What is Supply and Demand Trading?

The supply and demand trading refers to a market analysis approach that specifically focuses on identifying the price levels at which the purchasing and selling pressure is strong, thereby influencing price movements. This balance between supply and demand zones shows the availability of securities and the collective desire to own them. Investors can study these zones to know the breakout points, potential reversals, and high probability of entry and exit points. In this article, we’ll explore the meaning of demand and supply zone in the stock market, how to identify them, and more.  

How Supply and Demand Zones Work 

The supply and demand zone in stock market works in the following way:  

• The supply zone refers to the price areas where the selling pressure is strong enough to halt or reverse an uptrend. This indicates the presence of large sell orders. 
• The demand zones are price areas where the buying pressure outweighs the selling pressure. This often leads to a price bounce or trend reversal. 
• Both of these zones are created when the institutional traders place large orders, as this causes a sharp price movement from specific levels. 
• When price revisits a supply or demand zone, it often reacts again, as unfilled orders may still be present at those levels. 
• Traders use both of these zones to identify high-probability entry and exit points, along with stop-loss and target levels. 

How to Identify Supply and Demand Zones  

To identify the demand and supply zone in stock market, traders can follow the simple guide below:  

1. Spot a Strong Price Move: Traders need to first look for a sharp rise or fall that clearly stands out from normal price movement. This indicates a sudden dominance of buyers or sellers. 
2. Identify the Base Area: Before any strong move, traders need to mark the small cluster of candles where the price paused or moved sideways. This base is often represented as a heavy institutional order placement. 
3. Observe the Price Departure: A fast and decisive move away from the base signals a genuine supply–demand imbalance and strengthens the reliability of the zone. 
4. Monitor Price on Retest: When the price revisits the zone, its reaction, rejection, consolidation, or breakout may help traders understand whether the zone is still valid or not. 
5. Plan Entry and Risk Management: Consider entries near the edge of the zone, with stop-loss levels placed just beyond it to manage risk effectively while trading supply and demand zones. 

The Importance of Supply and Demand Zones 

• The supply and demand zone in trading plays the following important roles:   
• Supply and demand zones play a crucial role in price movement, as market trends are driven by the imbalance between buyers and sellers. 
• These zones help investors in selecting a suitable time to buy or sell. 
• The stock may be in an accumulation phase and may move up when its price stops decreasing after reaching a certain level and starts to move sideways for an extended period of time.  
• The distribution zone is the starting point and the downward trend of the price reduction.  
• To put it simply, accumulation occurs when a stock is bullish, which indicates that there is a strong desire for it. Similar to this, a bearish stock exhibits dispersion and a bigger supply than demand. 
• Distribution denotes pressure on the selling side, whereas accumulation denotes pressure on the purchasing side. 

Three Factors to Keep in Mind for Supply and Demand Trading 

The three factors to keep in mind while trading supply and demand are:  

• Identify the Zone Type: It is important for investors to first determine whether the price is in a supply zone or a demand zone. Prices near supply zones are typically higher and reflect selling pressure, while prices near demand zones are lower and indicate buying interest. The bid price represents the price a trader is willing to pay for a stock. 
• Recognise the Dominant Pattern: The next important point is to observe the price pattern within the zone. The strength and activity of the zone help determine whether the price is likely to reverse or continue its trend, guiding the decision to buy or sell. 
• Understand Rally and Drop Behaviour: Finally, analyse whether the price action suggests a rally or a drop. A rally from a demand zone may offer buying opportunities, while a drop from a supply zone can signal potential short-selling or exit points. 

Pros & Cons of Supply and Demand Zones   

The table below shows the pros & cons of Supply and Demand Zones.  

Conclusion 

Supply and demand trading provides traders with a practical framework to understand price movements by focusing on areas where buying and selling pressure is strong. By identifying supply and demand zones on a share market app, traders can better anticipate potential reversals, breakouts, and high-probability entry and exit points. Besides offering benefits like better timing and risk management, these zones also demand experience and discipline, particularly when dealing with volatile markets. Supply and demand zones, together with correct analysis and risk control, can be a useful tool for making informed trading decisions across various market situations and timeframes.