Combining AMD with supply and demand

You can combine a demand zone with a sweep below it into one trade idea, define where it fails and judge it with the risk tools from earlier chapters.

Two ideas, one place

Throughout this course, separate ideas have appeared: demand zones where unfilled orders may wait, stops clustering just beyond obvious lows, and the AMD pattern of a false move before the real one.

Many traders combine them. This last lesson of the chapter shows how such a combination looks, how to plan it, and why combining ideas does not turn them into certainties.

Zone plus sweep

The setup combines two ideas:

A fresh demand zone, from chapter 5: a base the price left with a strong move up. If unfilled buy orders remain there, they may support the price on its first return.
A sweep below it, from the lesson on liquidity grabs: just below the zone, the stops of earlier buyers often cluster. A dip through the zone triggers them.

Put together, the story is: the price returns to the zone, briefly falls through it, triggers the stops below, meets the waiting buyers and snaps back. In AMD terms, the dip is the manipulation phase, and the move away is the distribution phase.

In the fictional chart, a demand zone forms between 60.21 and 60.60 before a jump to 63.81. Weeks later, the price falls back into the zone and slightly below it, to 60.08 on candle 25. The next candle closes back above the zone at 61.20, and the price rises to 64.40.

The strength of the setup is not that it works often. Neither idea has strong research behind it as a trading rule, as the reviews cited in this chapter warn. Its strength is that it is precise. It says exactly where it is wrong: if the price falls through the sweep low and keeps going, the waiting buyers were not there. That makes it possible to plan risk before the trade, with the tools from the risk chapter.

Risk 1.30, reward 2.60

A fictional trader plans the trade after candle 26 closes back above the zone.

Entry: 61.20.
Stop: 59.90, below the sweep low of 60.08, with a little extra room.
Target: the old high near 63.80.
Risk and reward: risk 1.30 per share, reward 2.60, a risk-reward ratio of about 1 : 2.
Size: with 10,000 and a 1% rule, 100 ÷ 1.30 gives 76 shares.

The price reaches 63.82 on candle 31, and the plan's target is met. On another chart, the same setup would have been stopped out at 59.90 for a planned loss of about 99. Over many trades, only the record in a journal can show whether such a plan is worth following.

Common mistakes

Treating two weak ideas as one strong one. Combining them does not prove either.
Entering during the sweep. Many traders wait for the close back above the zone.
Stops inside the sweep. The stop belongs beyond the sweep's extreme.
Skipping the journal. Only many recorded trades show whether a setup is worth anything.

The takeaway

A sweep into a fresh demand zone combines unfilled orders and triggered stops. It gives a clear invalidation level, but no certainty.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the candle that swept just below the demand zone.

Tap the chart.

Candle 25 dipped to 60.08, a little below the zone's low at 60.21, and the next candle closed back above the zone at 61.20.
2Which two ideas does this setup combine?

The zone gives a reason for buying interest, the sweep a reason for a quick spike and reversal. Both are plausible, neither is proven.
3Where is this trade idea proven wrong?

If the price falls through the sweep low and keeps going, neither the zone nor the sweep idea held. The stop at 59.90 marks that.
4Buying at 61.20 with a stop at 59.90 and a target at the old high near 63.80. What is the risk-reward ratio?

Risk 61.20 − 59.90 = 1.30. Reward 63.80 − 61.20 = 2.60. That is 1 : 2.

of 4 correct.

Sources

Back to Technical Analysis