Determining the strong and weak supply-demand zones is crucial in supply and demand trading. The supply and demand zones concept in the technical analysis consists of the rally and drop base rallies. This is a basic concept. As we will continue to learn supply and demand trading, we’ll dig deeper into the supply and demand trading methods to become better and more advanced supply-demand traders.
I will explain the methods to differentiate between strong and weak supply-demand zones in this article. You can also manage your trading risk. For example, investing more in the strong zones while risking less in weak zones. This is the best way to manage trading risk.
How to determine the strong and weak supply-demand zones?
There are many ways to find the strong and weak zones on the candlestick chart. One way is to determine by adding confluences like Fibonacci, moving average and pivot point levels. The other way is to find strong zones using the number of candlesticks and time.
|Strong supply/demand zones||Weak supply/demand zones|
|If the price touches the supply-demand zone just after its formation, then the zone will be strong.||The supply and demand zone will weaken if the price touches the zone after one or two price swings.|
|The number of candlesticks in the demand or supply zone also shows the zone’s strength. One or two base candlesticks show a strong demand zone.||More than two candlesticks represent the weak zone.|
|The zone will be strong if the supply or demand zone forms at the Fibonacci golden zone.||However, if the zone forms at the other locations of Fibonacci, it means the zone is weak.|
|In the same way, if the zone forms at the pivot point, it will be strong.|
The psychology behind the strong and weak zones
The psychology behind a trading pattern tells us about the activity of traders behind the screen. You need to know psychology because it will help you make better decisions during live trading.
Accordingly, how fast the market reacts to the supply/demand zone determines the strong or weak zone. For example, when only one base candlestick forms and price fills orders just after the zone formation is the significance of a strong zone. However, if the price makes more than two base candlesticks and takes a lot of time to fill the orders, it shows that the zone is weak.
So you should prefer the zones in trading according to the above criteria.
Benefits of strong or weak supply demand zones
There are many ways to use the strong and weak demand zones in trading. For example, if you find a strong demand or supply zone, you should risk more than 2% of your account balance because you know the probability of winning in this demand zone is higher.
On the other hand, if you find a weak supply or demand zone, you should risk less than 1% of your account balance because you know the probability of winning the weak zone is less.
In this way, you can manage your supply and demand trading risk.
What’s the best way to filter the strong zones from the weak zones?
The best way is to use the supply and demand indicator in trading. Because in the supply and demand indicator settings, you can fix the number of candlesticks within the zone. Or you can also adjust the size of candlesticks according to your requirements or backtest results.
The bottom line
If you’re a supply and demand trader, you must learn the difference between strong and weak supply and demand zones. This will help you to trade effectively.
You should also learn the other articles related to supply demand to master it.