How Chart Patterns Work With Demand And Supply Theory?

Trading has always been a rewarding and exciting career. But, many people fear it because of the losses they may incur. In reality, it is rewarding only when you know its technicalities well. In technical trading, there are different strategies, techniques, and tools that are used by traders according to their understanding.

Traditional traders widely use the study of candlestick chart patterns to identify the right entry point for the trade. Patterns on the candlestick patterns are a good way to predict the future movement of the price. But, they are not highly reliable. Often, traders get trapped by the patterns and end up incurring heavy losses.

One thing that every trader should remember is never to rely completely on patterns, you need to consider other factors like Demand and Supply and Price Action. Having a collective approach towards analyzing candlestick charts can improve your trading.

Types of Trading in the Stock Market

There are two types of trading methods that are used by traders; Fundamental analysis and Technical analysis.

The technical analysis method has various types of techniques, strategies, and tools used by different traders. Trading based on patterns comes into the conventional type of technical analysis. The second type in the technical analysis is Demand and Supply.
Demand and supply is a completely practical approach to analyze the candlestick chart of the stocks. They help in identifying the points from where the price got triggered towards the trend.

Trading based on patterns is a long-used method. No doubt, many established traders made money using these. But, as time passed and its popularity increased, it started trapping traders.

Why Patterns Get Trapped

Traders use different types of patterns in the candlestick charts like double top, double bottom, cup and handle, rectangle, flag pattern, etc. Traders predict the movement of price after the pattern is completed.

The demand zone is formed where there are pending orders from the institutions. For example, if institutions placed an order worth 1cr at a price of 100. But, only orders worth 60Lakhs were executed, and this indeed created a demand area. Now, the price has gone up, but still, there are pending orders worth 40 Lakhs left. Further, if the price comes again in the range of Rs 100, then there is a high chance that the price will go up from that point because the pending orders of Rs 40 lakhs will start getting executed.

Now in this scenario, if the rectangle pattern was formed and the trader took the position of short trade at the breakdown point. As soon as the price enters the nearest demand zone, the price will shoot up again, by trapping the short traders.

Patterns in Accordance with Demand and Supply

A good and strong Demand zone holds the power of reversing the trend. It can give a good up move to the price even if it is coming from a strong downtrend. The same goes for the concept of a supply zone.

The concept of demand and supply combined with the concept of candlestick patterns can surely increase your accuracy and reliability on the trade. To avoid getting trapped by sudden market movements, you can check whether your point of entry after the pattern breakout is falling in accordance with the demand or supply zone or not. For your trading to be highly accurate, you can learn the science of demand and supply to support your knowledge of candlestick patterns.

Chances of trade failure will surely be minimized with the knowledge or combined knowledge of patterns and demand and supply.

If you are keen to learn trading with the help of demand and supply theory, you can enroll in a free course by GTF- Trading in the Zone Elementary and learn the technicalities of demand and supply.

The views and opinions stated in the content belong to Arun Singh Tanwar, Founder and CEO, of Get Together Finance (GTF).

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.