A trading zone is a band between the supply and demand zone. The supply and demand zones are very similar, even related to the zone of resistance and zone of support. Support and resistance levels are trend lines that are sticky or hard to breach on either side of the price movement for a particular time. Supply and demand include broad price levels of support and resistance.
When you see it plotted, you will find these are areas, or price levels were buyer or sellers tend to crowd. In some of the trading strategies, stop losses are triggered around these support and resistance levels.
Using Support And Resistance To Trade Supply and Demand Zones
The decision to trade in the zone or to have a breakout trade (execute buy or sell order when the prices breach the zone of resistance or support), depends on market volatilities. One of the tips for staying in the trading zone is to see if the movement is range-bound. Markets usually trade in a range as we see from the above graphic. This indicates a directional market, where traders have some idea about the direction of price movements. In a range-bound market, traders move with the belief that the support and resistance zones will hold ground. Then, traders can set stop losses at breakout price levels.
Zone of Support
In other words, traders will buy when prices are within the zone of support. The upper limit of this zone consists of the lowest prices levels, known as the support level. The lower limit of the zone is the next price level that the stock is yet to breach below. This is the demand zone, shown in green in the above chart since here there is a lot of demand to buy at these levels, but supply may be muted. This is because buyers will want to buy at the lowest price before the prices begin to rise again and sellers will want to wait it out, so they can sell at relatively higher prices.
Zone of Resistance
Similarly, the zone of resistance includes the resistance line (at the bottom) and the highest price the stock has traded in a given number of sessions. The top of this zone is the next level of price that the stock is yet to breach, shown in a red box in the above chart. This is the supply zone because here supply for the stock outweighs demand for it. This is because traders would want to sell at the highest price before prices start falling below the highs. But buyers will be few as they would like to wait for the prices to get cheaper before they buy.
Conclusion:
Trading zones offer investors technical indicators of price action, of when prices are likely to peak or bottom out and the right entry and exit points for stock investment.
