How to identify areas of supply and demand: step by step instructions
Most traders rely solely on buy and sell metrics to make decisions. However, there is another easy-to-use tool that will help you get a more precise and well-balanced view of the situation – the supply / demand areas. Below we provide short and simple explanations on how to find them quickly and accurately.
Thus, a supply area is an area of the chart located above the current price line. Hence, this is where users usually run sales. When the price enters it, the pending sell orders are executed, as a result, the value goes down again. These fluctuations are repeated over and over as long as there are commands available.
In contrast, an area of demand is below the current price level. There are also requests from traders awaiting favorable purchasing conditions. When they are met, the price increases again, and then this pattern repeats.
The next step is to discuss the models that influence supply and demand areas:
- Reversal. In such a situation, the price trend goes from an increase to a decrease or vice versa. He is considered strong. For example, it can follow a drop-base-rally pattern: the rate goes down, then stays down to form a base, and, finally, is headed up. The most essential aspect is the character of these fluctuations. So, if you see that the candles representing bumps or rises are long, it is a sign of a strong imbalance.
- Continuation. These are times when the price continues to rise or fall without changing direction. These trends are generally weak.
So, let us explain how to correctly determine the supply / demand zones:
- Find market imbalances. These are large price movements in the corresponding directions, they are represented by long candles.
- Determine the current rate.
- Find the strongest recent fluctuation on the chart (it will be on the left).
- The supply area will be presented by ascending candles, demand – by descending candles.
- Spot candles with extended range. They are long without (or almost no) wicks.
- Find the base. This is the point where the value stabilizes between long periods of work.
- For more confidence, use technical indicators to confirm the results of your analysis. Namely, we recommend that you apply pivot points, support and resistance levels, or Fibonacci levels.
- Draw the areas to visualize them.
In short, determining the supply / demand zones is a crucial step in market analysis. Thus, we insist on the fact that every trader must know how to identify and interpret them correctly.