Let’s just take some time and talk about the contrast between supply and demand vs support and resistance.
Depending on the trader you ask, what you read, or which YouTube video you watch, the two concepts seem very much the same, so much so that it can be rather difficult to decipher the difference.
It’s like telling a kid that doesn’t prefer meatloaf that it is practically the same as eating a hamburger! Similar ingredients for sure, but a different vibe altogether. Nice try mom!
Supply and demand and support and resistance perform very much alike but have unique characteristics and are developed differently, making them distinctive from one another.
What is Supply and Demand?
Supply and demand is an economic principle that dates back to the 17th century. It is used not only in the financial markets that we trade but also in every market where a buyer or seller exists.
How much supply exists and the demand for the asset explains product price movement. It is a place where a value range is formed due to the participation of buyers and sellers. The price will most likely then ebb and flow or fluctuate between those values.
Take for instance the housing market. When there are more buyers (demand) than there are homes (supply) for sale, real estate becomes more valuable creating increased prices. When the housing supply increases and is more than buyer demand, the housing price falls.
What is Support and Resistance?
Support and resistance are respected pricing values based on historical data.
For support and resistance levels to form, past price action must reject up or down multiple times at a key price level.
Support levels are where the price has failed to fall below after multiple attempts. When the price reaches valid support, buyer interest is engaged and the price of the asset increases.
Resistance levels are where the price has failed to rise above after multiple attempts. When the price reaches resistance, buyers bail and the price of the asset then declines.
The Principles of Supply and Demand vs Support and Resistance
On a price chart, these two concepts can look very similar when applied to day trading but there are three distinct differences.
Let’s go over the basic principles so you can better understand them and use them as technical analysis.
1) Supply and Demand is Relationship/Support and Resistance is Historical Data
The economic principle of supply and demand falls heavily on the relationship between the amount of supply of an asset versus the demand for it and vice versa.
The number of buyers and sellers in the market determines the value of an asset and creates a broad price region. This relationship provides an explanation for the way price moves and repeats on a price chart.
Who are these buyers and sellers that create the supply and demand levels? They are the market movers or big money. These consist of large financial institutional traders such as banks, hedge funds, and large corporations.
Support and resistance is developed by past price points being hit multiple times. These key price levels demonstrate that either support exists, and pricing will bounce back up or resistance has been met and price action will decline.
Many investors trading forex, stocks, and/or their options, would say that support and resistance are created when supply and demand levels are no longer new and are retested in value.
2) Supply and Demand Creates “Fresh” Zones/Support and Resistance Levels are Created by Retests
Supply and demand create linear, straight zones, where price will most likely repeat the behavior. These zones are a new (supply) high and a new (demand) low agreement in price range created by the significant imbalance of buyers and sellers.
Supply zones are created when the buyers are lacking participation and selling pressure increases. The asset may appear overvalued, creating decreased prices. The high value of the asset has been determined, and a price reversal to the downside follows.
Demand is created when the sellers and buyers agree to a lower value of an asset. You will see selling volume decreasing and buying pressure increasing. The asset then may appear oversold, and a price reversal to the upside follows.
When a supply and demand zone is created, traders may draw the value of the zones based on their trading strategy. Some use a set cent value. For example, I use a 10-cent margin to draw my supply zone and demand zone. Other traders may use a block method where they take the previous candle or several consolidated candles and their shadows before the up/down move to draw supply and demand.
When initially formed, they are not retests of any previous level. This is why most day traders will refer to supply and demand as “fresh” zones or a new high/low price structure.
Support and resistance value levels are only created by new price action hitting historical key price levels and rejecting them more than twice. This means they are retested time and time again and successfully repel the price push to be considered a support level or resistance level.
The result? Support and resistance levels, creating trendlines. These trendlines can be straight or sloped if a clear candlestick pattern is present.
3) Supply and Demand Gets Weaker/Support and Resistance Appears Stronger with Price Touch
Supply and demand zones do get retested, which creates possible trade entries. Supply and demand trading strategies tend to be a reliable analytical trading tool because the retest, especially initially, can prove to be a probable circumstance and profitable. Once the supply zone or demand zone gets retested a 2nd or 3rd time, the move may not be as dramatic.
Why is this? Most say the reason supply and demand zones get retested is to pick up previously unfilled orders that were left behind when the zone was created. Once this is accomplished, the zone may become weaker and less valuable. I say MAY because I have seen supply and demand zones get retested a few times and result in larger price reversals than the initial retest.
Support and Resistance levels appear stronger as they are successfully retested (until a breakout occurs).
Trading support or resistance may not be as reliable because they are developed from previous historical data. Whether that be from a previous supply/demand area or candle pattern, it represents a scenario where the price has reached and then turned already multiple times.
A trader can find trade entries using support and resistance, but they may not be as consistent as trading off of fresh zones created by supply and demand. From a chart perspective, they may seem stronger because of the withstanding of multiple price hits until suddenly they no longer hold up!
Think of it this way, when you take a bat and hit a car windshield it would probably become damaged in some way, not get stronger. Don’t get any ideas! I haven’t done this, but it is a good analogy. If you strike the windshield again, it may cause multiple cracks and fractures in the glass. Hit it again, a good home run type of swing, and it may cause the glass to break or even shatter all over the place.
The truth is, there is no sure 100% winning trading strategy. The market can only move up, down, or sideways. At some point, a break either way will transpire the more key price levels are tapped.
Summary: Supply and Demand vs Support and Resistance
In the principle of supply and demand, the relationship between the buyers and sellers will drive the market value. The significant imbalance between big money participants will create zones where price will turn and an opportunity for trade reversals will exist.
Levels of support and resistance created are based on historical price levels that have been retested and proven to hold up successfully. Of course, this is only proven to be true until the participants and market volatility measures otherwise.
There are risks involved when trading. A trader’s objective is to be as accurate as possible when reading the market atmosphere. This takes patience and the ability to make trade decisions that are in your best interest.
Take time to backtest your technical analysis and trading strategies in a simulated setting to gauge effectiveness. Implement a risk management condition that includes having added confirmation before taking a trade and an implemented stop loss that protects your capital.
Trading success truly depends on practice, how well your edge produces winning results, and how good a trader is at adhering to their criteria.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”
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