The first part of trading is the analysis; the analytical ability to find a great deal on a chart; something expensive to sell or something cheap to buy. There is no other way to make money. The ability to identify what a proper deal or “trade setup” looks like is the entire focus of the first part and the first step in trading; the analysis.
What is the final end-purpose of our analysis? All the hard-work done in the analysis is to extract only three numbers, or price-levels. An entry price-level , a stop-loss price-level , and a target price-level . At the end of it all, that is the sole purpose of our analysis: to extract the proper three price-levels.
We begin with the most basic component of the game. A buy-zone or a sell-zone is just what they call today as “supply and demand”, but let us dig deeper into what these zones are in order to answer a few crucial questions, such as how do we validate them, and how are they created. At demand, there is a large supply of Buy-OFV so we will classify it as a Buy-Zone. At supply, there is a large supply of Sell-OFV so we will classify it as a Sell-Zone. The key is to draw them methodically and to understand how to validate them and invalidate them.
Buy-Zones and Sell-Zones
There are certain areas on the chart where there are huge amounts of orders. These zones are called Buy-Zones and Sell-Zones and have very specific boundaries as we will learn. The best deals are usually found at these zones. So that gets us closer to our the answer to our first question; where is cheap and where is expensive.
Classic example of a Buy-Zone.
Demand Zone / Buy Zone: An area with a large amount of buy-orders is called a Buy-Zone, and it has very specific boundaries as we will see. This zone can be considered an area where a large amount of Buy-OFV was transacted at the origin. The only way the upwards move that occurred could have been created is by the triggering of a large amount of Buy-OFV at the origin of the movement. Somebody important decided that it was CHEAP TO THEM, so they transacted huge volumes of buy-orders. This is a great deal for a buyer and a terrible deal for a seller.
As a BFI Trader, your job is to buy at wholesale prices (cheap) and sell for retail prices (expensive), just like any other business.
A Buy-Zone is a very specific zone where two things are true:
1. A large amount of Buy-OFV originated there.
[This just means that, within this Buy-Zone, a BFI or a group of BFI’s clicked buy, with the volume of thousands and thousands of lots.]
2. A large amount of Buy-OFV is sitting there.
[This just means that, within this Buy-Zone, there is existing demand for Buy-OFV at these prices, if price were to return to this Buy-Zone in the future. This Buy-OFV can be in the form of existing pre-set limit-orders, as well as new demand of Buy-OFV that potentially enters when price returns to this Buy-Zone.]
Classic example of a Sell-Zone.
Supply Zone / Sell-Zone: An area with a large amount of sell-orders is called a Sell-Zone, and it has very specific boundaries as we will see. This zone can be considered an area where a large of Sell-OFV was transacted at the origin. The only way the downwards move that occurred could have been created is by the triggering of a large amount of Sell-OFV at the origin of the movement. Somebody important decided that it was EXPENSIVE TO THEM, so they transacted huge volumes of sell-orders. This area is a great deal for a seller and a terrible deal for a buyer.
As a BFI Trader, your job is to buy at wholesale prices (cheap) and sell for retail prices (expensive), just like any other business.
A Sell-Zone is a very specific zone where two things are true:
1. A large amount of Sell-OFV originated there.
[This just means that, within this Sell-Zone, a BFI or a group of BFI’s clicked sell, with the volume of thousands and thousands of lots.]
2. A large amount of Sell-OFV is sitting there.
[This just means that, within this Sell-Zone, there exists demand for Sell-OFV, if price were to return to this Sell-Zone in the future. This Sell-OFV can be in the form of existing pre-set limit-orders, as well as new supply of Sell-OFV that may potentially enter when price returns to this Sell-Zone.]
Again, for clarification, when we say BFI’s clicked “buy” or clicked “sell”, there really is no clicking going on. The markets are algorithmic, and the buying and selling is nothing more than the initiation of buy programs and sell programs. The majority of the financial markets are almost entirely automated and algorithmic, with very little human interference. This makes them more predictable, but more dangerous.
When we say the word "zones", I want you to think of the word "origins". A zone is nothing but an origin; the origination of huge amounts of OFV, and understand that the origin is where the heaviest volumes were transacted which eventually created our zone. The impulsive move created by this origin and the quality and strength of this impulsive move reveals a lot of information about those who transacted at its origin.
Zone Validation
Not all zones are created equal, and not all are tradeable.
We must validate any zone before even considering using it by studying the impulsive move that was created at the origin. In order to validate a zone as valid and tradeable, we must introduce you to a concept called the BFI-footprint.
A BFI-Footprint is a strong impulsive move that breaks previous market structure.
Now this is a very important sentence, and each word is important and each deserves its own understanding. A move is any A-to-B price movement. A strong one is one that travels a healthy distance. Market structure is also called a previous high/low or swing point, and “previous” means it must have occurred before the candle that created the zone being validated.
Examples of BUY BFI-footprints.
These are classic examples of “buy” footprints. All this simply means is that a large amount of Buy-OFV was triggered by a single BFI or a group of BFI’s at the origin of this BFI-footprint.
Examples of SELL BFI-footprints.
These are classic examples of “sell” footprints. All this simply means is that a large amount of Sell-OFV was triggered by a single BFI or a group of BFI’s at the origin of this BFI-footprint.
