The Supply Activity Retest strategy in trading is a technique used to identify potential areas where the price might reverse or continue based on supply zones. Understanding this concept involves recognizing how supply (or selling pressure) can influence price movements and how retesting these zones can provide trading opportunities.
Key Concepts of Supply Activity Retest
Identification of Supply Zones:
- - A supply zone represents an area on the chart where significant selling activity has previously occurred, leading to a price drop. These zones are commonly identified near resistance levels where the price has reversed downwards.
- - Supply zones are characterized by clusters of price action, typically marked by lengthy wicks or multiple failed breakout attempts to the upside.
Establishing the Supply Zone:
- - Once a supply zone is identified, traders wait for the price to retest this area. The initial touch or approach to the supply zone is crucial for identifying potential trading setups.
- - A true supply zone often results in swift rejections upon first contact due to intense selling pressure.
Retesting the Supply Zone:
- - When the price returns to the supply zone after an initial rejection, this is known as a retest. The retest provides opportunities to confirm the strength of the supply zone.
- - During the retest, traders look for signs that selling pressure is reasserting itself, such as bearish candlestick patterns (e.g., shooting star, bearish engulfing), increased volume, or momentum indicators turning downward.
Trading the Retest:
- - If signs confirm that the supply zone is holding (e.g., price struggles to break above or shows a reversal pattern), traders might consider entering short positions.
- - The entry is typically made close to the zone with a tight stop-loss just above it to minimize risk in case the price breaks through the zone this time.
Targets and Risk Management:
- - Profit targets can be set at the next support level or previous low, depending on the risk-reward ratio and market context.
- - Risk management is essential. Use stop-losses to protect against unexpected breakouts above the supply zone, as previous supply can sometimes turn into demand if breached.
Benefits and Considerations
- - Market Psychology: Understanding why supply zones function can aid traders in anticipating where large orders (from institutions or large traders) might be placed, providing a psychological edge.
- - Accuracy: The effectiveness of trading supply activity retests can depend heavily on the correct identification of supply zones and market conditions. They tend to work best in markets that are consolidating or ranging.
- - Practice and Patience: Successfully trading supply activity retests requires practice and patience. Not every retest will result in a reversal, so it's important to look for additional confirmation signals before entering a trade.
By incorporating supply activity retest strategies into their trading, traders aim to improve their timing of entries and enhance profitability by capitalizing on predictable reactions to significant price levels.
