Supply and demand indicator MT4 explained
In the financial markets, you can often observe that price does not move in a straight way. You can see price often zig-zagging its way, whether the price is rising or falling. The reason behind this is the supply and demand factors.
Supply and demand are two core elements in the financial markets and especially true when it comes to currencies.
With the currency markets, supply and demand factors are based on investor’s buying and selling activity.
As a result, whenever supply and demand starts to shift, you can expect to see prices rising or falling.
While most traders use various technical indicators, the price action is basically determined by the buying and selling activity. This is how support and resistance levels, which are commonly used terms in technical analysis is formed.
Traders know that when price reaches a support level, price can bounce off this support. This is also known as a level where this is high demand. A high demand area forms when there are more buyers than sellers.
In trading, investors tend to buy at the support level knowing the fact that there is demand for the security in question.
A resistance level is formed when there is high selling activity. This is also when the supply outweighs the demand. When there are more sellers in the market, it is difficult for price to be bid higher.
When price reaches a resistance level, it can drop sharply due to this phenomenon.
Whether you are trading with indicators, or chart patterns, support and resistance or supply and demand are two main elements that you cannot ignore.
Traders can often find it overwhelming to identify levels of support and resistance, or supply and demand. This can be highly subjective and requires years of expertise. Some traders apply support and resistance levels to the highs and lows of the price, while others prefer to use the open and closing price.
Regardless of the methods used, one key bit of information is that supply and demand span over a price area. Most traders tend to use a single price point as a level to identify support or resistance.
Buying or selling activity does not occur at one single price but in a price area.
This is where supply and demand can be beneficial for traders to understand the market context.
The main benefit of trading with supply and demand is that it allows you potential areas when price is likely to stall in its direction. This will enable traders to set their take profit levels or entry levels when trading.
It is also important to note that supply and demand levels are constantly shifting. As a result, what previously seemed like a supply area can turn into a demand area when it is breached and vice versa.
Therefore, when you are trading with supply and demand, it is important to understand that these levels tend to constantly shift all the time.
Supply and demand, based trading
The concept of supply and demand based trading was popularized by Sam Seiden. The concept, which is nothing new gained popularity at a time when trading strategies were all about using multiple indicators.
The indicator based trading strategies became saturated to the point that traders started to use more and more indicators to the point that price became of less importance. The generous use of indicators also got to the point that a trader would not understand what exactly their systems were showing them.
Amid this chaos, the supply and demand concept were a refreshing change. This method of analysis simply took the well-known support and resistance, based trading and shifted it into something more meaningful that traders could use.
Sam Seiden wrote his analysis of trading based off supply and demand trading. The concepts in his approach were a result of years of trading on the floor at the Chicago Mercantile Exchange (CME).
These days, supply and demand, based trading has become second nature and also has a strong set of followers for this type of trading.
To be successful with supply and demand trading, traders need to be good in understanding the market structure. It is also beneficial that traders have some experience with chart patterns, identifying trends and understanding what is happening in the markets.
Seiden also puts the whole concept in a simple approach which partly explains why this method is so popular.
According to Seiden, the supply and demand levels often see the below characteristics:
- Supply = Rally, base, drop
- Demand = Drop, base, rally
What this means is that a demand level is formed when prices drop to a price area, then consolidate and then rally, thus identifying the price level where there is demand. This is nothing but a support area.
A supply area is formed when prices rally and then form a base, consolidating and then price starts to drop. This is a resistance area that is formed.
Let’s take a look at the chart to illustrate the supply/demand areas and learn more about how to trade.
In Figure 1, we have used the supply demand indicator MT4 on the NZDUSD chart. The maroon colored rectangle shows the supply area, or resistance area. The blue rectangle shows the supply area or the support area.
You can see how the indicator plots these levels automatically. If you look to the demand area (the blue rectangle), price retests this level and then rebounds strongly. This is nothing but buyers overwhelming the sellers, leading to higher prices.
Supply and demand strength and weakness levels
The supply and demand have their own concepts of strength and weakness. This allows traders some more clarity when trading with this method.
The strongest supply or demand area is when price tests the level for first time after the level has been identified. This can be seen with Figure 1 where the blue supply area is seen being tested by price for the first time. When you observe this closely, you can see that price just touches this level before posting a rally.
This type of pattern indicates a strong level of supply (and demand if it occurs at the resistance area).
