What are Demand and Supply Zones, and How Do You Use Them in Crypto Trading?
As a crypto trader, identifying demand and supply zones is key to helping you conduct a proper technical analysis. These zones are also regarded as consolidation areas formed before a massive downward or upward price movement.
Demand and supply zones can signal market reversal or continuation of a trend. Experienced crypto traders integrate the analysis of these zones into their trading strategies in attempts to open successful trades. If you want to learn more about demand and supply zones, then continue reading this article.
Understanding Demand and Supply in Crypto Trading
Demand and supply influence crypto prices. In trading, demand represents the activity of buyers, whereas supply represents the activity of sellers. An increase in buyers pushes crypto prices up, while an increased number of sellers drags crypto prices to lower levels. Demand-and-supply crypto trading strategies are designed to exploit instances of excess demand and supply. A smart crypto trader would sell when prices are considerably high, which suggests excess demand, and buy when prices of digital tokens are low, which indicates excess supply.
What are Demand and Supply Zones
Supply zones are created when the supply of a particular token is higher than the demand. When such zones form, prices start falling. Demand zones, on the other hand, are formed when the demand for a certain digital currency is higher than the supply. When they form, prices begin to rise.
So, how do you identify a demand or supply zone? Find out in the sections below.
Impulse Waves
The large red or green candles you see on a crypto asset’s price chart represent impulse waves. They usually indicate demand and supply zones. Uptrend impulse waves have large green candles to signal high demand, while downtrend impulse waves have large red candles that indicate high supply.
Activity in Supply Zones
All supply zones have large red candles, which signal price reversal or downtrend continuation. Crypto traders normally go “short” when they notice these red candles.
Activity in Demand Zones
Demand zones have large green candles, which indicate price rebound or uptrend continuation. In this case, crypto trades go “long.”
Types of Demand and Supply Zones
Drop Base Rally
In this scenario, a cryptocurrency’s price moves downwards and then remains at a low price for an undefined time, thus forming a base structure. It will then rally upwards due to increased demand.
Rally Base Drop
Here, a token’s price moves upwards to form a base and then starts declining, signaling high supply.
It is worth mentioning that sometimes a base structure can appear on a price chart, but instead of a price reversal, the crypto asset may break that structure to continue with its current trend, and this could cause traders to lose.
How to Find Strong Demand and Supply Zones
Extended range candles or explosive price candles can help you identify a strong demand or supply zone. These candles have long bodies with relatively small wicks. The green Extended range candles signal strong market demand, while the red ones suggest strong market supply.
Can Resistance and Support Levels Help You Identify Demand and Supply Zones?
Yes! Support levels are areas where tokens stop trending down because of demand from buyers. If the buying activity is high, a price rebound may occur, thus starting an uptrend. On the other hand, resistance levels are points where a token’s uptrend stops due to intense selling pressure from sellers. Price reversals are common at these levels.
Risks of Demand and Supply Crypto Strategies
False Breakouts
There are instances where a price breaks through a demand or supply zone but quickly reverses. These false breakouts can trick traders into thinking the price will continue with its current trend.
Crypto News
Although determining demand and supply zones is crucial, your technical analysis can be rendered useless if news regarding the crypto market suddenly changes investor sentiment.
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