Demand and Supply: A Role reversal

Published by Sharekhan Education | March 14, 2022

Demand and Supply: A Role reversal

Our core strategy tells us that the most efficient way to trade is to buy in the demand zone and sell in the supply zone.  We see this as a simple trading rule. And surely, our courses help you identify those zones with ease. But today, we’d like to highlight this grey area that also acts as a potential entry point—one that can prove rather beneficial.

Demand Zone:

Typically, we buy in a demand zone and place a stop-loss just below the zone just in case we get it wrong. We do that as it helps us minimize our loss, but we’re probably not the only ones doing that. See, when the demand zone breaks and triggers several stop-losses, a reversal takes place – now the same zones start acting as supply zones and vice versa. As the price breaks the demand zone, it also shows that the buying pressure in the zone was weak; and sellers have gained control of the market. Traders should then look to sell with a stop-loss in case they’ve taken a long position.

There is another reason why the demand zone becomes a supply zone. Here goes: when the broken demand zone becomes a supply zone as the price breaks down and continues to move away from the zone, buyers get stuck in a long position and hope to get away with the trade with a small or negligible loss as the prices retrace back to the same level. And this selling pressure is something to take advantage of.

Supply Zone:

Precisely the same phenomenon occurs when prices break a supply zone, where the supply zone starts acting as a demand zone. Buy stop-losses trigger as the price breaks the zone, compelling sellers to exit for minimal loss. Traders often mistakenly short in a weak supply zone, which later proves to be a strong buying opportunity as it gets broken.

Conclusion:

Let us conclude this explanation with a parting thought – be like a dandelion, flow with the wind. Or, to put this in trading terms: trade with the trend. Remember, the trend is your friend until it bends. Professional traders always take advantage of novice traders who enter bad positions in weak demand or supply zones. One can greatly increase their chances of success in any market by simply following the trend and rule-based approach. And Sharekhan Education is where you come to learn the rules.

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