Supply and demand zone chart trading is a fundamental that is shaped in all markets. Supply and demand zone is a more important topic than support and resistance. You can also say that the supply and demand zone is the father of the support and resistance zone. It has more advanced staff. More confirmation than support and resistance. The supply and demand zone is a mirror of the buyer’s and seller’s psychology. By understanding supply and demand zone chart trading a trader can gain a deeper insight and higher knowledge of the market and predict easily the market’s next price movement.
In this article, you will know what is supply and demand zones. It’s fundamentals and advanced staff. Different types of supply and demand and how to use it with strategies.
What Is A Supply and Demand Zone?
In easy terms, the supply and demand zone is nothing but an extended version of support and resistance. The demand zone forms in the support area and the supply zone forms in the resistance area. Basically in the demand zone, the sellers get weaker, and the buyer enters the market and pushes the market up. On the other hand, a totally opposite case happened In the supply area. The sellers are getting stronger than the buyers. That’s why the market goes down. The buyers and sellers both try to control the market. That’s why the support and resistance zones are consolidated for some time. That consolidation zone in support and resistance is known as supply and demand.
There are so many factors to identify which supply and demand zones are the strongest. We will discuss this. Supply and demand zones are worked as a reversal point and continuation trend as well.
Why Supply And Demand Zone Chart Trading Is Important?
We all know how important support and resistance are. Supply and demand zones are more advanced and extended versions of support and resistance. There is no need to say it’s important. Supply and demand are the only reasons for market reversals. If you look into the chart you will see that the price moves like a (V) shape. It happens only because there is a strong supply and demand zones.
How To Identify Supply And Demand Zone?
Identifying supply and demand zones is very important because it can indicate reversal possibilities of price movement. When the price goes to the supply zone it struggles to go up and may reverse. Same case in demand zones. Identifying the supply and demand zone is a little bit tough though but not impossible. You need a little bit of practice and experience as well.
1. Multiple Price Reverse
If the price was respected multiple times in the past in same the area or support and resistance zones. That means it going to respect the same zone again and that zone will be considered a supply and demand zone.
2. Look For volume Or Big Candles
If a big candle forms or the volume of a candle is very high. That’s going to tell us the extreme pressure of buyers or sellers. It depends on the candle’s color. Again volume plays a very important role here. Some of the candle has a small body but is high in volume. High-volume candles are the signs of high pressure which confirms the reversal point.
3. Confirmation With Indicator
Momentum indicators like RSI, CCI, MACD, and MFI(money flow Index) works the best confirmation identifying supply and resistance zone. When the momentum indicator shows us the signal of overbought and oversold zones with supply and demand. It confirms that a reversal may happen.
How To Draw Supply And Demand Zone?
As you know supply and demand zone is the consolidation area of support and resistance. Generally, we use a horizontal line and draw it as the wick point or body point of the candle. However, the supply and demand zone is a consolidation area. You can not cover it using one horizontal line. In that scenario, you can use two horizontal lines and draw them one in the upper side and another one in the downside in the consolidation area. Or you can simply use a colorful channel tool and draw the whole consolidation area. It will help you mark the area. Whenever the price again touches that area. It will reverse the price.
Types of Supply and Demand Zone
Supply and demand zones are two types
1. Reversal Supply and Demand Zone
2. Continuation Supply and Demand Zone
1. Reversal Supply and Demand Zone
In the image, you can see there is Rally-Base-Drop and Drop-Base-Rally. In the supply zone first candle is considered a rally. The rally candle must have to be a big one. The second candle is a base candle. The requirement of a base candle is a doji candle, Hanging man, or shooting star. If there form a doji candle. It would be preferable to other candles and it’s considered as a strong zone. The 3rd candle must have a big candle and engulfed the base candle. The third candle is known as the drop candle.
This is the best setup of the supply zone. In the image rally-base-drop candle makes a candlestick pattern which is the evening star candlestick pattern. If this type of pattern forms in the supply zone. That means it is a strong reversal point.
The less the base candle is the stronger the supply zone. Increasing the number of base candles makes less possibilities of reversals and it makes the pattern weaker.
Similar case with drop-base-rally. It is a perfect demand zone setup. From that zone, the market may move to the uptrend. The pattern in the image is also known as the morning star. It’s a strong reversal pattern. It could be a hammer or inverted hammer instead of a Doji candle. But Doji would be more preferable. If there is more than one base candle. The possibilities of reversals will decrease.
2. Continuation Supply And Demand Zone
In the image, the continuation supply zone means that The trend will continue to the downside. Then how do we know that the trend will go even down? By seeing drop-base-drop. Drop is considered a healthy big red candle. Not abnormal. Then the base candle comes. A base candle can be a hammer-type candle or Doji. We will always consider the Doji candle over the other one. The candle color has to be the opposite color of the drop candle. Then another big healthy candle comes which is also called drop. This is the continuation supply zone.
Similarly, the demand zone continuation setup is rally-base-rally. Then the market continues to uptrend. The rally candle must have a big body green candle. The base candle has to be red doji or hammer type. And then another rally comes. It indicates that the seller tries to enter the market but they have no chance because the next rally candle gives us a signal of the high pressure of buyers. And the market continues to bullish momentum.
Supply And Demand Zone Time Frame Strategy
This strategy has a high winning ratio. But you have to be patient with this strategy. Because it takes time and patience. You have to wait a lot to meet all the criteria.
First of all, we look at supply or demand for a higher time frame. The time frame has to be at least 15 minutes to 4 hours time frame. We don’t use more than that time frame.
Then find supply and demand zones on a higher time frame. After that when we found those zones. Mark them using horizontal lines or a channel box.
After marking them we open a chart on a lower timeframe. 1 minute to 5 minutes. We have to find the same setup for those supply and demand zones. If we find an evening star candlestick pattern in the supply zone. Then It confirms the downtrend. Not only because of the evening star. The only evening star may give us false signals. But on a higher time frame. We see the same setup. That means it’s a sure-shot pattern. And the market will go down.
Similarly demand zone. If on the higher time frame and lower time frame make the same setup. Then we trade for an uptrend.
Conclusion
Supply and Demand Zone Chart Trading is a game of probabilities and long-term consistency. It’s not an overnight success game. Even with a highly promising setup, you may face losses for some trades. That’s why consistency is the key. Always stick to your plan. Long-term games need time and patience. That’s why always choose a broker who is trustworthy, reliable, and already stayed in this field for at least decades. Brokers like Exness, M4Markets, and FBS have given their services for decades. They have instant payout. Lower spread or some of them have no spread at all. A very good customer care with instant reply. They pay millions of dollars every year. Choose and explore one of these brokers to start your trading career now. Good luck.