Supply and Demand Zones (S&D) Explained

What are Supply and Demand Zones?

Supply and demand zones are areas on a price chart defined by a trader where price is likely to stall or reverse.

A demand zone is a range where a significant number of buy orders will likely be executed if the price of the stock drops within that range. A supply zone is conversely a range where a significant number of sell orders will be executed if the stock rises within that range.

The price of a stock entering a demand zone means the stock is likely to rise in price or stall. The price of a stock entering a supply zone means that the price is likely to drop or stall.

How to locate supply and demand zones?

To identify supply and demand zones on a chart, look for price ranges where the price has stalled or reversed. If on a chart tracking stock xyz everytime the price rises within the range 410-411$ the stock fluctuates near that price eventually drastically decreasing. This indicates there is a high level of selling interest from 410-411$ so it can be said that a supply zone exists from 410-411$.

Pattern for detecting Supply and Demand Zones:

Demand Zone

1. Price drops

2. Price stalls

3. Price significantly increases

Supply Zone

1. Price Rises

2. Price Stalls

3. Price drops significantly

Supply and Demand Zone Example

Here are some examples of typical supply and demand zones in trading.

Ticker: AAPL; Timeframe: 30min, Indicator: Flux Charts MTF Supply and Demand Zones (Premium)

Supply Zone:

1. Priced rises sharply entering a zone where a large number of sellers are waiting to exit

2. The price stalls while the buy pressure meets the sell pressure

3. The buying pressure fades driving the price back down

The converse of this is true for demand zones:

Ticker: AAPL; Timeframe: 30min, Indicator: Flux Charts MTF Supply and Demand Zones (Premium)

Demand Zone:

1. Priced drops sharply entering a zone where a large number of buyers are waiting to enter

2. The price stalls while the sell pressure meets the buy pressure

3. The selling pressure fades driving the price back up

(4) If the volume (pressure) of the movement entering the zone is not large enough the price will immediately be rejected (reverse) and no price consolidation (stall) will occur.

What is the theory behind supply and demand zones?

Supply and demand simply identifies areas where there are large numbers of buyers and sellers waiting for when the price of a stock enters a range. Most market moving entities such as large banks and hedge funds find the intrinsic value of companies then wait for price to drop below that value to purchase.

If a bank believes that stock xyz is worth 10$ a share then they will purchase the stock when the price is at or below 10$. However, banks cannot purchase all the shares of the stock at once as that would drive up the price of the stock over what the bank is willing to pay.

Banks throughout periods of the day, week or even month, will purchase the stock when it's within their accepted price range. This would form a demand zone around the price of 10$.

This is also true for selling of stock. Banks have a price where they want to exit their position and will sell off their positions over time. This selling over a period will create a supply zone.

What stocks are best for Supply and Demand?

Stocks that are traded by institutions are normally the best choice. Crypto currencies are difficult to value so there is less agreement at which price points to enter or exit making supply and demand zones less consistent. Stocks in the S&P 500 are a good starting point for most traders.