Demand & Supply

Demand & Supply is the core of the entire Price Action Analysis. Demand & Supply
are the places on the chart which shows the highest imbalances created by
institutions and are high probablity price region from where the price is about to take
the turn. In the stock market, Demand & Supply are the only thing which moves the
price up and down. We learnt about the candlestick pattern but when you will see
the chart, you will get to see the patterns everywhere and many of the times, the
patterns does not works and breaks the stoploss point. Demand & Supply are the
components which will help us to filter the unwanted price levels and focu only on
the strong levels. You will have to memorize this concept and get the control of it by
practicing. Demand & Supply is the key to success in Price Action Analysis and Stock
Market.

Demand & Supply in Stock Market:

Now, let us understand how Demand & Supply works in Stock Markets. Stock
Markets is all about unfilled orders and vested interest in the particular scrip at a
particular price level. Its always the big people’s (institutions) interest which moves
the price up or down.

The above picture represents the scenario for Demand. Let us assume that a
particular time, there are total 500 buy orders and 200 sell orders for stock ABC for a
price of INR 65. When the matching engine of stock exchange will match both the
orders, only 200 orders will be fulfilled and 300 buy orders will be left out unfilled in
the system. At this point, there are no sellers ready to sell the stock at a price of INR
65 and hence this situation will create imbalance thereby creating demand in the
market. As the demand is created, the price of the stock ABC will move upwards to
find sellers at another levels. However, please note that the institutions are smart
people and they will not rush at higher price to fill the orders. Infact, they will keep
the order in the system as it is for price of INR 65 and will wait patiently for the price
to retrace back to the same level and then get their orders filled at a cheap price. This
is how the price is moved up in the stock market.
The above picture represents the scenario for Supply. Let us assume that a particular
time, there are total 500 sell orders and 200 buy orders for stock ABC for a price of
INR 85. When the matching engine of stock exchange will match both the orders,
only 200 orders will be fulfilled and 300 sell orders will be left out unfilled in the
system. At this point, there are no buyers ready to buy the stock at a price of INR 85
and hence this situation will create imbalance thereby creating supply in the market.
As the supply is created, the price of the stock ABC will move downwards to find
buyers at another levels. However, please note that the institutions are smart people
and they will not rush at lower price to fill the orders. Infact, they will keep the order
in the system as it is for price of INR 85 and will wait patiently for the price to retrace
back to the same level and then get their orders filled at a expensive price. This is
how the price is moved down in the stock market.

Let us look at some chart examples of the above scenarios.

In the above charts, you can see the price is pushed higher or lower after equilibrium
is broken and based on the winners. These are the footprints of the big institutions
who moves the market. Remember, you can move the market price only if you have
lots of money and deeper pockets. We should always pay attention to these footprints
of market makers.
The Market Turning Points:

The big footprints on the chart in the form of Demand & Supply are the areas which
are the market turning points. These are the places from where the prices takes a
turn basis on the decision done by market makers/institutions.

The above chart depicts the difference between Professionals and Novices. Have you
ever wondered that the moment you bought a stock and the the price started going
down or when you shorted a stock it started going up. Have a look at the above chart
and it will answer the above question.
Novices always buys in the Supply wherein the Professionals are offloading their
stocks and Novices always sells in the Demand wherein Professionals are
accumulating the stocks.
Remember, we mentioned that you can see Greed & Fear on charts. In the abov
chart, you can see the same clearly. The price fall near the Demand area will always
show you the fear of the people wherein the people are selling the stock in panic.
Hence, you will always see large Red candles before the Demand area. The price rise
near the Supply area will always show you the greed of the people, wherein the
people are buying in bulk quantities in expectation of the further price rise. Hence,
you will always see large Green candles before the supply area.

Let us look at some chart examples.

The Mistakes

Please make a note of the below charts. We are sure you have been doing the below
mistakes again and again. From this point onwards, you will never ever commit the
below two mistakes. These charts will always remind you and ensure that you stay
away from the mistakes.
The Two Key Buying Mistakes :
The Two Key Selling Mistakes :

The Components, Setup & Action

At all the time, we have been talking about Demand & Supply. We are sure you
would be thinking that how does the Demand & Supply looks like on charts? How do
I identify the same on charts? This section will answer all of your queries and give the
visual ability to spot the big footprints.

In this section, we will learn all about the Demand & Supply structure. You will have
to spot these structures on the chart. This is strong tested structure which gives an
amazing view of the high probability price levels and place orders with the
institutions.
The Components :

All of the Demand & Supply structure consists of the following three main
components as shown in the below diagram.
  Drop : Drop is the component which signifies a sharp fall in the price for a long
time. It is represented by multiple large ERC BEAR candles.
 Base : Base is the state of equilibrium/balance wherein the Buyers & Sellers
are competing and deciding the next move.
 Rally: Rally is the component which signifies a strong rise in the price for long
time. It is represented by multiple large ERC BULL candles.

Demand – Setup/Structure for Buy/Long:

The Demand setup is to execute trades on the buy/long side. The below picture
depicts the two high probability structure for the demand.

 Drop Base Rally (DBR) : In this setup, we look for a significant rise in the price
with a basing & drop. This setup signals there the price has been dropping and
was on a fall, and suddenly a strong buyer entered the market and changed
the direction of the price. This structure can be defined as a Reversal Structure
and is of high importance.

