When trading on Binomo, it is essential to distinguish between supply and demand zones. They help determine when to enter a trade. In this article, we will explore supply and demand zones and how you can use them in trading.
- What are supply and demand zones?
- What is a supply zone?
- What is a demand zone?
- How to identify supply and demand zones on the chart?
- #1: Spot the current price
- #2: Find ERCs
- #3: Identify the origin of the price movement
- How to trade in Binomo with supply and demand zones?
- Supply and demand patterns
- Trend continuation patterns
- Trend reversal patterns
- Flip zone – role switching
What are supply and demand zones?
Supply and demand zones are areas on a chart where the price has difficulty breaking through. The demand zone is where the buying demand exceeds the selling demand, and the supply zone is the other way around. You can use these zones to identify potential reversal points in the market.
Let’s take a closer look at what they are.
What is a supply zone?
The supply zone is the price area where traders mainly sell. It is present where there is the highest interest in selling, that is, above the current price.
When the price hits or breaks this level, unfilled orders get completed and bring down the price. When the price hits the supply zone, it first waits for a while and then goes down. This movement will be repeated until all unfilled orders are completed.
What is a demand zone?
The demand zone is the price area where traders mainly buy. It is present where buying interest is highest, that is, below the current price. Due to many buy orders in the demand zone, there are many available buyers.
When the price rises to the demand zone, some orders are filled, and the unfilled ones are absorbed. At this moment, you can see an instantaneous upward price move on the chart.
How to identify supply and demand zones on the chart?
Some traders rely on technical indicators to identify imbalances in the market. Others observe trends and supply and demand zones to understand what strategy to use when trading.
To identify supply and demand zones, it is essential to identify market imbalances. These are areas where there are large price shifts in one direction (up or down) depending on fluctuations in supply and demand. The best way to find these areas is to use a candlestick chart.
In the chart below, you can see that:
- If there are big green candles, then demand exceeds supply, and the price rises.
- If there are big red candles, supply exceeds demand, and the price falls.
These big candlesticks indicate a market imbalance. Now that you can see it on a chart, let’s move on to the three steps to identifying supply and demand zones.
Note! Big candles that indicate market imbalance are also known as explosive price candles or extended range candles (ERC).
#1: Spot the current price
First, spot the current price on the chart. Then, on the left side of the chart, find a big strong row of candles. They must move up or down. Remember that the demand zone shows a downward movement while the supply zone shows an upward one.
#2: Find ERCs
Second, look for ERCs on the chart. You can see a line of big candles with few or no wicks on the chart. They are called ERCs. But remember that if any candle has the same wick and body size, it is not an ERC.
#3: Identify the origin of the price movement
It remains to determine the source of price movement on the chart. As you can see on the chart, the price rallied upward with small-sized candles, stopped for a while, and then dropped downward by two ERCs. This origin will help us to form the base of the supply zone and draw it.
How to trade in Binomo with supply and demand zones?
Once you have found a potential supply or demand zone, you must wait for a confirmation signal. This signal can be in the form of a candlestick pattern or a breakout from the zone.
Usually, when the price meets the demand zone, this is a signal for an upward movement (that is, the price will rise). At this point, you should enter a long trade (open a buy position).
When the price meets the supply zone, this is a signal for a downward movement (that is, the price will fall). At this point, you should enter a short trade (open a sell position).
Once you have received a confirmation signal, you can confidently enter a trade. The key is to ensure that your entry point is close to the zone to have a probability of a positive result.
Supply and demand patterns
There are several patterns of supply and demand. Let’s take a closer look at some of the most common.
Trend continuation patterns
During an uptrend, a pattern is created when the price goes up, then fluctuates to create a base level, and then continues to rise. You should enter a long position (buy) when the price returns to the demand zone after the rally.
During a downtrend, a pattern is created when the price falls into the base and then breaks it and moves further down. You should enter a short (sell) position when the price returns to the supply zone after the rally.
Trend reversal patterns
You can see a demand zone and a possible demand reversal pattern where the price falls, fluctuates within the base for a while, and then changes direction. When the price touches the demand zone again, you should open a long position (buy).
You can see a supply zone and a possible supply reversal pattern where the price rises, fluctuates within the base and then moves downward. You should open a short position (sell) when the price is back to the already created supply zone.
Flip zone – role switching
A flip zone is an area where the price reverses from resistance to support or vice versa (from support to resistance). In the first case, the supply zone is violated, creating a demand zone. In the second case, the demand zone is violated, creating a supply zone.
Let’s consider an example when the price flips from a resistance level to a support one.
The price created a resistance level and tested it twice before breaking it and creating a reversal zone. Then the price pulled back down to test the newly formed support level.
Traders must identify supply and demand zones to keep abreast of market imbalances and changing trends. It will help them choose a suitable strategy for online trading on Binomo. Also, you can test your supply and demand zone trading strategies on the Binomo demo account to reduce the risk of incorrect forecasts during real trading.