Drawing The Zone Properly
There is a certain candle that essentially “creates” these Buy-Zones and Sell-Zones. This is usually the candle where the buy program or sell program was initiated. Some may call it the supply candle or the demand candle. There is a very accurate and specific way to draw these zones properly. They are drawn from the price-extreme to the base; the extreme is either the high or the low of that movement. The high can be considered the most expensive price, and the low can be considered the cheapest price. The high will form the ceiling of any Sell-Zone. The low will form the bottom of any Buy-Zone.
BUY BFI-footprint.
Drawing the Buy-Zone Properly.
SELL BFI-footprint.
Drawing the Sell-Zone Properly.
Understanding Major and Minor Zones
When drawing these zones on your macro-timeframe, you will realize that there are multiple valid zones on any single chart. These can be categorized into major and minor zones.
There is always one major zone, and there are multiple minor zones that will originate from the major zone.
The major zone is the original major zone, and there is only one origin. There are always many valid minor zones, but there is only one origin and that is the major zone.
Make sure to first validate any and every zone you want to potentially trade by making sure a valid BFI footprint originated from the zone, or the origin of the big move.
A series of minor sell-zones created by a major sell-zone at the origin.
These Major zones are where you will find your high-probability trades [HPT’s]. Minor zones are usually where you find your low-probability trades [LPT’S].
A series of minor buy-zones created by a major buy-zone at the origin.
Differentiating between major and minor zones is an important skill that must be developed.
An elite BFI trader always knows the potential probabilities of the zone they are trading; is it a major one or is it a minor? is it against the trend (LPT) or is it in alignment with the trend (HPT)?
Asking these questions before every trade should be automated and turned into a subconscious habit. Don't be surprised if a major zone is well-respected, and don't be surprised if a minor zone is wiped clean. In the next section, we will discuss another key integral part in our understanding of the engineering of the markets, which is the Zone Wipeout.
Understanding Zone Wipeout
If we have learned that a zone is an area with large amounts of OFV, then the wipeout of a zone must essentially be the wipeout of the OFV that exists at that zone. That is exactly what price is doing; wiping out the zone and clearing out the OFV. In the case of a Sell-Zone, BFI clear out all the Sell-OFV at that zone. In the case of a Buy-Zone, BFI clear out all the Buy-OFV at the zone. It is a very simple process conceptually, and that is the key in this section; to understand the “wipeout” of the zone conceptually before you begin looking at charts.
Let us take a closer look at a zone and try to understand what is going on as price enters a zone and how the wipeout process occurs. If you can keep your focus on the most important word in trading: orders; OFV.
There are two ways a zone can get wiped:
1. QUICKLY: This is where all the OFV at the zone is purchased and cleared out in one strong impulsive move. This makes your job easier.
In the example below, a BFI purchased all the Sell-OFV at that Sell-Zone in one impulsive move.
An example of a QUICK wipeout of a Sell-Zone
2. SLOWLY: This is where the OFV at the zone is cleared out and triggered over a period of time using multiple impulsive moves. This makes your job not as easy.
An example of a SLOW wipeout of a Sell-Zone.
The second type of wipeout, the slow wipeout , deserves our attention so let us see what is happening here in terms of the only thing that matters: the OFV .
Classic wipeout scenario for a Sell-Zone.
Understanding the OFV (order-flow volume) and the type of OFV (buy or sell) being triggered is the key. In the image above, we see a valid Sell-Zone that price has recently penetrated, and the reaction to that was a bearish candle downwards. What does that mean? That means that a large amount of Sell-OFV that was at the Sell-Zone has been triggered. Those orders have been filled and executed, and they disappear. That is exactly what has happened so far in the above example of our macro-zone. What does that do to our Sell-Zone? It weakens it, and now the Sell-Zone has less Sell-OFV sitting there at the zone.
In order to understand this conceptually, let us imagine that we have a Sell-Zone, and if I added up all the orders sitting here at this Sell-Zone, they add up to 20,000 lots of Sell-OFV, for example purposes. In order to clear this zone, a BFI has to clear the way in front of them. They need to buy-out all the sellers. In this case, after every move up, there is a triggering of Sell-OFV, and thus every move downwards, removes Sell-OFV from the zone. This is what you should be seeing:
Since this is the case, now you should recognize that the best time to sell at this valid Sell-Zone would be on the first return back to the zone, and not on the 3rd 4th 5th, as the zone only gets weaker and selling at the zone becomes much more riskier.
Conceptualizing the wipeout of a Sell-Zone in terms of OFV.
You can imagine the same occurring for a Buy-Zone, but in this case it is simply Buy-OFV being triggered by every rally upwards from the Buy-Zone. Eventually, all the Buy-OFV at the zone is triggered and transacted, and they are no longer there anymore. That is when the BFI will be able to push price downwards and it will slice through the Buy-Zone like butter.
Classic Wipeout Scenario of Buy-Zone
When to delete a zone;
A zone is officially wiped and should be deleted from your chart when all the OFV at the zone has been triggered and cleared, and a macro-candle closes completely beyond the zone .
If price wicks into a zone, that is not considered a zone wipeout. The zone is considered wiped only when a macro-candle closes beyond that zone.
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