Supply And Demand Zone Trading
In this article, the focus will be on comprehensively exploring Supply and Demand Zone Trading. For a better understanding, it is advised to refer to our previous article where we discussed "How to Trade with Genius Investors." Within this piece, we will delve into the following key aspects related to Supply and Demand Zone Trading:
1. Understanding the market's structure.
2. Defining the concept of supply and demand zones.
3. Techniques to identify supply and demand zones.
4. Exploring different types of zones.
5. Evaluating the strength of a zone.
6. Recognizing when a supply and demand zone breaks.
7. Implementing trading strategies with supply and demand zones.
8. Utilizing odd enhancers to refine trading techniques in conjunction with supply and demand zones.
1. STRUCTURE OF THE MARKET
The price of an asset typically undergoes distinct phases during its movement:
1. ACCUMULATION: In this phase, the price remains relatively stable as smart investors start accumulating the asset, anticipating a potential uptrend.
2. REACCUMULATION: Following a significant uptrend, there might be a brief consolidation period where the price exhibits small fluctuations before resuming its upward trajectory.
3. UPTREND: This phase marks a sustained increase in the asset's price, driven by positive market sentiment and demand.
4. DISTRIBUTION: After a prolonged uptrend, the asset's price may reach a peak, and some investors start selling off their positions, leading to sideways movement or a slight decline.
5. REDISTRIBUTION: Similar to reaccumulation, this phase occurs after an uptrend and represents a short consolidation period before a potential downtrend.
6. DOWNTREND: In this phase, the asset experiences a sustained decrease in price as selling pressure outweighs buying interest, leading to a downward movement.
These phases often occur in cycles as market forces continually influence the price of the asset. Traders and investors analyze these phases to make informed decisions and adapt their strategies accordingly.
LAWS OF SUPPLY AND DEMAND IN TRADING
All financial markets operate based on the fundamental principle of Supply and Demand.
The Law of Demand states that as the price of an item increases, the demand for it decreases as buyers are less willing to purchase at higher prices. Conversely, when the price decreases, the demand increases as buyers are more inclined to buy at lower prices.
On the other hand, the Law of Supply states that as the price of an item increases, the supply of it also increases as sellers are motivated to offer their goods at higher prices. Conversely, when the price decreases, the supply decreases as sellers are less inclined to provide goods at lower prices.
Supply and Demand Zones refer to specific price levels that act as boundaries for support and resistance in the market. A Supply Zone represents a region where the selling pressure is higher than the buying interest, causing the price to face resistance and potentially reverse its uptrend. Conversely, a Demand Zone is an area where buying interest exceeds selling pressure, leading to support for the price and possibly triggering a reversal in a downtrend.
Let's now analyze NIFTY 50 STOCK in light of these concepts to gain insights into its market behavior.
In the provided chart, there are two key zones: the demand zone, which represents a broad support level, and the supply zone, which signifies a broad area of resistance.
We aim to identify price zones where supply significantly exceeds demand and vice versa.
The zones where supply outweighs demand are referred to as SUPPLY ZONES. When the market encounters these areas, the price tends to drop, presenting an opportunity for traders to profit by shorting the market (selling with the expectation of buying back at a lower price).
Conversely, the zones where demand surpasses supply are known as DEMAND ZONES. In these regions, the price tends to rise with the support of strong buying interest, offering an opportunity for traders to profit from a long position (buying with the expectation of selling at a higher price).
It's worth noting that if a supply zone is broken, it transforms into a demand zone. In such cases, a pullback test from the demand zone may present an opportunity to go long (buy) with the expectation of a further price increase.
How to Find Supply and Demand Zones in Trading
To identify supply and demand zones in trading, follow these two steps:
1. Observe the chart and look for successive large candles, indicating significant price movements.
2. Determine the base, typically represented by a sideways price action area, from which the price initiated the rapid movement.
There are various types of supply and demand formations in trading, some of the popular ones include:
Trend-Continuous Base:
1. Rally-Base-Rally (RBR) - A price rally followed by a base formation and then another rally.
2. Down-Base-Down (DBD) - A price decline followed by a base formation and then another downward move.
Trend-Reversal Base:
1. Rally-Base-Drop (RBD) - A price rally followed by a base formation and then a drop in price.
2. Down-Base-Rally (DBR) - A price decline followed by a base formation and then a rally in price.
Additionally, there is a concept called the "Flip Zone," which could represent a significant turning point or reversal area in the price movement.
LET'S PUT ALL THIS INTO NIFTY 50CHART
STRENGTH OF SUPPLY AND DEMAND ZONE
The strength of a supply or demand zone can be assessed by observing how the price departed from that level, referred to as the "strength of the move."
The rationale behind this is that the stronger the price moves away from a particular zone, the more pronounced the imbalance between supply and demand becomes at that zone. In situations where the price exhibits a powerful and decisive movement away from the zone, it suggests that significant buying or selling activity, likely from experienced and strategic investors, has influenced the market dynamics. These investors are often referred to as "Genius Investors" due to their ability to make well-timed and substantial orders that create strong market shifts.
