Stock supply and demand

It is in the understanding of Wyckoff’s explanation of market price action, that supply and demand zones are also known as accumulation and distribution zones. This will happen again with the $15 seller and $34 buyer – they are both making a bigger surplus by buying with each other and abandoning their limit prices entirely. However, this system can never be fully fair to all the buyers and sellers.

Stock supply and demand

Support is drawn at the low of a candlestick that has had at least two candlesticks with higher lows on either side. What we want to see in the breakout candle is an ‘Extended range candle’ or ERC. If the trading range that exceeds the breakout is too wide or has too many long-wick candles, it shows uncertainty and is less likely to represent accumulation from a whale. There are two types of candle zones to look for on the chart, either one will proceed a big price move. At some point, the price of crude oil moved to the negative zone.

What is a supply zone?

Second, there is a trend reversal base, which is categorized into rally-base-drop (RBD) and down-base-rally (DBR). In most cases, the latter point happens in the commodities market, which is widely known for its cyclical nature. When the price of a commodity rises, producers boost production in a bid to take advantage of the high prices. Again, when they boost production, they increase supplies, which leads to lower prices.

If a company surprises stock owners with low earnings, demand for the stock may wither. As it does, the equilibrium between buyers and sellers of the stock is changed. Supply and demand zones are a popular analysis technique used in day trading. The zones are the periods of sideways price action that come before explosive price moves, and are typically marked out using a rectangle tool in the stocks, forex or CFD trading platform.

Demand For Stock

Market participants have identified a number of supply and demand zones. In a supply zone, it means that there is more supply coming in the market while in a demand zone, there are more people buying an item. Therefore, an asset price will typically rise when it moves to a demand zone and vice versa.

  • Typically, low availability and high demand boost the price of an item and high availability and low demand reduce its price.
  • Interest rate increases tend to lead to decreased demand for stocks as the risk-free rate of return rises.
  • Besides, when there are more outstanding shares, the earnings per share will tend to decline.
  • Lets compare the two trading systems – the one where the most number of trades happen (but every trade has a different price) with the one where supply and demand are equal at one price.
  • Here, in this article, I try to explain How to Trade with Supply and Demand Trading in detail.

Of course, rates tend to rise when the economy is improving, which boosts demand for stocks, so these forces moderate each other. The demand or supply zone should ideally be between 1 and 10 candles. Accumulation and distribution can take a while but too long and the zone may get exhausted before the re-test later. Like in any form of technical analysis or trading strategy, there are strong signals and weak signals.

How to draw Supply & Demand Zones

Each time a new company lists, it increases the number of stocks that compete for investors’ capital. Using supply and demand zones as part of a trading strategy means involving other trading methodologies as well as a sound risk management system. Eventually the market will break in the way that these whales had been buying or selling, creating a period where supply and demand are out of balance i.e. a price trend.

The law of supply and demand is on display every day in the stock market. Strong demand for a limited supply of available shares will push a stock’s price up. And an oversupply of shares and weak demand will cause the price to sag. Look for days where the number of shares traded is much higher (or lower) than normal. However, it will only rise to the point where buyers find the price attractive.


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