This article for the understanding of Demand and Supply Zone in technical analysis. In this article you can know about how we can use Demand and Supply Zone while trading.
Table of Contents
What is demand zone and supply zone?
- Supply and demand trading is centered on supply and demand zones. These zones are regions that show liquidity at a particular cost. The demand zone is referred to as the accumulation zone, while the supply zone is referred to as the distribution zone.
- In the demand zone first candle can be red or green but the legout candle should be green exiting candle. Same like supply zone.
- Between them the doji candle mean base candle is the fight between the buyer and seller and after that whose winner that demand or supply zone will produce.
candles:-there is three type of candle.
- Exiting red
- Exiting green
- The doji
- IN this we have the LEGIN candle & LAGOUT candle for those candle to candle analysis done by this method.
Legin : legin is the first candle of demand zone or supply zone .
Legout : It ts the resultant candle of demand and supply zone .
THE FOUR TYPE OF PATTRAN IS:-
- Drop-base-rally < DBR >
- Rally-base-rally < RBR
- Rally-base-drop < RBD >
- Drop-base-drop < DBD >
- That we have a four type of patterns to trade in market or to understand the price action.
- This will work on any country of stock market in the world.
- That types of analysis it is. And also with accuracy.
- The leg out should be the exiting candle or explosive candle that demand zone or supply zone will be powerful.
- That mean the leg out is stronger than the leg in candle.
STEPS IN IDENTIFYING DEMAND ZONE:-
- Start from current market price on the chart and mark a horizontal line at current market price.
- Look left and down until you find an explosive up move (it mean exiting green candle)
- Mark all three or two component of zone (legin base legout) / (legin legout exiting)
STEPS IN IDENTIFYING SUPPLY ZONE:-
- Stat from current market price on the chart and make a horizontal line at current market price (cmp)
- Look left and up (red exiting candle) to the explosive down move.
- Mark all three or two component of the zone. (legin base legout) or (legin legout)
There is two types of zone marking.
- Body to body
- Wick to wick
For the demand and supply zone marking there is two type of horizontal line which proximal line and distal line.
For the wick to wick marking there is base candle high and low or for only legin legout (2 component) lower body and lower wick are the proximal and distal line.
& for the body to wick marking the proximal line will be highest body of all base candle and the distal line will be lowest wick of all base candle.
ABOUT ENTRY AND STOP LOSS:-
- Above the proximal line == entry (trade entry)
- Down the distal line == stop loss (trade stop loss)
For the trading all have to know about the market psychology. The demand and supply zone are have to fresh or only one time tested. This levels are <demand zone and supply zone> uses for maximum one or two times other than that it will stop loss.
- “Once a stop loss hit than hit”
Than trade over. Find new trade for the moment.
For the base candle how the base candle <doji> less that demand and supply zone are powerful. And the more base candle the level are weak. It called potential power of level.
35 Points Must Know About Demand and Supply Zone:
- Demand Supply Zones: These are areas on a candlestick chart where buying (demand) or selling (supply) is expected to be significant.
- A Demand Zone indicates a potential buying opportunity, while a Supply Zone suggests a possible selling opportunity.
- Demand Supply Zones are identified based on previous price action, where strong buying or selling pressure was observed.
- They can be seen as horizontal areas on the chart, usually formed by multiple candlestick highs or lows.
- Demand Zones are characterized by increased buying activity, often leading to price reversals or bounces.
- Supply Zones, on the other hand, show heightened selling activity, which can result in price reversals or pullbacks.
- Demand Supply Zones provide valuable insights into market sentiment and potential future price movements.
- These zones are not precise levels but rather areas where significant buying or selling pressure is expected.
- The size of a Demand or Supply Zone may vary based on the strength of the underlying buying or selling pressure.
- Multiple candlesticks within a zone indicate a higher probability of a price reversal.
- Demand Supply Zones can be used in various financial markets, including stocks, Forex, and commodities.
