Clear the Clutter – Supply & Demand Trading
As a trader I have witnessed that many novice trader fill their charts with indicators, oscillators, lines and what not. I’m not against them because they might be comfortable in trading using them. But most of the professional traders I saw like to keep their charts clean without clutter and and have proven to be successful as well.
Out of the decades of experience they posses, they stress only one thing “Price Action”. They believe that price is the leading indicator of whats going to happen not volume, not indicators , nothing else.
Of course, any indicator you see in the trading world is based on price/volume which has already taken place. Indicator which involves historical price is always lagging.
Let’s get straight to the point now. How can someone trade based on plain charts? Is that even possible? Yes it is and the answer is “Supply and Demand Zones”
Supply zone is the area where more number of sellers are interested in selling and Demand zone is the ares where more number of buyers are interested in buying. Now, when does this situation occur?
When sellers feel that stock is over valued they try to offload their shares and at the same time they also take care of liquidity. When buyers feel that stock is undervalued, they try to buy the shares.
Below are some of the ways you can identify and supply and demand zones on the chart.
Supply zone is an active resistance zone, which acts as a magnet to sellers. A zone is by definition a broader area, which attracts bears from all kinds. On the contrary, a demand zone is a broad area of support
Above two images are two kinds of supply zones that we saw. A bull trap supply zone is nothing but a failed second high. If you are addicted to indicators, you may take the help of RSI here. Basically I’m talking about RSI bearish divergence where price makes highers high but RSI make lower high.
Above two images are two kinds of demand zones that we saw. A bear trap demand zone is nothing but a failed second low. You may take the help of RSI here. Basically I’m talking about RSI bullish divergence where price makes lower low but RSI make higher low.
The reason we have used the word trap here is because, in a bull trap supply zone, Buy stop orders of buyers are hit and price gets reversed. In this case sellers are able to sell high.
In a Bear trap demand zone, Sell stop orders of Sellers are hit and price gets reversed. In this case buyers are able to buy low.