Supply and demand is something that drives the markets all over the financial world. The law of demand says that the demand is inversely proportional to the price. When the price goes up, the demand is lower because the buyers do not want to spend too much money to buy a product. But when the price goes down, the demand is higher because the buyers buy eagerly. The law of supply says that the supply is directly proportional to the price. When the price is low, the supply is low because the sellers do not wish to sell at such a low price. But when the price is high, the supply also rises because the sellers wish to sell the products at the possible highest price.
These are the simple laws of supply and demand. Now, let’s see how to use the supply and demand zones in the markets to trade at Olymp Trade.
Key Takeaways🔑
| →Supply and demand zones are critical to understanding market dynamics and making trading decisions. |
| →These zones can be identified by studying price fluctuations and are linked to support and resistance levels. |
| →Trading with supply and demand zones can involve trend continuation patterns, trend reversal patterns, and flip zones. |
| →Supply and demand zones’ strength can be measured through various indicators, including the types of candles after breakout, time spent in the zone, and the length of price movement from the zone. |
| →Successful trading using these zones requires understanding, analysis, and patience. |
Contents
Recognizing the supply and demand zones at Olymp Trade
The supply and demand zones can be identified as the broad area of the support and resistance levels. But the idea behind them is different. Support and resistance levels work because they are connected to past peaks and bottoms which are obviously visible to market participants. Supply and demand are more about cheap or expensive. The demand is formed at the support level and the supply at the resistance.
To find the supply and demand zones, you should look for the long candles that appear subsequently. Then, you should identify the basis for the fast movement of the price which is typically the sideways fluctuation.
Trading with the supply and demand zones on the Olymp Trade platform
Typically, when the price falls into the demand zone, it is a signal for the upwards movement. This means you should open a buy position. On the Olymp Trade platform use currency pairs (CFDs) instead of Fixed Time Trades. Remember to set a Stop Loss just below demand zone (or above supply zone for sell positions).
When the price meets the supply zone, usually the price will soon fall. That is why you should enter short.
Sometimes, the demand becomes the supply zone or the opposite. It is similar to role switching between support and resistance.
There are several formations of supply and demand. Let’s take a closer look at a few most common ones.
Trend continuation patterns
Demand and supply can form trend continuation patterns. It occurs when the price is going up, then fluctuates creating the base level and continues to rise afterwards. Then we can say that demand area is created. You should enter a long position when the price revisits the demand level after the rally.
During the downtrend, the pattern is created when the price falls into the base and then breaks through and moves further down. Open a sell trade when the price returns to the supply zone after the rally.
Trend reversal patterns
When the price was falling, then it moves within the base for a while and after that, it changes the direction, we receive a demand zone and possible demand reversal pattern. You should open a buy position at the moment the price is touching the demand level again.
A supply reversal pattern develops when, after the uptrend and fluctuating within the base, the price moves downward. That is why you should open a sell trade here. Enter when the price is revisiting already created supply zone.
Flip zone
We call a flip zone the situation when the demand changes into the supply. Supply and demand zones will finally exhaust. It happens when the price passes the zone and moves further. Sometimes doing that the price will leave a new base for new supply/demand pattern. Then we can say that the zone has changed its role.
How strong demand and supply are
The strength of demand and supply can be measured by the types of candles that appear after the breakout from these levels. When the price moves abruptly up or down and the candles are long and in the same colour, this signifies a very strong demand or supply. The zones are still considered to be strong when the candles are medium length with occasional retracements. After the weak demand or supply, the price is moving without much strength.
Another way to determine whether the level is strong is by the time spent in the zone. In this case, the time spent in the supply or demand is inversely related to the area’s strength. Such a short time within the zone is the evidence of more out of balance demand or supply.
The length of the price movement from the demand or supply and back also gives information about the strength of the levels. The level is strong when the price moves far away before it returns.
The level weakens every time the price returns to it. The first time the price touches the demand or supply, the zone is the strongest. The next time it is still relatively strong, yet it weakens with every subsequent return of the price.
Using the demand and supply areas to enter a trading position at Olymp Trade
You must first identify the demand and supply zones. Search for them in higher time frames.
The next step is to check how the levels are accepted on the time frame you want to trade.
Now, wait for the price action signal and enter the trade accordingly.
Below, there is an example of an hour time frame for the GBPUSD currency pair.
You should enter a trading position when you spot a strong demand or supply area.
Pros and Cons of Using Supply and Demand Zones in Trading 💡🏷️
Pros ✅
- Allows for better understanding of market dynamics.
- Helps identify potential entry and exit points.
- Can be used across different timeframes and trading instruments.
Cons ❌
- Requires time and patience to study and identify zones.
- May be complex for beginners to understand and apply correctly.
- Zones may not always act as predicted due to other market factors.
Distinguishing Characteristics of Supply and Demand Zones 💎🔍
| Supply Zones | Demand Zones |
|---|---|
| Indicates high supply and lesser demand leading to potential price drop. | Signifies high demand and lower supply potentially leading to a price rise. |
| Typically corresponds with resistance levels in the market. | Usually corresponds with support levels in the market. |
| Often provides a signal to open a sell/short position. | Can provide a signal to open a buy/long position. |
Summary
Supply and demand are the base for all financial markets. There are some universal laws regarding them and you can use this knowledge to find the best entry points for your trades. These strategies will not guarantee a successful trade one hundred percent of the time, but it minimizes risk and adds to your chances of succeeding, which is the most you can hope for with any strategy.
Practice identifying the supply and demand levels in the demo account. Olymp Trade offers it to its users free of charge and supplies it with virtual cash.
Tell us in the comments section below about your experience in trading with the supply and demand areas on the Olymp Trade platform.
Wish you high profits!
Frequently Asked Questions 📚💡
- Q: How can I identify supply and demand zones in the market?
- A: Supply and demand zones can be identified by studying price fluctuations, long candles that appear subsequently, and understanding the area of the support and resistance levels.
- Q: What does it mean when demand becomes supply or vice versa?
- A: This situation is known as a flip zone. It usually happens when the price passes a zone and moves further, sometimes leaving a new base for a new supply/demand pattern.
- Q: What are trend continuation patterns and trend reversal patterns?
- A: These are patterns formed by supply and demand zones that can indicate the continuation or reversal of a trend. Recognizing these patterns can help traders make informed decisions.
- Q: How does the strength of demand and supply zones affect my trading?
- A: The strength of these zones can indicate the likelihood of a price move. Zones are considered stronger when the price moves abruptly up or down with long, similar-colored candles. Weaker zones may show the price moving without much strength.
- Q: How can I successfully trade using supply and demand zones?
- A: Successful trading requires a combination of understanding these zones, analysis, patience, and waiting for the price action signal before entering a trade.