Supply and demand are fundamental concepts in trading and economics. They play a crucial role in determining the price and quantity of traded assets in financial markets. Let's explore these concepts in the context of trading.
Supply refers to the quantity of a particular asset, such as stocks, commodities, or currencies, that sellers are willing to offer for sale at a given price and time. It represents the availability of the asset in the market. The law of supply states that, all else being equal, the quantity supplied of a good or asset increases as its price increases, and decreases as its price decreases.
Demand, on the other hand, represents the quantity of an asset that buyers are willing to purchase at a given price and time. It reflects the desire and ability of buyers to acquire the asset. The law of demand states that, all else being equal, the quantity demanded of a good or asset decreases as its price increases, and increases as its price decreases.
The interaction between supply and demand determines the equilibrium price and quantity in a market. When the demand for an asset exceeds its supply, the price tends to rise as buyers compete for limited supply. This is known as a situation of excess demand or a shortage. Conversely, when the supply of an asset exceeds the demand, the price tends to fall as sellers compete to attract buyers. This is known as a situation of excess supply or a surplus.
- Fundamental Analysis
In financial markets, traders and investors analyze supply and demand dynamics to make trading decisions. They study factors that influence supply and demand, such as economic indicators, company earnings, geopolitical events, and market sentiment. By anticipating changes in supply and demand, traders aim to buy assets when they expect demand to increase and supply to decrease, and sell assets when they expect the opposite. - Technical Analysis
On the technical side we will use volume profile as our indicator to draw supply and demand zones the right way because not every swing high, consolidation or swing low can be supply or demand zone. These are the steps to set up the volume profile on tradingview:
Step 1: Go to tradingview and navigate to the right handside of the chart, then click on Projections menu and find Anchored Volume Profile and click it.
Step 2: Click on the Anchored Volume Profile and a recent swing high and low that hasn't been broken yet (the price should be trading between the swing high and low). It doesn't matter what timeframe you choose, it works on every timeframe, but it is better to draw your Anchored Volume Profile on higher timeframes like the 2 hour, 4 hour or the daily.
Step 3: Mark the longest horizontal box on the Anchored Volume Profile, that is where most of the volume is at, and it can be used as a supply or demand zone. If the price moves below it, it will be a supply zone, if the price is above it, the zone is a demand zone and we use it to buy once the price finds a support in that area.
So with this simple tool you can filter out unnecessary zones and find the right ones. I hope this helps you in your trading journey.