Supply and Demand Trading: A simple futures strategy
Once you learn this concept of demand and supply zones, your decision-making skills while trading will be highly enhanced. Having a commodity futures trade-coupled use of Relative Strength Index (RSI) indicator along with open interest data-you can easily recognize high-probability setups in the market with much more confidence. In this blog, I will share some strategy that incorporates these concepts to help you trade the markets with much discipline and precision.
Essential Components of the Strategy
- Highlight Demand and Supply Zones
- Generally, long buildup analysis employs futures trading
- RSI Indicator to use in overbought/oversold situations
- Open Interest to validate market sentiment Timeframe
Step 1 - Long Build up Check after 3:30 PM of Futures Trading
Futures trading is the first half, but market behavior is a bit different after 3:30 PM; they tend to be quieter and hence tend to analyze demand and supply zones much more effectively.
Use Open Interest for Long Buildup :
A great deal of an open interest buildup is a good sign of a bullish market. Through Opstra Options, look up for any open interests in the futures contracts. Look for a long buildup in the futures that shows the aspect to be oriented toward the side of the bulls through . Open interest gone up with prices show more and more traders opening their long positions; hence the demand.
Example : Reliance Futures showed Long Buildup on 16th October 2024
Once you have located a long buildup in futures trading, you continue with the next step.
Step 2 - Analyze on 15-Minute Chart using Zones for Demand and Supply
Now, go ahead and open your TradingView chart and set it for 15 minutes. The 15-minute charts detail price action to degrees that make these major zones of demand and supply stand out against the generic market noise.
Identification of Demand and Supply Zones :
In this strategy, you’ll focus on identifying demand and supply zones to pinpoint potential trade opportunities. These zones represent areas where price is likely to either bounce (demand zone) or reverse downward (supply zone).
Step 3: Determine the Demand Zone Using RSI Indicator
It is only through the RSI that one can judge an overbought and oversold condition. Thus, it helps to find possible demand zones.
Demand Zone: Identify the lowest RSI of the day on the 5-minute chart. An RSI below 30 normally means that the market is oversold. That market is about to turn up. That's your demand zone. You mark the price level where RSI is at its low point, thereby identifying your demand zone for possible buy entries.
Step 4: Place the Trade on the Demand Zone
Now you have marked a demand zone, wait for the price to come back in. Price must return back to this zone; supply and demand trading waits for price to come to it.
Entry: Reverse signs in the area of demand, such as bullish candlestick patterns or watchers building up.
Stop Loss: Use the low of the day minus twice the ATR value for your stop loss. ATR is Average True Range that measures the market volatility, and this way, you would allow your trade some leeway to breathe while at the same time protecting your capital.
Step 5: Establish Target Based on Supply and Demand Levels
After entering the trade, a fair target of profit is set.
Target: Place your target at the next supply zone or at the most recent swing high. The thinking behind it is, if your demand zone does hold, price should reach the swing high and then be greeted by resistance from supply.
By using zones and RSI, you'll increase the chances of hitting those profit targets while having a good risk/reward at play.
Why This Strategy Works
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Demand/Supply Zones: This strategy has areas of demand and supply zones. It will immediately place your trades in the natural flow of the market. A demand zone is a high-probability buying point, and a supply zone is a logical point to sell or short.
- Futures Trading & Open Interest: When one tracks the open interest in futures trading, it shows whether a trend is supported by growing demand or not. Rising open interest along with rising prices serves as a confirmation that traders are betting for an up move.
- RSI for Precision: Although an RSI will highlight the zone of demand more precisely, it does denote both overbought and oversold conditions, so you will enter at best price levels.
- Risk Management: This ATR helps base your stop loss and targets off real market conditions rather than arbitrary levels; the trades stay relatively realistic and manageable.
Frequently Asked Questions ( FAQs )
1. What is the significance of using demand and supply zones in trading?
Demand and supply zones are important since they show levels where price is most likely to reverse. Hence, at the demand zone, buyers should come in and take charge to push the price up, while at the supply zone, sellers should take the charge and push price down. And if you trade at these zones then you position yourself according to the natural flow of market forces, and thus chances for getting trades working to your advantage are increased.
2. How do I determine a demand zone by using the RSI indicator?
Now, using that RSI indicator, you can locate the lowest value for the day. You then draw a demand zone from that lowest value, but only if the RSI goes below 30. That's an oversold asset with its normed upside reversal at that point. From there, that corresponding price level of that low value in the RSI becomes your demand zone where you expect buyers to come in and drive the price upwards.
3. Why is a 15-minute chart used in this strategy?
The 15-minute chart is a balance enough to capture plenty of price action but not so short as to be overwhelmed by noise present in smaller time frames, like the 1-minute charts. There's ample capability to establish intraday trends, key demand and supply zones, and quickly draw conclusions on making trading decisions without over-influence from excessive market movements.
4. How can I confirm my trade using open interest in futures trading?
Open interest is the number of outstanding futures contracts that are still unsettled. You can use the open interest of futures to gauge the strength of a trend. Growing open interest with growing prices means there's a long buildup, and therefore, there is quite strong demand; that is, the market may continue trending in the bullish direction. All this data will help you validate your trade as you go into a demand zone following confirmation of the bullish tone.
5. What does ATR do in the end?
Average True Range, which represents the volatility or an index's volatility. And in the strategy put up here, the ATR is used as a basis for stop-loss and target levels. Then by doubling the ATR value from below the low of the day, and using the result as a stop-loss level, you ensure that your stop loss accounts for market volatility, letting prices range within normal levels and still stops adverse movements above normal sizes.