Mar 17, 2023 Value Broking 7 Mins 2.4K
A-Guide-on-Supply-and-Demand-Trading

Supply and demand are the major determinants of the prices of any asset trading in the share market. It applies to all the products we buy and sell in this world. Traders equipped with a sound understanding of supply dynamics and demand can anticipate the price movements reasonably. 

To better understand how supply & demand trading works, we first must know the market structure. For example, the price of an asset passes through the following stages in the market.

  • Accumulation: The floating supply of stocks gets removed because expert traders buy them heavily. It is because even big investors for traders cannot place their entire order in the market at a time.
  • Trend up: Trader’s intense buying pushes up the prices of an asset. They cannot sell all their positions at once since the selling pressure pushes down the prices reducing their profits. 
  • Distribution: The traders use increased prices to profit by selling the asset during the bull period.

There are also specific laws regarding demand trading. These include the law of demand and the law of supply. 

1. The higher the price of an asset, the lesser the demand, and the lower the price, the greater the demand. It is the law of demand.
rn2. The law of supply states that the higher the prices, the more the supply, and the lower the prices, the lower the supply. 

The latest understanding of the supply and demand zones is a commonly used technique for day trading. The zones refer to the periods of lateral price movements that arrive before the extensive price rise. They are the bordering areas of support or resistance. One can trace them using rectangular tools on a trading platform on the chart. A supply zone comes before the demand zone occurs before the uptrend. The supply and demand trading strategies use prices to reverse back to these zones as the entry and exit parameters. It is a neutral market strategy, useful for forex markets, futures index CFDs, commodities, etc.

A Supply Zone and a Demand Zone

Experienced traders generally locate the price zones where the supply is more than the demand or vice versa. When the supply overtakes the demand, it forms the supply zone. As soon as the market enters the supply zone, the prices decrease. Here, one can gain profits by short selling. Conversely, a demand zone forms when demand exceeds the supply, so the prices tend to go up. So one can benefit from an extended position. Another thing to note is that if a supply zone crumbles and the stock breaks out, that supply zone becomes the demand zone. 

How Can One Trace the Supply and Demand Zones in Trading

Finding the supply & demand zones involve the following two steps.

1. First, we have to locate the next large red or green candles. Remember there should be significant changes in the price.

2. Establish the origin of this big candle which is generally the sideways price action. It is the base place from where the prices started moving very quickly.

Different Kinds of Formation of Supply and Demand Zones

There may be various accumulation periods in an uptrend. It tells us that reversal and continuous patterns are similar to any other technical analysis pattern. Both the supply & demand reversal and continuous patterns have two subtypes.

  • Drop base rally, which is the bullish reversal pattern
  • Rally base drop with the bearish reversal pattern

Similarly, the following two subtypes make the supply & demand continuation patterns.

  • Rally base rally, which is the police continuation pattern.
  • Drop base rally that is a continuation pattern.

Demand and Supply as Against the Support and Resistance

The areas form the supply & demand pace for support and resistance levels, which are popular among traders. Although the supply & demand zones are close to support and resistance levels, they are not the same. Support price level marks a pause in price rise. 

The supply & demand zones cover larger areas than the support or resistance levels. This increased area helps assess the upcoming price movements better than single lines of support and resistance levels. Their understanding of both these patterns can assist in analyzing the price charts. Finding the big candle formed successively and locating the way helps draw supply & demand zones.

Points to Consider Regarding Supply & Demand Trading

1. First, one needs to identify whether they are in a supply zone or demand. The prices are higher than the bid price in a supply zone while lower in the demand zone. 

2. It is essential to recognize the pattern during trading in supply & demand zones. The knowledge of trend reversal for continuation will aid you in deciding whether to buy or sell subject to the most active zone.

3. Another thing is to hold the rally or drop patterns. If the prices are in a rally, go for selling and buying low. If you see a drop in prices, you may go for short selling.

The Trading Strategy: Supply & Demand Zones

A trader should assess all the economic and other factors which affect the markets. With this information at the back of the mind, traders can put a supply & demand strategy, including breakout and range trading. 

Range Trading

Well-established supply & demand zones are helpful for range trading. In addition, traders can use stochastic indicators or RSI to identify overbought or oversold conditions quickly.

Breakout Strategy

The prices cannot stay in a particular range forever and eventually move. The price moves outside the support and resistance level or even the supply & demand zone. Traders may eye for favorable entries in the breakout direction, which may be the beginning of a robust trend.

You also limit order and price action entry for supply & demand trade. One can be patient for stock to enter a particular zone before putting a limit order. 

You should place it on edge and hope for a reversal in prices. The price action is the use of patterns like candlestick trading at zones.

What Does the Trading Supply & Demand Zones Tell Us?

The supply & demand zones are the core of supply & demand trading. These are indicative of the liquidity at a special price. A supply zone is the distribution zone, whereas a demand zone is an accumulation zone. 

Importance of Supply & Demand Zones

Supply & demand significantly affect the market. Trading the supply & demand zones assist in making buy or sell decisions. The price of assets may not fall beyond a particular level and start moving sideways for a long time. The price of the asset is thus in accumulation and can go up. Distribution zones are points where prices start to drop. Accumulation shows the high demand for an asset. In the same way, the bearish nature of higher supply compared to the demand. Hence it is seeing distribution. 

Conclusion

Supply & demand trading is a promising strategy for understanding the zones in which one can enter into a trade. Supply & demand zones mark the more expansive price areas. The width makes it easier to find the entry for a trade. This article helps understand what is supply & demand trading in detail.

Frequently Asked Questions (FAQs)

Supply & demand trading is useful if you understand how to capitalize on it. One can make the best use of supply & demand zones while carrying out day trading. Sideways price action occurs between these zones before an explosive breakout. It can be used for forex. Apart from forex, one can use supply & demand trading in contract for differences (CFDs) to take complete advantage of the system.

After a strong move, the supply & demand tend to break. It happens due to the triggering and removal of other orders. If too many orders are in the opposite direction, it will break the level.