If we had to explain the differences in one phrase, we would
say that "Supply and Demand" is the only true "support and
resistance". Let us explain this further. If you asked random novice
traders "what is support and resistance for you?", one might reply
the 200 EMA (exponential moving average), while another one might say, this or
that trendline, or the piercing of a Bollinger Band, this or that
overbought/oversold indicator, the extreme readings of some magic oscillator, a
thousand other things, or any of a million combinations of all the above. Each
trader can believe different things to be support or resistance, and one
trader's support might be another trader's resistance. But Supply and Demand
can only be one thing.
Let's examine a completely imaginary (hypothetical)
situation, where we could have real-time access to all the world's open orders
in the market. Let's say that current EURUSD price was 1.2500, and we could see
that there were huge (institutional) buy orders waiting at 1.2350, and then at
1.2230, while there were huge sell orders waiting at 1.2660, and 1.2710. In
this imaginary scenario, we would be able to make a lot money easily and almost
without any risk, because we would know that as soon as price fell to the first
strong demand level below current price at e.g. 1.2350 (where demand is much
greater than supply) price would jump upwards and would keep going up until it
met a point were supply exceeds demand. There can be no other mathematical
outcome for price direction, it has to go up because demand at that level
exceeds supply. No matter what any indicators, oscillators, trend lines, news,
experts, or astrology and magic crystal balls suggest, price has to go up from
a level where demand is much greater than supply. Similarly, when price reaches
a level where the huge sell orders (bank, institutional etc.) are waiting to be
filled, price can only go down, because as soon as the last (novice) buy orders
are filled by the exceeding supply, price will collapse and keep going down
until it meets demand that can cover all that supply.
But in the real world we don't have access to all the
world's open orders. So how can we take advantage of Supply and Demand
imbalances? How can we find price levels where demand is much greater than
supply, in order to buy just above that level and enjoy a low risk entry and a
high possible reward? Or how can we find price levels where supply greatly
exceeds demand, in order to sell short just below that level?
Traders today have easy access to great trading tools. These
are not the complicated indicators and oscillators that all lag price and only
signal you after price has done something, and usually when it is too late to
take advantage of the opportunity. The simplest historical-price
multiple-timeframe charts have all the information you need in order to analyse
Supply and Demand in any market. Let us show it to you.
The following example has of course been prepared with the benefit of hindsight (can't avoid that in examples), but as a subscriber to our signals service, you can see in real-time that Supply and Demand works like this:
Please note that the above screenshot is just an
over-simplified example. In no way does it show you how to properly assess
Supply and Demand levels. Proper Supply and Demand analysis is much deeper, and
is based on many different factors which are NOT demonstrated above. This image
is just for illustration purposes, but even as a Free Trial subscriber you will
have access to real, detailed Supply and Demand analysis, with all trading
methodologies exposed and explained for your benefit.
Take a look at the level marked with the green lines. This
is a level that contained remaining unsatisfied Demand after price left the
level. How do we know that? From the outcome: price left the level with a strong
rally that lasted, and moved prices a lot higher (more details on this in
another educational article). This can only happen when Demand at some level is
much larger than the Supply there. When the existing Supply was exhausted,
prices rallied leaving behind big amounts of unsatisfied demand. Knowing this,
we could enter a buy order at a price just above the start of the demand level,
with a stop just below the level. Look at the market reaction next time price
touched the top of the green level. You guessed right, price rallied again.
This has nothing to do with a double-bottom pattern, the prices where the
market reversed are not even close to a bouble-bottom pattern. The price where
the market turned has to do only with the point that pre-existing unsatisfied
demand starts (at the top of the marked level, although the price could have
reversed anywhere in that level). Take a look at any other level, and you will
see the same thing happen again and again. Let's take the blue level for
example. This is a Supply level that contained unsatisfied Supply when the
price left the level, and we know that because of the way price left the level
(sharp drop) and from how far price moved before it managed to return back to
the level. When price left the blue level initially, the supply there was so
much larger than the demand at that level, that price collapsed and kept going
down for a long time and distance, leaving behind large unsatisfied amounts of
Supply. Knowing this, why not enter a sell order just below the level, and take
advantage of the existing supply there for a low risk entry? Would that level
and our trade definitely work? No, but chances would be on our side, and that's
the most important thing in trading.
Think about this: a novice trader might want to buy up
there, right below the supply level marked in blue, because some moving average
turned up, or some oscillator suggested accelerating prices upwards, or because
the news were really good. What that novice trader doesn't know is that he/she
will be buying close to a level where there is a ton of supply waiting to be
filled, and prices cannot move further up unless all of that supply can somehow
be covered by new incoming demand. Chances are against the novice trader making
that mistake, and any professional trader would be happy to sell to that novice
buyer near that supply level.
So that's the difference between "Supply and
Demand" and "support and resistance", these two concepts,
strategies, call them what you like. Support or resistance can be anything that
any trader thinks can affect the price in any way. And one trader's support
might be another trader's resistance or the opposite. But Supply and Demand can
only be one thing, and that is the true,
existing, unsatisfied supply and demand in any market, predictable in a
reliable way by those that know what to look for, how to evaluate levels, and
have a rule based strategy and plan to follow, thus having the chances on their
side when trading. Not all levels work, but if a supply and demand trader can
enjoy an acceptable win/loss ratio, and a great reward ratio, what more would
someone need in order to be a successful trader?
Will all levels work? Of course not, but enough will work to
allow an experienced supply and demand
trader to profit from the markets. The reasons why a level might not work are
many. Imagine a huge multinational company having the need to sell billions of
euros to buy another currency. They might chose a demand level to do that in
order to satisfy their own supply, causing any demand level to fail badly.
Would that stop us from trading the next demand or supply level? Of course not.
Long-term the chances are on our side, and every time we see a solid demand or
supply level that meets all our criteria, we will be interested in placing an
order in the market.
