A Trader’s Guide: Supply/Demand vs. Support/Resistance

In the world of trading, nothing stirs up more debate than the concepts of Supply/Demand vs Support/Resistance.

Though seemingly interchangeable to the untrained eye, these methodologies serve as the bedrock of many successful trading strategies, each providing a unique lens to understand and navigate the markets.

Today, it’s time we put these concepts head to head.

Strap in as we breakdown these pillars of trading, explain their differences, and help you understand which deserves a spot in your trading arsenal.

Ready to learn more?

Let’s do this!

Overview: Supply And Demand Vs Support And Resistance

Supply and demand and support and resistance have much in common, but how do these two actually function in the market?

Here’s a quick breakdown…

Supply And Demand

Supply and Demand refers to a forex strategy whereby the econmonic concept of supply and demand is used to find high probability reversal points:

Supply and Demand zones.

Sounds a lot like S&R already.

Supply and Demand zones form when a wave of institutional supply (that’s selling, folks) or demand (yup, buying) crashes into the market, causing a major price imbalance. These zones highlight hotspots where major banks might fancy buying or selling in the future, triggering a price reversal.

Neat, huh?

Before we dive deeper, a quick note:

Swing by my all-inclusive supply and demand trading guide for a comprehensive breakdown on how to pinpoint, draw, and trade supply and demand zones. You don’t wanna miss this!

Zones come in two types…

  • Supply Zones: Areas where prices may fall.
  • Demand Zones: Areas where prices might shoot higher.

Visual learner?

Here’s what these zones look like:

Think of the price movement caused by Supply and Demand as like a game of ping pong.

It bounces from a supply zone to a demand zone, then ricochets back to a supply zone. Sometimes, it takes a breather, consolidating (that’s when supply and demand are balanced). Then, it shoots higher again, creating a fresh demand zone.

Make sense?

Onto S/R now…

Support And Resistance

You’ve heard about S&R, haven’t you?

No?

Let’s dive right in!

Support and Resistance, or S&R, is a classic forex strategy that’s been around for decades. It identifies future reversal points based on past highs and lows.

The levels act as barries, stopping price from rising (resistance) or falling (support).

So, let’s break it down:

Support Levels – These are like trampolines for price!

When price hits a support level, it’s more likely to bounce back up.

The level indicates that since this is a point where market prices were considered too low in the past (hence the prior reversals), there’s a strong chance traders will view current prices as being too low once price reaches the level again, resulting in a reversal.

Important: Support and Resistance levels require a minimum of two prior reversals to form.

Resistance Levels – Imagine these as invisible ceilings.

When price hits a resistance level, it’s more likely to come tumbling down.

The level shows traders considered this price too high in the past, and so are likely to believe current prices are too high once the market returns, causing a reversal.

Simple, eh?

Now, let’s crack on with the differences…

Supply And Demand Vs Support And Resistance: 3 Major Differences (That You Need To Know)

Let’s get straight to the point:

Supply and demand and support and resistance, though they appear similar on the surface, are NOT the same – nowhere near.

YES – both strategies are used to trade reversals.

YES – each strategy follows a similar process.

But that’s where the similairties end…

Support and resistance levels and supply and demand zones differ in most other areas, with one technical point being far superior to the other in most aspects.

Want to learn which it is?

Read on…

Difference #1: Levels Vs Zones

Well, that’s a no-brainer, isn’t it?

Or… hang on a sec… is it?

Yes, indeed it is!

The clearest difference between supply and demand and support and resistance is how they predict potential points for price reversals.

So, here’s the lowdown:

  • Supply and demand zones form a zone at the root of significant price moves.
  • Support and resistance levels form a line along previous price lows or highs.

Aha, all clear now, right?

Wait… not so fast…

Let’s dig a little deeper and compare these two:

Check this out!

We’ve got a supply zone on EUR/USD, and it aligns perfectly with a solid resistance level. So, put yourself in the hot seat and tell me – which of these two would be your go-to for an easy short trade?

The supply zone?

Or the resistance level?

(Ring any bells yet?)

Bingo!

You’ve nailed it!

It’s the supply zone, of course!

The zone might seem like the more appealing option, and here’s why: it offers a more extensive area for price to potentially reverse within. The odds of a price reversal are much higher within a larger area compared to a tiny line.

This makes the zone a much more comfortable option to trade.

And there, my friends, we’ve hit the nail on the head with the problem of trading S/R:

Trading those tiny lines can turn entering reversal trades into a downright frustrating experience.

Just take a gander at the example below…

Does this look familiar?

We’ve got a solid support level forming on EUR/USD. But when the market looped back and formed a reversal signal (a bullish pin bar), the pattern fell just a few pips shy of hitting the level.

The fallout?

You’ve got it – a missed trade that could have been a massive win.

A real bummer, isn’t it?

