The author presents a three-step trading formula built on price action alone, without indicators or chart patterns. The author states that the formula has been backtested thousands of times and was profitable over the long term in every month tested. The strategy consists of three steps: identifying market structure, marking supply and demand zones, and filtering trades by risk-to-reward ratio.

Step 1: Market Structure

Market structure determines the direction of the trend. The author considers this the most important step, because an error here invalidates the rest of the strategy.

• Uptrend: The chart makes higher highs and higher lows.
• Downtrend: The chart makes lower lows and lower highs.

Validating a Low

A breakdown below a low does not automatically signal a reversal. Many traders make this mistake. They see price break a low and begin looking for short trades.

The author applies a specific rule: a low is valid only if price breaks the previous high. The rule works as follows:

• Low breaks, previous high does not: The low is not valid. The previous valid low remains the reference point, and the trend stays up.
• Price breaks the previous high: The low is validated. The valid low transfers to the new low point.

In an uptrend, the trader looks only for bullish trades. Short trades become valid only if price breaks the valid low. Price may move up, down, or sideways in the meantime, as long as it does not break that low.

Step 2: Supply and Demand

Supply and demand zones identify where price is likely to react. The author uses the following principles:

• Demand zones form in uptrends. Traders buy from demand zones.
• Supply zones form in downtrends. Traders sell from supply zones.

Rationale

• Demand: A strong upward move from a base shows that many participants bought from that level. The author assumes that when price returns to the area, traders will again buy there.
• Supply: A strong downward move from a base shows that many participants sold at that level. The author assumes that when price retests the zone, it will again move lower.

The author describes supply and demand as the core of the strategy.

Marking a Demand Zone

1. Confirm the uptrend in Step 1.
2. Locate an area of consolidation, where price moves sideways before a sharp move upward.
3. Use the rectangle tool.
4. Mark the zone from the low to the high of the candle immediately before the impulse move.
5. Ignore supply zones while the market is in an uptrend.

Trade Execution in an Uptrend

1. Wait for price to return to the demand zone.
2. Enter the trade.
3. Place the stop loss below the demand zone.
4. Set the take-profit target at the recent high.

Example: Uptrend

The author describes a chart in which price rose, pulled back, and broke the previous high. The resulting low was validated, which confirmed the uptrend. The author marked a demand zone at the consolidation before the impulse move. The trade was a winning trade.

Example: Downtrend

The author describes a chart in which price made a low that broke the previous high's structure, confirming a downtrend. The author then marked supply zones and traded only short positions.

The trade procedure in a downtrend is the mirror of the uptrend procedure:

1. Wait for price to return to the supply zone.
2. Enter the short trade.
3. Place the stop loss above the supply zone.
4. Set the take-profit target at the recent low.

The author reports four consecutive winning trades on this chart, each taken from a new supply zone that formed as the downtrend continued.

Assessment of the Method

The author states two conclusions:

• The strategy is highly accurate.
• Trading only in the direction of the trend raises the probability of winning a trade substantially.

Step 3: Risk-to-Reward

The third step filters trades by their risk-to-reward ratio.

• Minimum ratio: 2.5:1.
• Example: A trade that targets $250 in profit while risking$100 meets the 2.5:1 requirement.
• Rule: If a setup meets Steps 1 and 2 but has a risk-to-reward ratio below 2.5:1, the trader does not take the trade.

The author states that this rule substantially increases the strategy's profit rate.

Example: Full Procedure

The author describes a final uptrend example with the following sequence:

1. Confirm higher highs and higher lows.
2. Mark the demand zone at the consolidation before the upward move.
3. Wait for price to return to the zone and enter.
4. Place the stop loss below the demand zone.
5. Set the take-profit target at the recent high.
6. Check the risk-to-reward ratio. In this example, the ratio is 3:1, which exceeds the 2.5:1 minimum, so the trade qualifies.

The author concludes that the trader should repeat this process on each setup.

Summary of Rules

Trade Decision Sequence