Supply Zone

A price range where merchants often sell is known as a supply zone. The area with
the largest sales potential is above the current price. Unfulfilled sell orders are
normally filled when the market reaches a known supply price level, which often
drives the price lower.

Demand Zone

A price level where traders often buy is known as a demand zone. This region is
represented below the current price, where the possibility of or interest in
purchasing is greatest. Several buyers are often available with purchase orders in
a known demand zone at that level.

Differences Between Supply and Demand Zone

Understanding the distinctions between supply and demand zones is essential for
traders utilising these concepts in their technical analysis and decision-making
processes. Here’s a tabulated comparison between the two:

Aspect Supply Zone Demand Zone

Definition Area where selling interest surpasses buying interest. Area where
buying interest surpasses selling interest.
Appearance on a Chart Often seen as a resistance area, where price tends to
reverse downwards. Typically identified as a support area, where price tends
to reverse upwards.
Price Action Prices usually decline after reaching a supply zone. Prices tend
to rise after reaching a demand zone.
Role in Trend Analysis Considered as potential areas to short or exit long
positions. Viewed as potential areas to buy or exit short positions.
Indicator for Traders Traders may look to short trades when price approaches a
supply zone. Traders may consider long trades when price approaches a demand
zone.
Market Psychology Indicates an excess of sellers over buyers in a specific price
range. Indicates an excess of buyers over sellers in a specific price range.
Relevance in Trading Important for trend continuation and reversal strategies.
Crucial for identifying potential reversal points and trend continuation.
Identifying Supply and Demand Zones
The initial step in identifying supply and demand zones involves recognising market
imbalances, where substantial price shifts result from imbalances in supply and
demand. These imbalances typically lead to significant upward or downward price
changes. On a chart, traders focus on recognising larger candles known as extended
range candles (ERCs) or exploding price candles. Thereafter, the next three crucial
steps in discovering supply and demand zones follow.

Step 1: Determine the Pricing Now

To begin the supply and demand zone identification process, traders need to first
locate the current price on a given chart. Following this, they should identify a
substantial, cohesive cluster of candles on the left side of this chart, indicating
either upward or downward movement. Demand zones typically showcase notable prior
downward price movements, while supply zones demonstrate the robust preceding
upward price

Step 2: Look for ERCs

In the next step, traders should search for ERCs. These candles are characterised
by their substantial bodies and minimal to nonexistent wicks. It’s important to
note that a candle is not typically considered an ERC if the size of the wicks and
body is the same.

Step 3: Determine Origin of Price Movement

In the final step, traders need to identify the source of the price change on the
chart. If the price rose with small-sized candles, paused, and then fell, as
indicated by numerous ERCs, this starting point becomes the foundation of the
supply zone.

Laws of Supply and Demand Trading

The dynamics of supply and demand are influenced by various external factors and do
not operate in isolation. Nevertheless, the four fundamental concepts that
illustrate the correlation between demand and supply offer a straightforward
explanation of their relationship.

Supply remains unchanged while demand rises: In a market characterized by price

competition, this scenario leads to a price increase. The scarcity of the product
elevates its value.
Supply remains unchanged while demand declines: A persistent decrease in demand
results in an oversupply of the product, leading to a reduction in its value.
Supply rises while demand remains steady: When a product becomes widely available,
its price tends to drop. This situation may lead to an overstock condition if
demand remains constant for an extended period.
Supply declines while demand stays steady: The price will increase when the supply
of a product decr