Supply and Demand Zone in Trading

Supply and demand zone in trading is very important zone and in this article, we will discuss about Supply and Demand Zone trading in depth. Before diving in, make sure you have read our previous article on How to Trade with Smart Money. In this piece, we will cover the key aspects of Supply and Demand Zone Trading.

The price moves through these major stages:

• ACCUMULATION
• UPTREND
• DISTRIBUTION
• DOWNTREND

Accumulation

During accumulation, smart investors buy up a lot of stock, which reduces the amount of available stock for sale. The process we can called as accumulation.

Uptrend

During an upward trend, smart investors push prices higher with strong buying activity.

Distribution

Distribution stock happens when a companies shares are being sold more than bought in the market, which is the opposite of accumulation stock. On the other hand, a dividend is cash given to shareholders, or sometimes extra shares, called a stock dividend.

Downtrend

During distribution, smart investors capitalize on the higher prices achieved during the rally by starting to sell the stock back to traders or investors who are not well-informed.

What are Supply and Demand Zones ?

Supply and demand represent the boundaries of support or resistance.

In the chart, you will see a demand zone (a strong support area) and a supply zone (a strong resistance area).

We are looking for price zones where supply is higher than demand and where demand is higher than supply.

When supply overtakes demand, it forms supply zones. Prices usually fall when the market reaches these zones, allowing you to make money by selling (shorting) the market. On the other hand, when demand is stronger than supply, it creates demand zones. Prices typically rise with the support of demand, allowing you to profit by buying (going long) in the market.

If the supply zone is broken, it turns into a demand zone. Testing a pullback from the demand zone can be a signal to buy (go long).

All financial markets follow the basic rule of Supply and Demand.

Demand Law – When prices go up, people tend to buy less because they do not want to spend more money. But when prices drop, people want to buy more because things are cheaper.

Supply Law – When prices rise, sellers are willing to sell more because they can make more money. But when prices fall, sellers do not want to sell as much because they will earn less.

Strength of Supply and Demand Zone

When the price moves far from a certain level, it means there is a big difference between how much people want to buy and sell at that level. Smart investors notice this and place big orders.

When does Supply/Demand break?

When the price starts getting near the supply zone, it means there are fewer goods or shares available for sale at that level. This makes the supply zone less strong because there is less stuff available to meet the demand. Essentially, as the price moves closer to the supply zone, it eats away at the available supply, making the zone weaker. When a particular zone is tested a lot or during a big price move, the Supply and Demand levels can break. This happens because the existing orders get filled and removed, or because there are suddenly a lot of orders pushing in the opposite direction, causing the level to break.

How to spot demand and supply zones through Price Action ?

Here are the key points to remember.

• Prices moving far from a zone indicate imbalance in supply and demand.
• Smart investors place heavy orders in response to this imbalance.
• When price approaches a supply zone, it weakens it by reducing available supply.
• After repeated testing or strong moves, supply and demand levels may break.
• This can occur due to filled orders or a sudden influx of orders in the opposite direction.

How to trade using Supply and Demand zones ?

Identification: Traders look at past prices to find certain areas where the price made big moves away from a certain level.

Confirmation: Before making a trade, many traders want to make sure the price really reacts to these areas. They wait for signs like certain patterns or indicators.

Entry Points: When the price goes back to one of these areas and starts moving the way they expected, traders might jump in.

Stop Loss and Take Profit: To avoid big losses, traders often set a limit to how much they are willing to lose, and they might take their profit at certain levels.

Risk Management: It is important for traders to be careful with how much they are willing to lose on each trade, so they don not risk too much of their money.

Timeframe: These areas can be spotted on different timeframes, but the ones on large timeframes (15 min, hourly, daily, weekly depending whether you want to take intraday or swing/positional etc) are usually seen as more important.