Understanding supply and demand zones and being able to identify them correctly could give you the edge you need to be a successful trader long term. In this post we’ll talk about what supply and demand zones are, how to identity them, a few examples and how you could use them in your trading strategy.
What Are Supply & Demand Zones?
Supply and demand zones are where buyers and sellers will step into the market and take control. In a demand Zone, buyers will look to take control to push the stock up. In a supply zone, sellers will look to push the stock down. If you want to think about it in terms of support and resistance, a support zone acts like a resistance zone and a demand zone acts like a support zone.
How Identify Supply & Demand Zones Can Help Your Trading
For the best results, you want to look for higher time frames. The best time frame in my opinion is the 30 minute time frame and the 1 hour time frame. If you check a stock on a higher time frame, it will usually give you a better view of where the clear supply and demand zones are. Before we get into an example of TSLA below, look at this image that helps show the different type of supply and demand zones. One simple way to identify a zone is to look for a big move, consolidation, and then another big move. The consolidation is where the zone is created. Take a look at this photo to have a better understanding of the concept.
These supply and demand zones were drawn using a 30 minute chart on August 15th. I identified the zones based on what happened on August 15th. The following day, on August 16th, you can clearly see how price went into a demand zone, there was strong buying pressure, and buyers were able to push the price up to the supply zone. I marked the best entry and exit points with yellow circles in the photo. If you entered a long position in the supply zone and looked to exit in the demand zone, you could’ve won the trade. The best part is that the risk to reward would’ve been very good. If you entered the trade when TSLA was in the demand zone, you could’ve risked the low of the bottom wick, while your reward would’ve been to exit once price hit the supply zone.
Why Should you Trade Using Supply & Demand Zones
There are a few reasons why you should use Supply and Demand Zones.. First, and most importantly, it will really help you with your entries. You will enter a position long or short at the best times, before the major price move has been made. Since you are entering your position earlier, this will give you the best risk-to-reward ratio and give you the best chance to win the trade. Having a good risk to reward ratio is extremely important to have long term sustainability as a trader. Having the ability to draw supply and demand zones and identify them correctly will give you an edge in the market. All traders must trade with an edge to be successful long-term. If you don’t have an edge you won’t be successful long term.
Understanding support and resistance lines is very important when trading stocks. It’s probably the most important part of technical analysis as a day trader. If you can master support and resistance lines you will have a much better chance of being a successful day trader. In this blog post, I’m going to go over some support and resistance examples and how it can make you a better trader and help you have more winning trades.
Why is it important to understand support and resistance lines?
By understanding support and resistance lines, you will give yourself the best possibility to make the best possible entry into a trade. This is very important because it will give you the best chance to have a winning trade. For example, you should only buy at support and sell at resistance. You don’t want to buy at resistance, in fact, that’s the worst area to buy, because there’s a good chance that the stock will hit resistance and reverse and go back down. This will result in a loss. There is a possibility the stock will breakthrough resistance and breakout. In this situation, you would win the trade. However, there chances of the stock breaking out are very low. Usually it will hit resistance 2 or 3 times before breaking out.
GROV Chart Example
Take a look at this chart. Notice the support lines in orange. The support line would be the orange line at the bottom. The resistance line would be the orange line above it. Notice how the candle stick are moving in between the lines. if you were to buy at support and sell at resistance you would make a profit. On the flip side see, if you were to buy at resistance and sell it support you would take a loss. As a Trader you want to try your best to buy and enter a stock at support. This will give you the best chance to have a winning trade. You can short a stock at resistance and then cover at support. This is another way where you can trade the stock and still be profitable.
Once you identify as a support line that price level will be your best potential entry because at that price level you know that it will most likely bounce and return to the resistance level. In some situations if the price continues to go down through the support line then there’s a good chance the price will continue to go down to the next support line below it. In this case the original support line will now become new resistance. On the flip side, if the price breaks through a resistance line then that resistance line will become new support. Old resistance becomes new support.
Here is a great youtube video with a simple examples if you want to check it out.
Simply put, an area of support is where the price of a stock will most likely stop falling. Most likely there will be buyers at the support level to push the stock back up to the resistance level. Understanding support and resistance lines is a good starting point to becoming a profitable trader. To become a successful trader you need to have good entries and exits. Understanding support and resistance lines will help give you the best chances to have the best entries and exits.
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Daniel Pessin talks about his worst loss as a trader and what makes it worse, it was a bad trade 🙁
I experienced my worst loss today trading BHAT. What made it worse, it was a bad trade. It hurt really bad. The main reason why it happened was because I didn’t respect my stop loss. If I had just respected my stop-loss I would have lost roughly about $1,000. But because I didn’t respect the stop loss I lost a lot more. I ended up losing about $5,000. Once BHAT broke the stop loss support line that’s when I should have sold. After that point I did feel like sellers were controlling the stock and buyers seemed weak. But I stayed hopeful that buyers would make a push and the stock would reverse. I stayed in the stock and I didn’t sell hoping for a reverse. However, a reverse never came. The stock kept trending down further and further and I kept telling myself maybe it will turn, maybe it will reverse. This is an important lesson.