HOW MUCH TIME DID THE PRICE SPEND AT THE ZONE?
The duration of time that the price remains at a specific zone is referred to as "Time at Level."
The rationale behind this is that when the price spends less time at a particular zone, it indicates a greater imbalance between supply and demand at that price level. In such cases, Genius Investors are likely to enter the market with aggressive actions, swiftly influencing the price movement. Consequently, price levels with significant supply and demand imbalances tend to be characterized by shorter periods of time spent at those levels.
The measure of how much the price moved away from a zone before retracing back to that zone is known as "Distance from the Zone."
The underlying logic is that the greater the distance the price travels away from a zone before returning, the higher the potential reward-to-risk ratio and probability of a successful trade.
When the price revisits a supply or demand zone, especially for our short entry, it provides valuable insights into the location of buyers (demand) and equally crucial, where buyers are absent. This information helps Genius Investors make informed decisions about the market dynamics and potential trading opportunities.
HOW MANY TIMES IS THE PRICE APPROACHING THE ZONE?
When does Supply/Demand zone break?
Supply and Demand levels break under certain circumstances, resulting from a combination of factors that influence the market dynamics. These breaks are also influenced by the actions of skilled investors, whom we can refer to as "Genius Investors."
One common scenario leading to a break is when a supply or demand zone is tested multiple times or when there's a significant price movement in its direction. In such situations, the remaining orders are triggered and gradually removed, contributing to the eventual break of the zone. Alternatively, an overwhelming influx of orders in the opposite direction can also break the level.
Observing the price action around these zones provides valuable insights. If the price remains close to the zones without experiencing substantial declines, it indicates a high probability that the zones will eventually break. Additionally, a forceful price move towards the zone may also cause a break. Moreover, when a zone is tested with low trading volume and still holds its ground, it acts as a confirmation that the zone is likely to break.
All these factors, along with the strategic moves of Genius Investors, contribute to the breaking of Supply and Demand levels in the market.
HOW TO ENTER DEMAND AND SUPPLY USING PRICE ACTION?
To enter demand and supply zones using price action, follow these steps:
1. Identify the supply and demand zone on a higher time frame (HTF) and wait for the price to reach this level.
2. Observe how the price behaves around this zone on your trading time frame (TTF).
3. Look for any reversal price action signals on the TTF as potential entry points.
4. Make sure to enter trades in the direction of the dominant trend.
For instance, in a downtrend context, if the price rallies to a supply zone on the TTF, watch for any bearish reversal price action signals as an indication to enter a short position.
Additionally, pay attention to the volume during these reversals. A low volume test in these areas is a positive sign, making such trades highly probable.
For day trading, consider using the previous day's high and low as potential supply and demand zones. Observe the price action around these levels to determine if the zones are accepted or rejected.
Now, let's proceed with an example to illustrate this approach.
To identify the supply and demand zones, start by examining a higher time frame, such as the hourly chart, to get a clearer perspective of the market.
When analyzing the big picture, focus on two critical factors:
1. Determine the overall trend - whether it is upward or downward, as this will guide your trading direction.
2. Identify significant support and demand levels in the big picture, as these zones play a crucial role in understanding potential price movements.
It is essential to avoid going long (entering a buying position) below the supply zone, as this could lead to unfavorable trading conditions.
When the price approaches a demand zone, look for signs of strength in price action to confirm the validity of the zone. These signs may include:
1. Momentum loss: Observe decreasing candle range and body, indicating a potential shift in the market sentiment.
2. Lower wick: A longer lower wick on a candle suggests buying interest or demand at that level.
3. Mix of both red and green candles: This combination indicates a balanced battle between buyers and sellers, suggesting a potential turning point.
By paying attention to these price action signals when the price approaches a demand zone, you can gain confidence in the validity of the zone and make more informed trading decisions.
Entry on the trading time frame
ENTRY SIGNAL CANDLESTICKS
In supply and demand trading, certain candlestick patterns act as entry signals at supply and demand zones. These patterns include:
1. PIN BAR: A pin bar is characterized by a long wick or tail and a small body, indicating a rejection of higher or lower prices and a potential reversal.
2. ENGULFING: An engulfing pattern occurs when a larger candle fully engulfs the previous smaller candle, signifying a shift in market sentiment.
3. OUTSIDE CANDLE: An outside candle forms when the current candle's range encompasses the entire previous candle's range, indicating a potential trend reversal.
To enhance the odds of successful trades, consider the following examples:
- Trade with the trend: Aligning your trades with the overall market trend increases the likelihood of favorable outcomes.
- Analyze indexes and sectors: If broader market indexes and sectors show positive signals, it can provide additional confirmation to go long (buy) from demand zones.
In the next article, the topic will delve into day trading with the trend in detail. In this article, the focus has been on explaining supply and demand trading extensively. I hope you find this supply and demand trading article informative and enjoyable.
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