 Rally Base Rally (RBR) : In this setup, we look for a significant rise in the
price which is followed by another rise with a basing. This setup signals that
there are more buyers in the market who are willing to take price to the next
higher levels. This structure can be defined as Continuation Structure and is of
low importance compared to DBR structure.
Demand – Action for Buy/Long:

Drop Base Rally (DBR) : Once we identify the setup, all that we have to do is to wait
for the price to retrace at the level and buy the moment price touches the Demand
Zone as shown in the below picture.

Rally Base Rally (RBR) : Once we identify the setup, all that we have to do is to wait
for the price to retrace at the level and buy the moment price touches the Demand
Zone as shown in the below picture.
Supply – Setup/Structure for Sell/Short:

The Supply setup is to execute trades on the sell/short side. The below picture
depicts the two high probability structure for the supply.

 Rally Base Drop (RBD) : In this setup, we look for a significant drop in the
price with a basing & rally. This setup signals there the price has been rising
and was on a rise, and suddenly a strong seller entered the market and
changed the direction of the price. This structure can be defined as a Reversal
Structure and is of high importance.

 Drop Base Drop (DBD) : In this setup, we look for a significant drop in the
price which is followed by another drop with a basing. This setup signals that
there are more sellers in the market who are willing to take price to the next
lower levels. This structure can be defined as Continuation Structure and is of
low importance compared to RBD structure.

Supply – Action for Sell/Short:

Rally Base Drop (RBD) : Once we identify the setup, all that we have to do is to wait
for the price to retrace at the level and sell the moment price touches the Supply
Zone as shown in the below picture.

Drop Base Drop (DBD) : Once we identify the setup, all that we have to do is to wait
for the price to retrace at the level and sell the moment price touches the Supply
Zone as shown in the below picture.

Base & Leg Rules

At all the time in stock market, we have to be objective i.e. we need to be specific
about the rules and should never ever deviate from them. We have to think just like
robots or computers who works on one’s & zero’s. The base and leg identifications
sometimes becomes more subjective and hence leads to identification of wrong
demand & supply zone. In order to avoid subjectivity, there is a rule for the same as
mentioned in the below diagram.
We need to apply the below mentioned rules only to the Leg-out (Rally for Demand
Zone & Drop for Supply Zone) and the basing. This rule will very easily & clearly
separate out the basing thereby helping us to draw the zones.
The rule always the compares the body and the range for a candle. If the Body (Open-
close) of the candle is less than 50% of Range (High-Low), then that particular candle
will be defined as basing candle. If the Body (Open-Close) of the candle is greater
than 50% of Range (High-Low, then that particular candle will be defined as Leg
candle.

Drawing the Zones

In this section, we will learn about drawing the zone lines. It has to be very specific
as it will define the exact point of entry and stoploss which are critical for every trade.
The below diagram explains about the line types and definition.

 Proximal Line = Entry Point

 Distal Line = Stop Loss Point

Demand Zone:
Supply Zone:

Zone Filters

High Quality zone Filters is a set of rules which are used together to filter out bad
and low probability zones. These filters helps us to objectively measure the quality of
Demand and Supply zones to select only the high quality. We always wants the
success rate to be high hence we will only select the high quality zones for trading.
Filter # 1: Zone Qualification/Validation

The qualification of the zone is critical as it confirms the validity of the zone and
helps us to select the right levels. Below are the rules applicable for both Demand
and Supply Zones. Any one of the rules/conditions should be satisfied while
validating the zone.
Filter # 2: Strength of the Price Movement

This filter helps us to understand the strength and power of the institutions
associated with the price move. We have to focus only on the price moves which has
resulted in almost a ninety degree movement. The moves has to be large in size and
the same can be identified if the move away candles are continuous ERC candles.

Filter # 3: How did Price leave the level?

This filter helps us to understand the momentum of the price. We have to always look
for the levels in which the leg-out candles are ERC candles. Any leg-out which has a
sluggish exit in the form on NRC & ERC candles, we will not take those levels. The
levels which has a Gap opening are considered to be the strongest level.
Filter # 4: How much time did price spend at the level?

This filter helps us to understand the amount of orders may be left in the level. The
lesser the candles in the basing area, the higher are the orders and vice versa. We
will always look for less than three candles in the basing area which signals high
amount of unfilled orders.
Filter # 5: Price Arrival to the level

This filter helps us to understand the intensity of Fear & Greed among the crowd.
This is the only filter which is to be used at the time of trade execution to understand
the crowd emotions. If we are getting to see large ERC candles while the price is
approaching the zone, then it signals that there is high probability of the zone to
work. This filter will be rarely used as we will be using set and forget methodology for
trade execution.
Filter # 6: Reward to Risk Ratio

This filter helps us to set our exit targets for profit booking and to keep our account
in GREEN. We will always be focussing on the zones which helps us to achieve
minimum Reward to Risk ratio of 3:1.
Filter # 7: Fresh Levels

This filter helps us to understand the amount of orders left after every touch of the
zone. Remember that every touch of the zone will decrease the winning probability as
the order will be consumed. Hence, we will always focus on the levels which are not
touched even a single time.

Filter # 8: Price move away from level

This filter helps us to understand the strength of the price movement. This is the
second filter which gives an idea about the power in the price movement. The price
move aways has be to be minimum of 2 times of the zone size and the price needs to
keep moving away from the zone. If the price has immediately retraced near the zone,
then we will discard the zone.
Filter # 10: Level on level

If there are more than one zone present after after the other, then it signals a stack of
orders in the price band. We should look at either combining thos zones or split the
quantity equally across all of the zones present.
 Zone Identification Process

In this section, we will understand the steps to be followed for identification of the
zones. Remember, we always look left on the chart for identifying the zones with
probability.
Demand Zone:

Supply Zone:

Setup’s Summary