Supply & Demand Trading - Strategy, Benefits | Espresso

All About Supply and Demand Trading

Traders implement multiple trading strategies to determine the right position type, opening and closing value, price movement and action, and so on. While day trading is the most common form, somehow, it suffered a death blow, and traders do not completely rely on this particular strategy, especially when they open a long position.

Published on 17 October 2022

The current market statistics exemplify the popularity of the supply and demand trading system. Not only is it easier to understand than other trading strategies, but it also helps traders to make accurate calculations about that position type or the opening and closing values. As a result, the risks are reduced significantly while the profits are comparatively more than other trading strategies.

In this article, we will explain the basics of supply and demand trading strategy to clarify your doubts and offer you an in-depth clarification.

What is the supply and demand trading strategy?

To define the supply and demand trading strategy, you must understand the concept of supply and demand zones. In usual cases, we consider the high and low-key levels to mark the highest and lowest price at a particular moment within a trend.

However, the supply and demand zones are spread over an area, so the strategy is often called a distribution strategy. A supply zone will cover all the price points at similar levels in the uptrend graph right before a downtrend is reversed. Similarly, the demand zone covers equal price points in the downtrend till it changes to an uptrend.

What are the uses of considering the supply and demand trading zones?

Several reasons can back up the growing use of supply and demand zones to determine the price action, speculate the future movement, open, or close a position, and choose the position type. Here are some of how the supply and demand trading zones have proven beneficial for traders.

  1. The supply and demand zones have proven to be the main key drivers of the trade market since they determine a long-term uptrend or downtrend before an explosive change in the graph.
  2. Traders can easily decide when to sell or buy the assets based on the studies of the supply and demand blocks in the price action movement. As a result, the chances of suffering from losses are much less when compared to other forms of trading strategies.
  3. The supply and demand strategy can be combined with day trading to make maximum profits by closing the position at the right time before a trend is reversed.
  4. In the supply zone, the price does not move up and down. Instead, it moves sideways, almost linearly, indicating that the price may fall anytime. This is known as the distribution zone and indicates a downtrend in the upcoming time.
  5. Similarly, the prices move sideways when considering the demand zone, causing the accumulation. Since the downtrend is maintained consistently at the same price level, the accumulation zone indicates a probable uptrend.
  6. A distribution zone means more traders are selling their assets, and the liquidity pool is getting huge supply. On the other hand, the accumulation zone indicates traders are buying the assets, thereby exhausting the liquidity pool.

How to identify the supply and demand zones on the trading graph?

Before you start applying this strategy for trading, your job is to identify the supply and demand zones in the graph. Until and unless you do so, you won't be able to get higher profits and predict a trend reversal correctly.

Step 1: Spotting the present price

First, you need to find the current price point on the market graph and then find a strong slope of candlesticks in the same direction. Remember, the slope must be on the current price's left side. It can be at a higher or a lower position, but the side should be left. A strong slope means the price has been dropping or increasing consistently until the current price candle.

Step 2: Finding the ERCs

The next step is to find the key points in the slope region where the price index movement is consistent either in the upward or downward direction. These are identified by ERC candles or the ones with pretty long bodies. However, the ERCs do not have wicks, or the wick length is quite small.

Step 3: Identifying the price movement origin point

Since you need to draw the supply zone block, you must determine its origin. It is the starting point where the price suffers minute ups and downs and then suddenly increases or decreases with the help of ERCs.


As you are aware of the basics of the supply and demand zones, the right ways to identify the starting point of the zones, and their importance, you won't have any problem applying the knowledge in trading. Ensure you study the price movement properly before opening or closing a position or deciding if you want a long or short position.

Chandresh Khona
Team Espresso

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