely to trigger reversals.
Why?
Because it's improbable banks would wait for weeks, months, or even years to fill leftover positions. Therefore, if the supply zone in our example is old, we can reasonably rule it out
as the cause of the reversal.
This leaves us with two remaining contenders: the psychological level or the resistance level.
Let's take a closer look...
Now, let's examine the resistance level.
My Unpopular Opinion: Support and resistance levels are overrated. While these levels do exist, they often act as temporary pauses in price action rather than major turning points. And I'm highly skeptical that reversals occur at these levels simply because they've been touched multiple times in the past.
Think about it: Why would banks choose to buy or sell at a price point where the market has already reversed multiple times? What's the logic behind that?
Our current resistance level?
It falls short.
Yes, it has multiple touches, but they're not fresh. The most recent unbroken touches (marked with blue arrows) were wiped out when the price surged before the reversal even began. All its touches are historical, with no recent interaction.
Moreover, the level's last touch was accompanied by a significant price drop, effectively nullifying any previous significance it held.
We can conclude the reversal was likely not triggered by the resistance level.
This leaves us with just one remaining contender: The 1.25500 Psychological Level.
Psychological levels are not just a theory; they're backed by statistical evidence. Studies have shown that these levels consistently influence price action across various markets.
But you might be wondering:
Why do prices tend to change direction at these seemingly arbitrary round numbers?
Here's the answer:
Banks and other major institutions can't execute massive trades all at once.
They have to break them down into smaller chunks, carefully timing their entries when there are enough orders available in the market. This results in a pattern of banks entering trades at similar price levels, creating the illusion of a single, large transaction.
To efficiently execute their trades, banks strategically influence the market to reach price levels where a significant orders are already present. The orders allows the banks to fill their positions swiftly and effortlessly, reducing the need for further market manipulation.
And where do these orders tend to cluster?
You guessed it—at psychological levels!
Psychological levels act as magnets for orders, creating a pool of liquidity that banks can tap into to execute their trades. Hence why we often see reversals or significant price movements around psychological levels.
The psychological level was likely the catalyst for the reversal, as it's the only factor with strong empirical evidence supporting its influence on market behavior.
Now, what's my point in saying all this?
Should you scrutinize every supply and demand zone to predict whether it'll cause a reversal, or if some other factor will come into play?
Absolutely not!
That would be an enormous time sink.
What I am emphasizing is this:
Don't make the mistake of attributing every price change, reversal, or market movement solely to your trading strategy. Forex is a behemoth of a market, riddled with complex variables that interact in unpredictable ways.
Reducing it to a single theory—like Supply and Demand—is overly simplistic and likely to cost you money without ever understanding why.
As Einstein wisely put it, *"Make things as simple as possible, but not simpler."*
Here's a quick guide on which technical points typically cause reversals, depending on where price is situated.
1) Short-term reversals are usually caused by new supply and demand zones, as the banks always want to execute trading actions quickly.
2) If a supply or demand zone is too old to cause a reversal, the next most likely point to watch are psychological levels.
Remember: Psychological levels should be considered as zones, not just levels, much like Supply & Demand (S&D).
3) Traditional support and resistance levels aren't always reliable on their own. However, levels with at least two recent, unbroken touches can often act as catalysts for short-term directional shifts. This commonly occurs when the price consolidates sideways after a sharp rise or fall, forming two similar lows or highs.
Once the second low or high is established, price often retraces back to a comparable level before reversing.
Occasionally, a weak demand zone may form at this second high or low, but it's not a given.