A common source of confusion and debate among supply and demand students is whether it’s permissible to cut through candles.
In this article I explain exactly where and when cutting through candles gives us a useful “heads-up” and also the circumstances when you should never cut through candles.
As we have seen in previous articles, the more a supply or demand zone is tested, the more orders are consumed and the weaker it becomes. Once price has broken the supply or demand zone, there are no more orders to consume at that level.
In the example below, the first test of demand is always the most reliable. The second demand test also worked in this case and subsequent tests eventually consumed demand until the level was finally broken through.
Once the demand zone is broken, it can be seen in the second chart that price tests the underside and eventually comes back above it. When price is back above, we cannot cut through candles and “re-use” the zone as demand again – if we want to buy, we must find new demand zones to work from.
However… the area of old demand has become a price pivot point or “flip zone” (marked by the dotted line). We can use this pivot point to scout for buying opportunities when above and selling opportunities when below.
Moving down to a 15 min chart (below), once price has broken back above, we find a smaller demand zone in confluence with the pivot zone. Note, that we have not re-used the old demand zone, but found a completely new untouched zone. The combination of new demand and the pivot area makes for a high probability trade.
Also note on the following chart, that at the point the (yellow) demand zone was broken, it gave us a valuable heads-up as to future direction. Below the engulfed zone, a smaller (red) 15 min supply zone was formed, which was also in confluence with the pivot area. There was a stophunt going into this zone, and taking all these factors into account, this would have been another excellent trading opportunity!
So in conclusion, you should never cut through candles when trading supply or demand zones, but when a zone is finally broken, use it as a heads-up for a change of future direction, a place where price may pivot, or an area to find new zones.
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