We often hear about demand and supply, but how do we trade with these patterns? Why is demand created, and why is supply created? Which demand and supply levels to trade? At what demand and supply levels should more weights be added? All of this will be clear to you in the post on this blog.
Hello, friends. Prashant welcomes you to this blog post. It is a very interesting topic, and you guys made many requests in the mail to bring some content on demand and supply.
We will start from a very basic level. When I talk about my basic level, there is a difference between my basic level and your basic level.
So first, we will see
- How the demand and supply area is formed?
- What the reason is?
- What the logic is that we follow the demand and supply areas?
- Which demand-supply areas should we look at, and which should we ignore?
What is Supply and Demand Zone in Trading?
First, we start to understand the supply and demand zone in trading. See the rules of supply and demand, and they control every marketplace. You have also studied supply and demand in class 12th, and every marketplace is a function of supply and demand.
For example, if there is demand, the price will go up, and if there is more supply, the price will come down.
Who Creates Supply and Demand?
Now the question is what creates this Supply and Demand. Banks, mutual funds, and major institutes create supply and demand in a particular zone.
For example, large institutions have to buy a stock at a particular price and have a pre-determined price range. They have sources, information, and a big research team that does the groundwork. After that, after many complex calculations, he decides that he will invest in this stock.
They have a pre-defined investment level and always place buy and sell orders on a pre-defined zone only.
The Banks and other similar institutions create these zones, which are price levels where unfulfilled orders wait to be completed. To win over the concept of supply and demand, traders need to find smart money orders on the price chart.
So remember one thing, whenever we talk about demand and supply, we are talking about smart money. These levels and zones only create smart money. And our job is to follow in the footsteps of smart money. We can get an advantage if we identify and mark them properly.
What is Supply Zone?
A supply zone is an area on the chart where traders usually place their sell orders.
Now they place sell orders for two reasons:-
Profit Booking:- Big institute places sell order if they feel that the stock has been bought, anything has happened, and they will book their profit there. Here the selling has the highest potential, and the presence hits the level repeatedly.
I will tell you why this price hits here again and again in this blog. If you look at the chart, you will see the supply area. The price was continuously moving upward; now, the big institutions decided that this stock had become overvalued. Now profit booking starts from here.
Now big players wait to exit the stock immediately, and they book profits slowly. If you look at the round mark area on the chart, it is a late-stage area just before profit booking.
Here media or many intellectuals come and speak very well about the stock. Tips and call providers also come near this late-stage area. Along with this, brokerage houses also come, and you must have noticed that the stock starts falling after the call of brokerage firms.
Many people start recommending the stock here in this area, and the stock comes into the public eye. But the big player who is sitting has bought on the lower levels. Now it’s time to book profit here. Looking at the chart, we can see how profit has been booked gradually.
And the public thinks this stock will go up and will go up, and finally, the stock falls.
Big players cannot exit all the stocks at once because if they do so, the public will come to know. That’s why they do slow distribution, which is called a supply zone.
Let us talk about any concept, but it should be known what is happening behind that concept, and I have learned my concepts in this way only.
If you come to know the reason why this price is stopping at a certain point, then your trading will improve further.
What is Demand Zone?
A demand zone is a price area at which traders usually buy. This area is below the current price, with the highest buying interest or potential. It means the demand zone has many buyers available due to buying orders at that level.
It is the same area where the smart money sits with their buying orders.
As you can see in the image, this is the same area where the smart money is sitting. So institutes buy at this level (marks and images) and remain pre-determined.
For example, how many shares to buy, at which level to buy, and up to which level they can buy continuously are pre-determined. So this is the demand zone. Here the fall of the price stopped, and a base was formed, and if it were retested, it would be called a demand zone.
You will only come to know after this zone is formed when the price retests; only then can we take advantage of it.
Now the price may come down after breaking that after testing so many times, we will take the stock called Quality of Zone. How to trade, where will be the entry and exit, all these will be discussed further.
Why Does The Supply and Demand Zone Appear?
Supply and demand zones are created due to order activities on institutions, and these levels are created because of the big players who punch orders in the system. So let’s take them one by one; we understand what it is
Paste the image here:
See, from here, the price had fallen, and here the price reacted and stopped falling. And here, by looking at the candle’s wick, you can understand that if there is buying, then demand has been created. So here, the big institution has placed the first buy order.
The buying order of a big institution is huge; like us, it is not 5, 10, 100, or 500; it is much higher than this. For example, the institution has to buy 10 lakh shares, and then it will place its buying order in parts at different levels.
Tell me one thing: an institute buyer has given an average price of 100 rupees, second in 105 and third in 106, so now their average buy is between 100-106. Now if the stock price comes to 125, will They buy? No, They will not buy because their average will get messed up.
So now the big player will start playing the game with the small traders who had bought in his footsteps. So, how do we use this information?
