The Bouncing Zone Strategy — Part 1

Introduction

Your are about to read the part 1 of a 3 part article called "the bouncing zone strategy".

You should know that I haven't invented this strategy. I've learned it on the internet and with friends, and then tweaked it to feet my needs. Some people call this strategy "supply and demand levels", but I think "bouncing zones" better describe what it's about.

The setup

This is a strategy based on Price Action, so the setup is quite simple: just the price in candle sticks. No indicator at all. I trade mostly on the main pairs (EUR/USD, GBP/USD, etc.), and on a 1h timeframe (TF). But this technique should work on any pair and any TF.

The basic idea

Sometimes we see price moving very rapidly in one direction. What does it mean? Let's use an example to make things simple:

• Some people are selling a huge amount of $currency, and these "some people" are usually big banks
• That makes the price drop quickly from 1.3 to 1.2
• It means that a lot of people who wanted to sell $currency at around 1.3 couldn't do so, since price moved so fast
• So next time the price goes back around 1.3, a lot of sell orders are going to be triggered, and price is going to move down again
• Of course it works the opposite if price increased from 1.2 to 1.3

Once you realise that, you just have to use this information at your advantage. Here's a EUR/USD chart that shows this.

Legend:

• 1) Price dropped quickly from here, we call this a zone
• 2) Then when the price reaches back the same zone, the price bounce

Now you should understand why we call this strategy "bouncing zones". The zones from where price move quickly in one direction are called:

• Demand zone, when people want to buy and price will increase
• Supply zone, when people want to sell and price will go down (like in the example chart above)

So you just have to identify these supply and demand zones, place orders when the price goes back into these zones, and wait for the price to bounce. Obviously not all zones are going to work as planned. But from my experience, enough are going to work in our favor to make this system work, and make money.

How to identify bouncing zones

Identifying zones is quite easy. All it takes is two steps:

• 1) On a chart, identify all strong price movement
• 2) Find the base of the price movement, where the price moves slowly in sideways. This is what we call a zone.

In the example below we see 3 strong price movement. There is a supply zone that already worked, and a new demand zone.

You can see that it's quite easy to do!

How to precisely draw zones

This part is hard to explain precisely, cause there may be some rules to follow, but your also need some kind of instinct, that you can only learn by doing. Drawing zones is an "art". Anyway, the basic idea is this:

• Look at the base of a strong price movement to find some candles moving sideways
• Make the zone cover all of these candles (body and shadows)
• Then refine your zone:
  • If it's a supply zone, you do not care about the lower shadows of the candles
  • If it's a demand zone, you do not care about the upper shadows of the candles

Here are a few examples of zone drawing:

Legend:

• In blue + orange: the whole zone that covers all the candles
• In orange: the shadows we're not interested in, as explained above
• In blue: the refined zone to use for the trade

Entry, stop loss and take profit

Once you identify a zone that you want to trade, you have to set up the trade. Here's how I do it with a little example.

Legend:

• Blue rectangle: the supply zone
• Blue line: the entry of the trade, at the beginning of the zone
• Red line: the stop loss (SL), usually 2-3 pipes above the end of the zone
• Green line: the take profit (TP), that is simply placed in a way to have a 1:2 or 1:3 risk:reward ratio (in this example it's a 1:3)

So once you know how to draw zones, setting up trades is really simple with these rules.

Examples of bouncing zones

Below are 4 examples of bouncing zones from CHF/JPY charts. Two are demand zones (top), and two are supply zones (bottom).

You should try to find zones on your own charts, and see the price bouncing into them

Credit: 21pips