Introduction to Supply and Demand Zones
Supply and demand zones are areas that indicate trend reversal or consolidation. When it comes to investing, cryptocurrency investors can maximize profits by identifying supply and demand zones. This method can be added to the crypto trading strategy as a way to locate the optimum purchase and sell points for investors.
It is important to note that there are various factors that are associated with supply and demand zones. Additionally, depending on the price trend classification there are various types of supply and demand zones.
How do Supply and Demand Zones Work?
Supply and demand zones are the fundamental concepts in trading that impact the price of a given asset class. If the supply of a product is increased, its demand falls and the price decreases. In contrast, if the supply of the product is reduced, its demand is going to increase which could lead to a price hike. The same principle may also impact, cryptocurrency evaluation.
The rise in the total number of purchases increases the price of a digital currency while an increase in sales of a given currency leads to price devaluation. The goal of an investor is to purchase a given cryptocurrency at a low price and sell it at higher returns.
Therefore, investors can identify the supply area where the total sales of a cryptocurrency exceed its total purchases. Meanwhile, a demand zone is a range where the total purchases of a coin are greater in comparison to its total sales.
When a cryptocurrency is fairing in a demand area, its prices are likely to increment and when it persists in a supply area its value is likely to decrease. It is important to note that a cryptocurrency is going to fluctuate between various demand and supply areas in a transitional manner.
It means that there are no sharp price hikes or falls rather price fluctuations happen in a gradual manner. Investors can identify demand and supply zones by recognizing the relevant applicable factors and patterns.
How to Identify Demand and Supply Zones?
Impulse waves are visible red or green candles on a price chart. The study of the big candles can reveal demand and supply zones for investors using technical analysis techniques. The upward impulse wave prints a big green candle indicating dominant purchases or rising demand.
On the other side, a downward impulse wave is a red candle that shows selling pressure or supply inflows. Impulse waves may point towards differences in buy and sell orders or trend reversals.
The area of a price chart that is dominated by red candles is indicative of a downtrend. This type of price movement can lead to bearish movement after a considerable upswing. However, it may also morph into the continuation of an ongoing downtrend that will result in further price depreciation.
At the same time, it could also mean a rise in shorting positions where investors benefit from a price decline. This area can be identified as a supply zone.
When investors are about to break into a purchasing spree, the price chart of the asset will start printing green candles. It could be present in the form of various subsequent or a large green candle. It indicates the demand zone that often leads to a price increment. At the same time, it may also point towards an upwards price reversal or continuation of a price increment trend.
Types of Supply and Demand Zones
Pattern reversals indicate price fluctuations that indicate a shift in the upward or downtrend and vice versa.
Drop Base Rally
A drop base rally happens when the price of a given asset class remains in a downward price state for a considerable time forming a base. However, the base is later turned into an upward rally on account of high demand. it is a bullish force.
Rally Base Drop
Rally base drop is a phenomenon where price remains in uptrend and creates a base before dropping downwards on account of massive supply. It is a bearish development.
Continuation patterns appear when the price is trying to break out of an ongoing trend after forming a base but the existing trend does not break. Continuation patterns do not bring strong volatility in prices like reversal patterns and therefore less favorable for investors. They may occur when a given asset persists in side-ways movement.
Drop Base Drop
Drop base drop is when the price declines and stops the downward trend to make a base and continuous forward on further downward movement.
Rally Base Rally
This is a bullish overlapping pattern. In this instance, the price of an underlying asset rises and pauses during the upswing to make a base. However, rather than reversal, it continues price increment.
Investors may also leverage ERCs or extended-range candles, Fibonacci levels, and support/resistance levels as measures for identifying supply and demand zones. As the accuracy of supply and demand zone identification increases, so does the trading profit.