Technical supply and demand is an approach based on price action. The general idea is to locate points on the chart where price has made a strong advance or decline. A demand zone is typically formed after a strong rally north. Conversely, a supply zone is effectively created following a noticeable move to the downside. This method, especially in the price action community, is widely popular.
There are four key areas of interest on the charts to look for:
The rally base rally, or ‘RBR’.
The drop base drop, or ‘DBD’.
The drop base rally, or ‘DBR’.
The rally base drop, or ‘RBD’.
Now that we have a basic idea of what to look for, here’s what some of the above noted zones look like on a live chart. Obviously, not all areas will give winning trades! Learning how to accept a loss is a large part of trading any methodology.
In just about every trading forum on the planet there’s debate among technicians as to whether there is any difference between supply and demand or support and resistance! There does not seem to be a single definitive answer to this puzzle, so we’ll just throw across our two pips’ worth on the subject…
Support and resistance is where one is able to see a number of failed attempts to move beyond a line/area that stretches back in history. However, in regards to supply and demand, we would essentially be looking for a strong move that has a fresh untouched base, rather than an area which has held firm on a number of tests.
There is no denying that trading supply and demand zones can be a profitable venture. Nonetheless, some traders prefer to confirm these zones using other technical tools, while others prefer to simply trade the zones naked, if you will.
Do yourself a huge favour and start scouring the charts and marking up these zones. What is also worth doing is noting the areas that worked and the ones that failed. Were there any tell-tale signs (apart from a news event) that could have forewarned its failure?
On the whole, this article has only really skimmed the surface of supply and demand analysis. There is a lot more to learn. In future articles, we’ll look at specific ways in which one can look to strengthen a zone such as: trend direction, price action confirmation, converging trendlines and so on…
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