Supply and demand zones are powerful reversal points, but like all trading concepts, their success rate can be enhanced by aligning them with other key elements on the chart.

The secret? Confluence.

Confluence occurs when multiple technical factors overlap at the same point on the chart, creating a higher-probability setup.

For instance, when a demand zone aligns with a major psychological level, the likelihood of a reversal increases dramatically. The demand zone indicates a point where insitutional traders may enter large buy positions whereas the psychological level contains significant sell orders banks and institutions can exploit to enter those positions easier than at other key market points.

There are countless types of confluence—Fibonacci levels, moving averages, trendlines—but three specific points stand out as the most reliable and impactful when trading supply and demand zones.

Let’s check out the first.

Confluence Point #1: Psychological Levels (Round Number Prices)

Why Are Round Numbers So Important?

Big round numbers (e.g., 1.1000, 0.9500, 1.0500) are some of the most influential levels in forex.

These psychological price levels act as magnets for buy and sell orders, attracting significant attention from retail traders and institutions alike. But why?

• Simplicity: Round numbers are easy to remember, so traders gravitate toward them when placing orders.
• Significance: These numbers hold psychological weight, making them feel like critical levels to traders.

Round numbers often become hotspots for liquidity, where clusters of buy and sell orders accumulate, creating ideal conditions for reversals.

(Check out these scientific studies on round numbers in FX and other markets)

How Round Numbers Affect Reversals

Price frequently reverses at or near round numbers because these levels provide the perfect opportunity for banks and institutions to execute their trades.

Unlike retail traders, who can execute small trades without noticeably affecting the market, banks must distribute their positions across multiple trades and time frames to avoid excessive slippage.

To avoid slippage, they break their trades into smaller chunks and execute them where and when they can find enough opposing orders—like the dense clusters found around round number prices. The banks utilize the liquidity here to enter or exit their trades more efficiently.

These methods help them minimize slippage and achieve better average prices for their positions.

Example: Spotting Reversals at Big Round Numbers

Take a look at this chart.

Notice how many reversals from supply and demand zones tend to occur at or very close to big round number prices like 1.1000 or 1.0500?

When price approaches a big round number, the banks often push it into the orders clustered around these levels, execute their trades, and then allow the market to reverse. Supply and demand zones that align with these prices or form close to significant round number prices, usually hold a much higher chance of reversing than zones which don’t.

To incorporate big round numbers into your supply and demand trading:

1. Identify zones near round numbers: Look for zones that form within 150 points of a BRN.
2. Prioritize these zones: When a supply or demand zone aligns with a big round number, it has a higher probability of holding.

Key Note: Big round numbers are most effective on timeframes below the 4-hour. On daily and weekly charts, round numbers occur too frequently to provide meaningful confluence. Due to the size of supply and demand zones on these timeframes, multiple levels will usually form inside these zones, making it tough to decipher which level may cause price to reverse.

Key Note: SD zones that align with or are situated near psychological levels have a significantly higher probability of reversing price than zones that lack this confluence. This is not a coincidence; it reflects the clustering of institutional orders and the market’s natural tendency to gravitate toward key round-number levels, making these zones more reliable for trading opportunities.

Confluence Point #2: Higher Timeframe Zones

Another natural point of confluence is when supply and demand zones on lower timeframes align with zones on higher timeframes.

Zones on higher timeframes (H4, Daily, Weekly) represent areas where institutions have placed significant trades.

These zones often form at the beginning and end of larger price trends, making them more reliable than lower timeframe zones due to the amount of capital invested into their formation. When a lower timeframe zone (e.g., 1-hour) aligns with a higher timeframe zone, it creates a more powerful setup.

The overlap indicates that institutional interest is present at both the higher timeframe zone and the lower timeframe zone, increasing the probability of a successful reversal.

Key Point: Forex is a fractal market, meaning price acts the same on a lower timeframe as it does on higher timeframes. For supply and demand, this means higher timeframe zones are made of smaller zones on a lower timeframe. Use this to identify and trade higher timeframe zone using the lower timeframes.

How to Use Higher Timeframe Zones as Confluence

1. Mark zones on higher timeframes: Start with the daily or H4 chart and identify key supply and demand zones.

1. Check for alignment: Look for zones on lower timeframes that overlap with the higher timeframe zones.

1. Trade with confidence: Zones that align across multiple timeframes have a much higher likelihood of success.

Confluence Point #3: Cot Report Graph

The COT Report Graph is another excellent source of confluence for supply and demand zones. The report reveals the positions of large players like:

• Commercials (Hedgers): Often trade against trends, entering areas of value.
• Non-commercials (Speculators): Follow trends and influence momentum.

When these participants show significant buying or selling activity, it often aligns with potential turning points in price. If an SD zone overlaps with heavy institutional buying or selling from the COT data, it strengthens the likelihood of a strong reaction at the zone.

Consider USD/JPY, For Example:

Institutional Positioning Shifted Strongly

• The green line (likely representing non-commercial/speculative long positions) saw a steep decline.
• The red line (likely representing non-commercial/speculative short positions) surged upward.
• The blue line (possibly representing commercial hedgers or net positioning) remained relatively stable.

This kind of shift often signals a major trend change or at least a short-term correction.

A sharp unwinding of long positions and increase in shorts suggests that large speculators (hedge funds, leveraged traders) flipped bearish on USD/JPY.

• 07/09/24 – 182,033 Speculators Long (2nd Highest Ever!)
• 07/16/24 – 151,072 Speculators Long (Massive Drop of 30,961 in Just One Week!)

Key Observations from the Chart and COT Data: Massive Long Speculative Positioning at the Top (Near 160.000): On July 9, 2024, COT data showed 182,033 speculative long positions for USD, the 2nd highest ever. This suggests that speculative traders (typically trend-followers) were heavily long USD/JPY as price reached the 160.000 psychological level.

This is often a warning sign of a potential market top because when speculative longs become overcrowded, there are fewer buyers left to push the price higher.

The two green vertical lines highlight the price action during the period when the COT data showed a major shift in positioning.

A Daily Supply Zone was formed on July 11, 2024, right around the 160.000 psychological level.

Price failed to break above this zone and reversed sharply, confirming the presence of strong selling pressure. By July 16, 2024, speculative long positions had dropped to 151,072 – a massive decrease of 30,961 contracts in just one week.

This rapid unwinding of speculative longs likely contributed to the sharp price drop from 160.000 to below 152.000.

Initially, price continued higher, driven by strong speculative buying. However, once speculative longs began exiting in large numbers, price reversed aggressively, breaking multiple support levels. After rejecting 160.000, price dropped towards 150.000, a key psychological level.

It later rebounded and is now testing 158.000, approaching the Daily Supply Zone again.

Final Thoughts

By combining supply and demand zones with these three points of confluence—big round numbers, higher timeframe zones, and significant trendlines—you can dramatically improve your trading success.

• Big Round Numbers: Highlight areas with dense liquidity and institutional interest.
• Higher Timeframe Zones: Provide an added layer of confidence due to their institutional significance.
• Cot Report Graph: Act as confirmation, reinforcing the strength of your zones.

Start incorporating these points of confluence into your trading today, and you’ll notice a significant improvement in your ability to identify high-probability setups. Now, let’s move on to the next lesson!