In Online Trading Academy courses, we are taught to buy in demand zones and sell in supply zones as the most effective way to trade. This is the simple part of trading, following rules. However, the difficult part is locating the best zones in which to make those trades. If you have attended one of our courses, you obviously know how to find those zones, but are you aware of another area that could be just as beneficial?
When we buy in a demand zone, we immediately place our stop below that level. We do this because if we are wrong, we want to exit as soon as possible to minimize the resulting loss. When demand zones are broken, they reverse roles and act as supply for a couple of reasons. First, there are many sell stops that will be triggered immediately when prices break that level. Price breaking a demand zone shows that the buying pressure in the level was not very strong and sellers overwhelmed the buyers. Traders who entered longs should look to sell with a stop immediately if the level is broken.
The second reason a broken demand zone becomes a supply zone is that when price breaks down and continues to move away from the zone, traders stuck in a long are hoping to exit for a small loss or no loss at all and will jump at the chance to sell their losing positions at the first return to that level. This additional selling pressure is something we may be able to take advantage of.
This also works on longer term charts.
The same phenomenon occurs when there is a break of a supply zone. That former supply reverses roles and becomes a demand zone when it too is broken. This also occurs as shorts are stopped out for small or no losses. If we see traders making the mistake of shorting at a weak supply that is later broken, then it will become a strong buying opportunity for us when that zone is tested as a demand level in the future.
One of the key factors to successful trading is to make sure you are trading with the trend. You should always look to enter long positions when the markets are in a bullish trend and short when they are bearish. By taking advantage of novice traders who entered bad positions at weak demand or supply zones that were later broken, you can increase your chances for success in any market.