Trading, for a majority of individuals associated with financial markets, is a complex process. Add up the complex charts, statistical analysis, a plethora of technical indicators, and obviously, the volatility of the market, and trading appears to them as rocket science. However, trading is a much simpler process, where effective predictions can be made by efficiently analyzing the bullish or bearish trends of a stock. Supply and Demand Trading is one of the most basic trading practices when it comes to stock predictions. A form of technical analysis, supply and demand trading implies the movement of buy and sell attributes of a stock to make predictions.
Breaking down ‘Demand’ and ‘Supply’
‘Demand’ implies the presence of a strong bullish attribute in the market. Also known as ‘accumulation’ zone, it is characterized by the fact that prices increase only when the buyers surpass the number of sellers. The price maintains the uptrend till more sellers enter the market to fulfill the buy orders.
‘Supply’, on the other hand, signifies the presence of a bearish attribute in the market. ‘Distribution’ or ‘supply’ zone is characterized by sellers outnumbering the buyers. The price takes a fall and maintains the downtrend until buyers find the stock worth trading.
Here is a EUR-GBP chart which illustrates supply and demand zone.
Rules of Supply and Demand Trading
Here are some salient points which must be considered before indulging in supply & demand trading.
1. Focus on trading in the direction of the most recent high/low
Trading in the direction of the most recent highs or lows is harnessing the best opportunity to make a winning trade. If you are the risk-taker, consider the fact that reversals are never quite easy to predict, and when the reversals occur, there will be ample timeframe to alter the trading decision. A majority of traders wait for the market to traverse back to the old zones, considering the factors which indicate only a reversal. However, this focused approach lets the trader ignore the direction of the current movement.
2. Make a timely exit
In Supply and Demand Trading, making an exit is as important as making an entry on a bullish attribute. Obviously, no one would go for price spending on a supply zone. Long ranges are void of institutional sales, but still, supply zones are fragile and don’t last for long. A shorter demand zone has a better working, where re-entries are feasible to maximize returns.
3. Refrain from trading in zones created a long time ago.
According to several analysts, trading on the basis of zones created a long time ago is recommended. The cited reason is ‘prediction of reversals’. Well, the truth behind the myth is that reversals are unpredictable and there is no other method to describe its credibility, other than using old zones. The only way, in which a reversal takes place is if the shareholders remove profits from existing positions or place bids in an opposite direction to the current trend.
Check out our Support Resistance Trading system below:
Supply and Demand Trading, in its true sense, is one of the most basic trading practices. Using technical indicators along with fundamental analysis will let you make profitable predictions. However, if hasty decisions are to be made, you would not succeed in the long term. Just observe the point of breaks of bullish or bearish trends, analyze the long-term behavior, and you are good to trade and reap returns upon your valuable investment.