Supply and Demand 101 📚 OKXIDEAS

📌1- Introduction
To understand trading supply and demand, let's consider a simplified example. Imagine I typically purchase a specific brand of rice for $ 5 per bag. However, one day, while shopping, I discover that the price of this rice bag has increased to $ 7.

While I could afford the extra $ 2, I'm accustomed to paying $ 5 and prefer not to pay more if possible. So, I begin to search for an alternative brand of rice that costs $ 5. This behavior is common among consumers, and many others would likely do the same thing in this situation.


As time passes, the rice company notices that sales are decreasing, prompting them to reduce prices to move their inventory. Eventually, the bag of rice is back to 5 , and consumers begin purchasing it again.

In this example, 5 represents demand. The same principle applies to supply and is relevant in trading, where instruments such as BTC, APPL, USD are involved.

📌2- Supply and Demand
Supply and demand is a trading and price action concept that analyses how financial markets move and how buyers and sellers drive the price.
On every price chart, there are certain price points where you can observe a sudden shift between the buyers and the sellers.

Those areas are usually characterized by strong and immediate turning points, or an explosive breakout. We as traders call those areas supply and demand zones.

The fundamental concept is to identify points on a chart where the price has experienced a significant increase or decrease. A demand zone is marked when the price experiences a strong advance, and a supply zone is marked when the market has undergone a sharp decline. This principle is based on the mass psychology behind supply and demand, as exemplified by the bag of rice analogy.


For instance, a trader may observe a significant bullish candle, but they may have missed out on the big move, causing them distress. Consequently, they are unlikely to buy now, believing the price is too high. Instead, they may wait for the price to retest the area where the aggressive upward movement began to identify buying opportunities where they perceive the price to be reasonable.

As a result, this area becomes a demand zone as many traders are awaiting its retest to purchase.

📌3- There are four key areas of interest on the charts to look for:

The drop base rally, or ‘DBR’.
The rally base drop, or ‘RBD’.
The rally base rally, or ‘RBR’.
The drop base drop, or ‘DBD’.


A 'DBR' demand zone is typically indicative of a market bottom. Initially, the price is trending downwards until it begins to bottom out or base, then reverses its course to the upside.

Similarly, an 'RBD' supply zone is formed in the same way as the 'DBR' formation, but instead of a market bottom, this pattern creates a market top before reversing to the downside.

A 'RBR' demand zone typically emerges during an uptrend. The price starts with an upward movement, followed by a consolidation phase or base, and finally, a continuation move to the upside.

On the other hand, a 'DBD' supply zone is essentially the same formation as a 'RBR' area but occurs within a downtrend. The price begins with a decline, enters into a consolidation phase, and is followed by a continuation move to the downside.

Identifying these demand and supply zones can help traders in determining potential trading opportunities.

Now that we have a basic idea of what to look for, here’s how the noted zones above look on a live chart. OKX:ETHUSDT OKXIDEAS

📌4- Characteristics Of a Strong Zone

a- Momentum from the zone
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One of the fundamental rules to trading supply and demand is “The stronger the move away from a zone the higher the chance the market has of having a strong move away when it eventually returns”

b- Time Spent Away From Zone
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It doesn't seem logical that an old zone still contains orders to buy or sell within it. Let's consider a supply zone that is four years old and the market has not returned to it yet. Is it plausible that traders still have a pending order to sell around it?

The strength of a supply or demand zone is defined by the amount of time the market has spent away from it. The more quickly the market returns to a supply or demand zone, the higher the probability of a successful trade.

Usually, older zones do not work out frequently. Therefore, it is better to concentrate only on the recently created zones.

In the above example, the last demand zone is still fresh, the more time passes, the weaker it becomes.

📌5- Difference Between Supply & Demand and Support & Resistance
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The concept of support and resistance is based on the idea that a line or area that has been tested multiple times in the past and prevented the price from moving beyond it is considered significant.

On the other hand, when it comes to supply and demand, we are interested in finding areas with a strong, recent, and untested movement, rather than areas that have been repeatedly tested and held strong.

Sometimes, just like the above XRP example, it happens that we have got a demand zone (blue) around a support zone (red) but it doesn't mean that they are the same.

📌6- How to trade Supply and Demand
There are plenty of methods one can use to enhance the probability of a zone holding firm. Each individual is different and will, therefore, rarely look at the charts the same way.

Some traders, like myself, prefer to confirm these zones using other technical tools, while others prefer to simply trade the zones naked.
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As per my trading style, I only locate supply/demand zones on higher timeframes. And as price approaches the supply/demand, I zoom in to lower timeframes to look for sell/buy setups for extra confirmation.

7- Conclusion
Traders, especially amateurs, are usually fascinated by supply and demand because they want to catch the exact price tops or bottoms. However, supply and demand is not foolproof and definitely not the Holy Grail.

Supply and demand zones are not a stand-alone strategy but act as extra confluence for an existing potential setup.

Remember:
Higher-timeframe areas are more reliable.
Trading the first time back to a zone is the highest probability trading setup.

I have shared my personal thoughts about Supply and Demand, however it is your job as a trader to find what works for you.

Let me know if you find this post useful, and what which topic would you like me to cover next 🙏

📚 Always follow your trading plan regarding entry, risk management, and trade management.

Good luck!

All Strategies Are Good; If Managed Properly!
~Richard

Disclaimer: The information provided is for educational and informational purposes only and should not be considered as financial advice. It is important to do your own research and make informed decisions before entering any trades. Past performance is not indicative of future results. Always be aware of the potential for losses, and never risk more than you can afford to lose.