A moderate level is when price retest the supply or demand area for a second time. This weakens the strength of the supply or demand area and thus, traders need to proceed with caution.
While there is no limit on how many times a supply or a demand level can be tested, the more number of times such levels are tested, the much weaker these levels becomes.
The supply and demand levels can vary in width (the price levels) depending on how these levels were established and how price behaved.
In figure 2, you can see that price has rallied back to a previously established level of supply. This would mark the first retest of this level since the supply area was established. We can deduce that from here, price is likely to fall.
However, traders should also make use of other confirming indicators to validate the basis to ensure that there is a higher probability of price behaving the way you expect it to.
How to use the Supply Demand Indicator MT4?
The Supply Demand indicator MT4 is easy to use. Once you install the indicator, you can drag/drop the indicator onto your charts.
The supply and demand indicator MT4 can plot the levels based on the time frame you are currently using. Therefore, when you switch to a different timeframe, you can see that the levels can change.
The settings for using the supply demand indicator MT4 are also very simple as shown in Figure 3, below.
The settings are very easy to use. Below is a brief explanation of the configurations for using the Supply Demand Indicator MT4.
Forced.tf = 0
If you set this setting to 0, then the indicator will plot the supply and demand levels for the current timeframe on your chart. You can of course change the setting based on minutes. For example, you can use a 1440 setting and use a 1-hour chart time frame.
This will enable you to see the supply and demand levels from the daily chart on a 1-hour chart time frame.
Use.narrow.bands = false
The default setting is false but you can set this to true. When you set this to true, the indicator will also plot narrow areas or supply and demand. It is not recommended to use this setting as using the regular areas are more ideal.
Kill.retouch = true
This setting will delete previous supply and demand levels after they have been touched more than twice. This is because the more number of times a supply and demand area has been tested, the less significant it becomes.
This setting allows you to select the supply and demand area colors. You can use any of the colors available on the MT4 platform and thus customize the indicator to your chart’s existing color configuration.
Price_width = 1
This is the size of the price width label. You can increase or reduce the font of the price level by adjusting this value.
How to trade with the supply demand MT4 indicator?
Now that you know how to add and configure the indicator as well as the concepts behind this form of trading, let’s look at some ways the supply and demand MT4 indicator can be used to enhance your trading.
Identifying support and resistance levels
You can identify support and resistance levels easily using the supply demand MT4 indicator. You just drag and drop the indicator for the current time frame and apply your own trading strategies.
For example, looking for a reversal candlestick pattern near the supply or demand area can be a great way to anticipate price reversals and trade them accordingly.
In Figure 4, we make use of the Stochastics oscillator. Using an oscillator is a great way as it can tell you when the momentum is rising or falling. In the area marked with the arrow, you can see that the corresponding Stochastics oscillator moves up from the oversold levels.
Combining the information from the supply demand indicator which shows a first test of the level (which is the strongest) and the Stochastics oscillator’s positioning, we can deduce that going long at this level would be a good idea.
The target is set to the previous highs (you do not see the supply area because it was eventually breached).
Stops can be set at the lows right after the bearish candlestick pattern.
Using trend lines with supply and demand levels
You can also use something as simple as trend lines to identify where price will drop or rally to when the trend line is breached.
Figure 5 below shows the trend line plotted on the chart alongside the supply and demand areas.
In the above chart, we have a rising trend line. When the trend line is breached, taking a short position is obvious. However, the question, where do you take your profits?
This can be easily answered using the supply demand indicator for MT4. As you can see, there is a clear area of demand that was established. Price eventually drops to this level with relative ease allowing a trader to book their profits easily.
Supply Demand indicator MT4 – Conclusion
In summary, the supply demand indicator is an automated indicator for MT4. Unlike other indicators, the supply demand indicator plots areas of support and resistance levels. By using this information, traders can visually identify potential price areas where price is most likely to reverse direction.
Using supply demand in your trading allows you to keep your charts clean and focus more on price rather than the indicator. By allowing you to identify the supply and demand levels with relative ease, traders can employ a number of technical analysis methods including multi-time frame analysis as well.
Table of Contents
- Supply and demand indicator MT4 explained
- Supply and demand, based trading
- Supply and demand strength and weakness levels
- How to use the Supply Demand Indicator MT4?
- How to trade with the supply demand MT4 indicator?
- Using trend lines with supply and demand levels
- Supply Demand indicator MT4 – Conclusion