As a beginner trader, I think you don’t want to take a loss and you want to be optimistic. You have to understand though that you’re going to make losing trades and that’s okay. It’s not a bad trade if you enter a trade and get out at your stop loss. It’s a bad trade if you don’t get out at your stop loss because then you run the risk of losing more money. You need to respect your game plan. What’s the point of even having a game plan if you’re not going to follow it. That’s what makes it a bad trade. Not respecting your stop loss. In the future I’ll make sure to respect my stop loss and that will help me ultimately be a better trader. I heard that the best trades are usually the ones you get in and you’re in the green right away or there’s a bounce that puts you in the green right away and the worst trades are the ones where you’re holding and hoping. That’s what I experienced today. There were several key resistance lines where buyers had a chance to break through resistance and buyers failed everytime. Sellers were clearly in control of the stock. I saw the writing on the wall and just ignored it. I was stubborn.
My Original Plan
Here was my original game plan. I thought the stock could run up to the 200-day simple moving average around $4.27. I was hoping to start my position around $3.50 and I was hoping that the stock would move up to around the 200-day SMA and then I would sell around that point. But right from the opening bell it had a slight drop then it had a large spike, and I was thinking okay it’s going to spike up but then it started falling back down. my stop loss was around $3.30 because that’s where the next support line was. However once it broke below $3.30 I did not sell the stock and I held it and unfortunately I held it all the way down to under $3 all the way down to roughly $2.60. And then I finally sold and took a huge loss. once it broke the support of $3.30 that’s where I should have got it now. That’s where sellers were clearly in control. Hopefully this is a lesson learned for the future and hopefully you want to make the same mistake and respect your stop loss as well.
What I learned
Respect your stop loss. It’s ok to take a loss. You are going to take losses as a trader, there that doesn’t mean its a bad trade. It’s only a bad trade if you don’t respect your stop loss. That’s exactly what I did and that’s why it was a bad trade. I will learn from this mistake and I hope you will too. Don’t hold and hope. It’s not worth it. Losses could get worse. There is no guarantee with anything and there is no guarantee the stock will bounce.
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Hi my name is Daniel Pessin and this blog will be to document my journey as a day trader. As a beginner, I’ve been learning a lot. I haven’t even started trading yet. Here are a few things that I think all beginner traders should be thinking about.
1. Education Is Vital
it’s important for traders to keep up on the latest stock market news and events that affect the market. This can include the Federal Reserve System’s interest rate hikes, other indicator announcements, and any economic, business, and financial news. A lot of the decisions made by the Fed have a huge impact on the overall market and it’s very important to be aware of all of these events.
2. Decide your risk to reward ratio
On each trade, how much are you willing to risk and what’s your target profit? Many successful day traders risk less than 1% to 2% of their accounts per trade. This means if you have $50,000 in funds in your trading account and you are willing to risk 1% of your capital on each trade, your maximum loss per trade is $500 (0.1 x $50,000). As an important side note, if you lose 3% in 1 day, you should stop trading for the day. You are clearly not in the right head space or not having a good day. Tomorrow is a new day! “Personally I like to have a 2:1 risk to reward ratio” Daniel Pessin said. “This way if you lose 2 times, and win 1 time, you should be about even.” Of course the goal is to win more than you lose though.
3. Timing is everything
“Did you know that the prime trading hours are from 8 AM to 11 AM EST time?” Daniel Pessin said. During this time, there is the most volume in the market and patterns and charts are often more predictable. That’s why most traders do a majority of their trades during this time frame. Day trading requires your undivided focus. If you are serious about trading, make sure you are able to have 100% of your focus on the market during this time frame. Stocks move quickly and you don’t want to miss any opportunities!
4. Practice Paper Trading
As a beginner, it’s recommended to paper trade for at least 3 months before you start trading with a live account. There are many reasons, but the main reason is that you can practice and prove to yourself that there is a good chance you will be a successful trader. You should be able to grow a paper account for at least 3 months in a row before trading with real money.
5. Stop Losses
It’s very important that you set a stop loss when you trade. What’s a stop loss? Stop loss is basically setting the maximum amount you will lose on a trade. When you enter your position, it’s important to determine your stop loss immediately and automatically set your stop loss. This way, it’s not an emotional decision for you. For example, at any point during your trade, you lose 1%, your position will automatically be closed and you will take a 1% loss. This way you don’t hold on to a losing position and end up having a much worse loss, like a 10% loss. For a more technical definition of a limit order, check out the investopedia definition on limit orders.
6. Limit your emotions
“Controlling your emotions is one of the most difficult parts about trading,” Daniel Pessin said. “Greed, hope, and fear are strong emotions that could influence the way you trade.” You want to take the emotion out of trading. This is why it’s important to have a plan, which leads us to our next point.
7. Have a Plan
Successful traders have a plan. They don’t just trade on a whim or make a trade based on emotion. It’s important to enter a trade only when certain conditions have been met. What conditions? That’s up to you to decide. You are in control of what conditions need to be met before entering a trade. In addition, after you enter a trade, it’s important to set a stop loss and have a target profit zone. This way you will make sure your risk to reward ratio is kept in check.
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