In economics, the law of supply and demand determines the price people pay for a product.
This law states:
In this article we will discuss what is supply and demand zones in trading. When supply of a product is high and the demand is low, prices must fall to incite buyer’s interest; when the demand for a product is high and supply is low, prices must rise to represent the scarcity of that product.
The supply and demand laws ultimately control all marketplaces. When discussing trading in the market, most traders depend on technical indicators to identify imbalances in supply and demand. In world of Forex, “Supply and Demand trading” has gained a reputation as one of the most popular trading strategies. It combines the best elements of support and resistance trading with the timeless power of supply and demand.
But the market couldn’t care less about your support or resistance lines on your charts! The reason for this indifference? Supply and Demand serve as significant driving forces behind market movements. So if you can unlock the secrets of WHY and HOW they work, you’ll significantly improve your ability to place key levels on your charts – that price responds to!
Banks and other similar institutions create these zones, which are actually price levels where unfulfilled orders wait to be completed. To win over the whole concept of supply and demand, traders need to find smart money orders on the price chart. Moreover, they also need to identify the supply-demand zone correctly.
At Demand Zone, Buyers are dominated to buy and Sellers are weak. At Demand zone, Massive Buying pressure of Banks and institutions unfilled orders are placed at demand zone.
Demand Zone Entry Example:
As you monitor the market to take entry at demand zone, you observe that the price approaches the Supply zone and starts to reject it. This serves as your cue to exit the trade, as you recognize that this area likely has a higher Supply-to-Demand ratio…
DEMAND ZONE ADVANTAGES
There is minimum risk.
There is high profit potential.
The probability for right trade is high.
Very easy to identify the area.
The risk to reward ratio is more.
” Supply Zone” :
At supply Zone, Sellers are dominated to sell & Buyers are weak. At Supply zone, Massive selling pressure. Professional traders and banks pending orders placed at supply zone in heavy volume. This area is present above the current market price in chart. When the price hits a recognized supply price level, the unfilled sell orders get completed and, thus, usually bring down the price. Take the help from the chart below to understand the supply zone concept more clearly.
The above chart shows the price reaching a specific price zone (the shaded area), and then going back down. This cycle will keep repeating itself until all unfulfilled sell orders get filled.
Supply Zone Exit Example:
Can you see how this concept keeps you in sync with the market rather than leaving you guessing or out of touch with its dynamics?
Once you begin to grasp what’s happening behind the scenes in the market, it becomes much easier to construct a narrative about what might unfold when prices reach these critical zones.
Main advantages of selling in supply zone:
Minimum risk.
High profit potential.
High probability for Right trade.
Very easy to find out the area.
Risk reward ratio is more.
How Demand and Supply Trading Work
To clarify, picture a range on a price chart… “flow of supply and demand” and demonstrates how prices in the market respond to these fundamental forces.
When price rises, demand outstrips supply.
When price falls, supply outweighs demand.
When price moves sideways, S & D are in balance.
You can see how changes in supply and demand create price moves.
First: Supply meets demand, and boom – a consolidation forms! Prices move sideways for a while, then climb higher as demand increases.
Second: Suddenly, things take a turn, and supply starts overwhelming demand! A bunch of traders—or maybe just one big whale—decides to offload a massive chunk of EUR/USD, causing price to plummet!
Supply outstrips demand for a while, as more and more people decide to sell.
They see price fall, so decide to sell themselves.
Third: Demand comes in again, catapulting prices skyward , sparking a fresh upswing. This continues until more supply enters the market. With supply and demand now in relative balance, price moves sideways, and a tight consolidation forms.
It is a “play-by-play” commentary that goes on day by day, week, month, quarter, year, etc.You can think of these zones as the boundaries within which traders are willing to buy and sell assets, effectively forming a price range until a new imbalance emerges.
Understanding this concept of Supply and Demand is an invaluable tool, as it enables you to anticipate how prices are likely to react.
Once you begin to grasp what’s happening behind the scenes in the market, it becomes much easier to construct a narrative about what might unfold when prices reach these critical zones.
Taking time to comprehend the principles of Supply and Demand can begin to shed light on why and how the market behaves as it does…
Armed with this knowledge, you can step away from feeling like you’re trading blindly.
Instead, you can create a well-laid-out plan and a solid theory supporting your trade decisions!
This can boost your confidence in trading and provide a clear understanding of where prices might bounce when these zones are breached.
Consider this scenario: Imagine marking a key Demand zone a week ago because the price made an aggressive move away from it…