- They can be applied to different timeframes, from short-term intraday charts to long-term weekly or monthly charts.
- The concept of Demand Supply Zones is derived from the principles of supply and demand in economics.
- In a Demand Zone, buyers outnumber sellers, leading to upward price movement.
- In a Supply Zone, sellers outnumber buyers, resulting in downward price movement.
- Demand Supply Zones are not guaranteed to hold as support or resistance levels, but they provide useful guidelines for trading decisions.
- Combining Demand Supply Zones with other technical analysis tools can enhance the accuracy of trading strategies.
- Traders often use trend lines, moving averages, and other indicators in conjunction with Demand Supply Zones for confirmation.
- Demand Supply Zones can be spotted manually by identifying areas of consolidation, breakouts, or significant price reactions.
- Various technical analysis software and charting platforms offer automated tools to identify and plot Demand Supply Zones.
- Understanding the overall market structure and trend is crucial when analyzing Demand Supply Zones.
- Demand Zones are typically found at the bottom of downtrends or pullbacks within up trends.
- Supply Zones are commonly observed at the top of up trends or retracements within downtrends.
- Demand Supply Zones can act as targets for taking profits or setting stop-loss levels.
- They can also serve as entry points for new trades, either for reversals or continuation of the prevailing trend.
- Traders often use candlestick patterns, such as bullish or bearish engulfing patterns, to confirm potential price reversals at Demand Supply Zones.
- The longer a price remains within a Demand or Supply Zone, the higher the likelihood of a breakout.
- A breakout from a Demand Supply Zone can signal a strong continuation of the trend.
- When a breakout occurs from a Supply Zone, it can lead to a rapid price decline.
- Conversely, a breakout from a Demand Zone can result in a sharp price increase.
- Supply Zones can act as resistance levels, preventing prices from moving higher.
- Demand Zones can act as support levels, preventing prices from moving lower.
- The more times a Demand or Supply Zone is tested, the weaker it becomes.
- Demand Supply Zones can be subjective to some extent, as different traders may identify them at slightly different levels.
- Back testing and practicing with historical charts can help traders develop
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Demand and Supply Zones play a crucial role in technical analysis and trading decisions. They represent areas on a candlestick chart where significant buying or selling pressure is expected. By identifying these zones, traders can anticipate potential price reversals, bounces, or pullbacks. While they are not guaranteed to hold as support or resistance levels, Demand and Supply Zones provide valuable insights into market sentiment and help traders make informed decisions. Combining them with other technical analysis tools and understanding the overall market structure enhances their effectiveness.
Can Demand and Supply Zones be used in any financial market?
Yes, Demand and Supply Zones can be applied to various financial markets, including stocks, Forex, commodities, and more. The principles of supply and demand are fundamental across markets.
Are Demand and Supply Zones precise levels?
Demand and Supply Zones are not precise levels but rather areas on the chart. They are determined based on previous price action and are expected to hold significant buying or selling pressure.
Should I use other technical indicators along with Demand and Supply Zones?
Yes, combining Demand and Supply Zones with other technical analysis tools can enhance the accuracy of trading strategies. Traders often use trendlines, moving averages, and candlestick patterns to confirm potential price reversals at these zones.
Can Demand and Supply Zones be subjective?
Demand and Supply Zones can be subjective to some extent, as different traders may identify them at slightly different levels. It’s important to practice and develop your own approach through back testing and experience.
Can I use Demand and Supply Zones for short-term and long-term trading?
Yes, Demand and Supply Zones can be applied to different timeframes, from short-term intraday charts to long-term weekly or monthly charts. The concept remains the same, but the significance may vary based on the time frame.
How do I use Demand and Supply Zones in my trading strategy?
Demand and Supply Zones can serve as targets for taking profits or setting stop-loss levels. They can also be used as entry points for new trades, either for reversals or continuation of the prevailing trend.
Remember, while Demand and Supply Zones can provide valuable insights, it’s essential to combine them with other analysis techniques and have a disciplined approach to trading.