Supply and Demand Trading (Part – 1)

Supply and Demand Trading

In this article, I am going to discuss Supply and Demand Trading. Please read our previous article, where we discussed Market Structure through Swing. At the end of this article, you will understand the following pointers.

  1. What are the Supply and Demand Zones?
  2. Why are supply and demand zones in our chart?
  3. Why does the market return to the supply and demand zone?
  4. Why trade from the supply and demand zone?
What are the Supply and Demand Zones?

Supply-demand is nothing but the border area of support or resistance

What are the supply and demand zones?

Why is the supply and demand zone in our chart?
  1. The supply zone formed due to the smart money placing sell trades. We can confirm this to be a fact because the market continued to fall after the zone formed (opposite of the demand zone)
  2. If you are aggressive, you want to buy or sell NOW. In other words, you place a MARKET ORDER to buy or sell immediately at the best available current price.
  3. Because your position is pretty big, it won’t be filled all at once. It will get filled quickly, and you will be able to enter the whole position, but the position will get split as the price moves quickly. The aggressive market participants drive the price aggressively up or down with their market orders.
  4. So, the supply and demand zone can only be seen once the price speeds away from the zone. It indicates that there was smart money buying or selling interest at the origin of that move.

Why supply and demand zone in our chart?

Why does the Market return to Supply and Demand Zones?
  1. Due to a Pending Block order
  2. Because the smart money position is pretty big, it won’t be filled all at once. Smart money could not get all their trades placed when the zone formed. If they rush into the market, the price goes along with them. This action will make them buy higher and sell lower. They resolve this issue by leaving blocks of orders on the books.
  3. To get their remaining trades placed, the banks leave pending orders at the zones so that when the market returns to the zone, the trades they were unable to get placed initially are executed, and the market moves back in the direction in which the zone was created.

Why does the Market return to Supply and Demand Zones?

WHY TRADE FROM THE SUPPLY AND DEMAND ZONE?
  1. Low-risk high reward
  2. You are with the smart money.

WHY TRADE FROM SUPPLY AND DEMAND ZONE?

Supply and Demand Trading Summary:

Supply and demand trading is a concept in economics that can also be applied to financial markets to identify potential price movements based on the imbalance of supply and demand. In the context of trading, this concept is often used to identify areas on a chart where the price has made a strong move up or down, indicating a zone where supply and demand are out of balance. Here’s how supply and demand zones can be used in trading:

Identification of Zones:
  • Supply Zones: These are levels where selling interest is significantly strong and exceeds buying pressure. They are often identified after a significant move downward from a price level, suggesting that sellers are willing to sell at that level (or even lower).
  • Demand Zones: These are levels where buying interest is significantly strong and exceeds selling pressure. They are identified after a significant move upward from a price level, suggesting that buyers are stepping in and are willing to buy at that level (or even higher).
The Basic Principle:
  • When the price returns to a demand zone, traders expect buyers will enter the market again, creating upward pressure on the price.
  • Conversely, when the price returns to a supply zone, sellers are expected to enter the market again, creating downward pressure on the price.
Trading Strategies:
  • Traders may place buy orders at or just above demand zones and sell orders at or below supply zones.
  • Stop-loss orders are often placed just outside these zones. If a demand zone is breached with a strong price move lower, it suggests that the demand zone has failed, and similarly for supply zones.
Consideration of Volume:
  • Volume is an important confirmation in supply and demand trading. High volume at the formation of the supply or demand zone can indicate stronger interest levels and a greater likelihood that the zone will hold.
Timeframes:
  • Supply and demand zones can be identified on various timeframes, but they are often considered more reliable on higher timeframes because they reflect broader market sentiment.
Limitations:
  • Like any other trading strategy, supply and demand trading is not foolproof. False breakouts or breakdowns can occur, and economic or news events can quickly change the balance of supply and demand.
Combination with Other Analysis:
  • Traders often combine supply and demand analysis with other technical indicators or fundamental analysis to confirm signals and improve the accuracy of predictions.

In practice, traders specializing in supply and demand look for areas where the market has made a strong move, either up or down, which indicates an area of imbalance. They then wait for the price to return to these levels before entering a trade, expecting the price to reverse direction.

It’s important to note that supply and demand zones are not the same as support and resistance levels, although they are similar concepts. Support and resistance are typically single price levels or narrow ranges that the price has touched multiple times. At the same time, supply and demand zones are broader areas where the price has made a significant move and has not been tested frequently.

Successful supply and demand traders often have a deep understanding of market dynamics and have a disciplined approach to trading, including risk management and psychological resilience to deal with the market’s inherent uncertainties.

Here, in this article, I try to explain Supply and Demand Trading. I hope you enjoy this Supply and Demand Trading article. Please join my Telegram Channel, YouTube Channel, and Facebook Group to learn more and clear your doubts.

2 thoughts on “Supply and Demand Trading (Part – 1)”

  1. can you please clear the concept of Level-I, Level-II and Level-III data in trading and on that basis how to take a trade

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