Supply and demand areas are more powerful than support and resistance, it is the place where banks and institutions are buying and selling in the market, if you can identify these turning points, you will make a difference in your trading account.
To trade the engulfing bar pattern successfully with supply and demand areas, you have to be able to identify quality supply and demand levels on a chart, according to my experience; there are three factors that define quality supply and demand areas:
1-The strength of the move:
Pay more attention to the way the price leaves the zone, if the market leaves the area quickly, this is an indication that banks and institutions are there.
2-Good profit zone:
You have to make sure that the level provides a good risk/reward.
3-Bigger time frames:
The daily and 4-hour supply and demand areas are the most powerful zones in the market.
The chart below shows a quality supply area, as you can see the move was very strong, and that indicates that banks and institutions were there.
The formation of an engulfing bar was a clear signal that the bears are still willing to sell from the same price level.
See another example of these areas:
I think that it’s not complicated to identify these zones, because they are characterized by strong moves. The secret behind supply and demand areas is that big players put their pending orders there, when the market approaches these zones, we see a crazy move from these levels.
If you can combine trading supply and demand areas with the engulfing bar price action signal, you will increase your chances to make money as a trader.