Hsaka- Supply & Demand

Supply & Demand

A short primer on one of the most fundamental aspects of trading.
  1. Premise
  2. Types
  3. Identification
  4. Factors of Strength
  5. Trading

A. Premise


The primary reason price of any asset moves is because of an imbalance between supply (sellers) and demand (buyers). The larger the imbalance, the stronger the move.
  • Supply > Demand: Price falls
  • Demand > Supply: Price rises
  • Supply = Demand: Consolidation
Resistance: provides you a means of supply
Support: Provides you a means of demand

B. Types

There are several types of supply/demand zones, but broadly speaking they fall into two categories:
  • Reversal: Price rallies (falls), consolidates, and reverses to fall (rally).
    • Reversal (Supply)
    • Reversal (Demand) 
  • Continuation: Price rallies (falls), consolidates, and continues to rally (fall).
    • Continuation (Supply)
    • Continuation (Demand)
1.1. Reversal (Supply)
1.2. Reversal (Demand)
2.1. Continuation (Supply)
2.2. Continuation (Demand)


C. Identification

As noted above, supply/demand zones always from during the consolidation (the base) b/w rallies and drops.
  • Method 1 (Clusters):
    • Demand: Use the low of the base and the highest candle body.
    • Supply: Use the high of the base and lowest candle body.
  • Method 2 (Single Candles): More commonly known as order blocks (OB)
    • Demand: A down candle before an up move that leads to a higher high.
    • Supply: An up candle before a down move that leads to a lower low.

D. Factors of Strength

1. Force of breakout: 

The more explosive the breakout from the base, both in terms of speed and distance of ensuing rally/drop, the stronger the buying/selling power at the base, ergo, the stronger the zone. 
Re: A clean move away, no wicks.

2. Freshness:


  • The best reactions to a supply/demand zone will always be on the first return to the zone. 
  • With every subsequent retest of a zone, the supply/demand at said zone depletes, ultimately leading to a break of the zone.
  • Contrary to popular belief, with every subsequent test of a supply/demand zone, the said zone loses its strength. 
  • Soon, most of the orders in the zone will be consumed causing it to cave and give way to price.

3. Length & width of the base

The less time spent forming the base, the stronger a zone is, since that connotes the buy/sell strength out there is greater than its counterpart.
A narrower base is stronger. Too many wicks above/below the base depletes supply & demand

4. Miscellaneous

Reversal zones > Continuation zones
The best zones form around key high time frame support or resistance levels
An exception to the supply/demand depletion factor is if there's an extremely
important price from a fundamental/psychological perspective.

E.Trading

  • Aggressive:
Bid/offer the upper/lower limit of the zone with a tight stop loss below/above the zone.
  • Conservative:
Scatter your bids throughout the zone at various intervals and place the stop loss at idea
invalidation. Note: Zone retest can be traded upon a break.