Daniel Pessin

Using Supply & Demand Zones for Trade Setups

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.

 

Leave a Comment

Your email address will not be published.