Support and Resistance with Supply and Demand Order Flow
Support and Resistance is very common terminology that is used throughout the trading industry. Many traders believe support and resistance to be the same as supply and demand. In this article we will discuss how they are different and how to use support and resistance areas to add probability to your upcoming trades.
Support and Resistance are price levels which has previously held price from going beyond this point and are likely to do so again. Support levels have previously held prices from going lower, and resistance levels have previously held prices from going higher. These areas may vary and are not defined by a consistent method of size. They are also commonly tested multiple times which proves the level to have buyers at one time.
Support and Resistance levels can be identified by many types of analysis, including pivot points, trend lines, consolidation, Fibonacci retracements/extensions and many more. Both may eventually be violated which then, gives the opposite effect. Example: when support is broken, it often becomes support for future price movement / when resistance is broken, it often becomes support for future price movement.
Supply and Demand Levels have similarities, yet they have differences in many ways. Supply and Demand levels are exact price points that are used to pre determine upcoming trades or to locate large piles of willing buyers/sellers for a particular instrument (order flow). The most dominate differences between the types of levels are
1. Supply and demand may not be broken or violated. If broken, the orders have been consumed and this is no longer an exact price point used to calculate an entry.
2. Supply and Demand should only be used if they have not been tested since the level formed
When locating exact price point entries it is common practice to look for "confluence" (the flowing together of two or more data sources at one juncture point). Support and Resistance areas add extreme confluence to Supply and Demand levels. This is due to psychology and the differences between each style of trader. When you combine the two, there are double the amount of potential willing buyers/sellers making the upcoming trade much higher probability.
When analyzing an instrument's chart, locate the SD Levels first. Then look left (it is perfectly okay to cut through candles to locate SR) to see if there is confluence from previous trend lines, or pivot point that may help with your upcoming trade.