Supply and Demand is the most basic principle of economics but is seems to be ignored by most traders. The laws of supply and demand state that if supply is greater than demand prices will go down and if demand is greater that supply prices will go up. This is what drives price movements in any market. Markets will trade sideways if supply and demand are in balance. It doesn’t matter what any technical indicators are telling you, if supply is greater than the demand the price will go down and if demand is greater than supply price will go up. It’s that simple. We plot these areas of supply and demand as zones on our chart. We can define these zones by looking at previous price action.
Every time price changes direction there is an imbalance of supply and demand. The key is being able to determine the likelihood of the imbalance still being there when price returns to that point. This is where most traders get frustrated when trying to apply supply and demand principles to their trading. I promise you, if you learn how to properly draw supply and demand zones, you will never use technical indicators again.
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