As demand zones are visible after the move has been made! Price will come back to the demand zone!… buy why?
We must take advantage of this information (the demand zone in the chart). Generally, if the demand zone is strong, the price returns to the demand zone.
As I said, there was an order of 10 lakhs, but it needed to be filled, so institutes returned to fill it. It is what we call a retest of the level.
See why this retest happens? It is also very important to know this. Let’s understand this with the help of an example.
Suppose a big institute of Reliance has to buy 10 lakh shares; now their order block is huge. If they punch an order of 10 lakh sarees together, Reliance will start running up by 20-30% in 1-2 days.
It will immediately alert other market participants, and you will also start running after this stock. In such a situation, the stock’s average will be very high so the institute will buy slowly. The orders which become pending are called pending block orders.
What is Order Block?
There are two types of block orders in the stock market.
- Pending order:- A pending order in the stock market refers to an order placed by a trader or investor to buy or sell a security at a specific price in the future. The order is only executed when the stock price reaches the specified level.
- Market Order:- Those small traders whose quantity is between 500-5000 or 10000, then place market orders. Market orders not meant for institutions do not use this order block.
Generally, the price retests its demand zone due to a pending order block. That’s why it is necessary to keep the information about the demand and supply zone because there can be pending orders of the institution; it only happens sometimes.
So now you will say whether it can be guaranteed, and we will discuss it further.
Paste the image here:-
Now understand this on the chart, the demand zone is marked with a DZ. Here the institute bought, the demand exceeded the supply, and the price went up. Now the price returns and retests the demand zone; it runs up from there.
Generally, whenever a bottom is formed, it is a retest. Sometimes the price falls below the bottom but shoots up again. It is called shake out. Big players often use this pattern in their trading.
The demand zone will not be a straight line; you will never get the exact support number it is a zone. So you have to do zone marking.
How Many Times Will the Price Come Back To the Demand Zone?
We have understood the pending order block, but now let’s talk about how many times the premises test can be done. Now you must have heard in books or somewhere that if the price repeatedly touches a support level, that level is a strong support level.
Whenever the price is retesting, then absorption of demand happens again and again. Price is unable to take off from here and is returning to the same demand zone.
Finally, the demand is not getting strong for the 4th time; rather, the demand week is happening after multiple retests. Now, this demand zone will turn into a supply zone.
The buyer in the demand zone saw that the price was not going up at all, even after placing his buying orders. There is still a week in the price, so big players will exit all their orders here.
Big money will not be affected because its average is around the demand zone. There are retail traders like you and me who buy above, on news and tips, and have maximum losses.
If you look at the chart, the volume from which the candlestick has been formed cannot make small traders like you or me; it is the exit of big money.
The same concept applies to the supply zone as well. So now you will ask how many times we will consider the test good. That test and two tests are good after the first demand candle is formed.
If even after the second test, it does not go up, does not give a break, or does not break the supply zone, then it gets out of that stock.
- Never Sell at Demand Zone
- Never Buy at Supply Zone
- VSA (Volume spread analysis) will confirm the presence of big institutes at the retest of the zones
Why Buy Near Demand and Sell Near Supply Zone?
So now you will ask another question why buy near demand and why sell near supply, Let’s answer this too.
The first answer is that if you buy near the demand, the risk and reward are most favourable at these levels. If you take a trade randomly, then in its comparison, buying or selling near important support and resistance is more favourable because big players execute the trade on the same.
So let’s think like the mind of a big player and know how and where he likes to trade.
How To Trade Demand Supply Like a Big Players?
So let’s get into the mind of a professional trader and start thinking like him. As I said, a professional trader already knows where to buy, and our job is to track their footprints.
If you are trained, skilled, and have knowledge of price action, then you will also come in this professional traders category.
As shown in the image, professional traders will buy somewhere at the bottom, or if they buy, we will sit silently. We do not have to do anything now because the order block of big traders does not get filled in one go.
So when buying comes, the price is pushed upwards, and as soon as the 3rd green candle is formed, it becomes visible to everyone. Now some raw players will start giving you tips and say buy and will create, and all will start buying.
As soon as small traders enter, the next baby candle will be formed, creating concern.
My buy price has come down a lot, now what should I do? Now you did not stop, and you said just man, there is no more hold, and you sold the stock. You sold the stock in the demand zone where the order block was placed.
And the next candle moved upside down, and we got confirmation from the next day’s fat and price action that the action had been confirmed. Now here, the risk-reward will be in your favour if you buy.
After this, the price goes up and by the breakout of the supply zone. It is the game of incomplete order block, which is why the funny behaviour of demand and supply is seen.
Hello Traders, Myself Prashant, doing trading from last 4 years. I’m uploading content from my own experince hope you’ll appericate my efforts. If you have question please leave a comment. Follow @Instagram