Now, let’s switch gears and compare that with a demand zone…

Look at this!

Same scene, totally different outcome.

Price falls into a the demand zone. What’s the outcome? The bullish pin bar forms inside the demand zone, giving us a valid entry signal.

Spot the difference now?

This pin bar formed within the area of the demand zone.

The substantial size of the zone essentially acted as a buffer, enhancing the probability of the pin bar providing a valid entry signal.

Using the support level, that wasn’t the case, and we ended up missing the entry.

Difference #2: Support And Resistance Rely On Historical Price Action

Compare the following two images….

Here’s a tidy support level on the 1 hour chart of Eur/Usd.

Check out this demand zone equivalent on the 1-hour chart of USD/JPY.

Now, stop and think for a moment – what’s the main difference between the time it took for these two POIs (points of interest) to take shape?

You’ve got it, right?

The support level is from way in the past, created by historical price action.

For a bit of context, the five reversals that formed the support level stretch back over six whole months. On the other hand, our demand zone is fresh. The steep drop that formed the zone?

Yeah, that only happened a month prior.

Spotting the contrast now?

Support and resistance levels are dependent on historical price action to exist.

Supply and demand zones form during much more recent price action.

What does this mean in technical terms?

Supply and demand zones are hold far more weight than support and resistance levels. The action that created the zone – the banks, buying and selling – has far more importance in the market than any historical price action.

Let me illustrate this with a quick example…

Check out the image above.

See that “strong” support level just above a supply zone on Eur/Usd? Where do you think price is more likely to reverse?

At the support level?

Or at the supply zone?

Drumroll, please….

It’s the supply zone!

The support level might appear strong, but, look a little closer… You’ll see it’s formed under ‘ancient’ price action. The touches creating the levels are multiple weeks or even months old.

Whatever actions caused these reversals are probably not relevant anymore.

Now, let’s shift to the supply zone…

The zone formed from the banks selling just a month prior.

So, ask yourself, what are the odds they’re finished with the zone and would prefer the price to reverse at resistance instead?

Yeah, pretty low!

I mean, think about it…

Why would bank traders opt to sell because of a line created months ago versus a zone we know was recently created by the banks selling?

Doesn’t add up, does it?

For this reason: Supply and demand zones have a higher probability of being successful than support and resistance levels and hold more signifcance in the market.

Levels have their place, but between the two, zones are the key points to watch for price action.

Difference #3: The Psychology Behind S&R and S&D

Alright, let’s get this straight once and for all…

In forex trading, understanding the WHY is a million times more important than just knowing the WHAT.

You catching my drift?

Any Joe or Jane can open up a chart and point out a support or resistance level or supply and demand zone without much trouble.

Piece of cake, right?

But, how many can truly dissect these levels & zones and understand the hidden psychology that drives their formation in the market?

… I’ll give you a hint: not a whole lot, that’s for sure!

So, here’s the deal:

On the surface, supply and demand zones and support and resistance levels might seem like they’re cut from the same cloth.

But dig a little deeper, and you’ll find they form due to entirely different circumstances.

Let’s look at a support and resistance levels…

Support and resistance levels form when price bounces from a similar price range multiple times in the past.

These levels reflect traders’ perceptions that certain prices are either too low or too high. Thus, traders will often buy or sell when the price hits these levels, instigating a reversal in the opposite direction.

Sounds straightforward, doesn’t it?

Now, let’s delve into supply and demand…

An Important Clarification: Contrary to popular belief—and what many trading gurus or books might tell you—support and resistance levels DON’T become stronger with multiple touches.

Quite the opposite, in fact, these levels tend to weaken over time.

Furthermore, historical touches hold no sway or relevance when it comes to the probability of a level proving successful in the future.

This is a crucial point to remember; don’t be fooled by common misconceptions!

Supply and demand zones form ONLY when the banks and other big players execute a significant trading action.

They could be:

  • Opening new fresh positions,
  • Closing open positions, or
  • Taking profits from their ongoing trades.

Spot the difference now?

Both supply and demand zones and support and resistance levels trigger reversals. But there’s a critical distinction – levels form due to individual traders buying or selling, whereas zones form due to the banks entering or exiting trades.

What does this mean for you?

In short, supply and demand zones have a WAY higher probability of causing a price reversal than support and resistance levels.

Keep this in mind: Banks don’t trade for kicks.

Their aim is clear: to rake in as much money as humanly possible.

Supply and demand zones are a significant part of their grand strategy.

On the other hand, support and resistance levels, despite their much-hyped effectiveness, lack substantial evidence to justify their significance in the market.

Sure, levels can incite reversals – we’ve all seen it happen before.

But the force behind those reversals (retail traders buying or selling) is nothing compared to supply and demand zones.

So, what do you think has a better shot at causing a reversal:

  • A supply zone created by banks entering a 150 million short position?
  • A resistance level where, perhaps, a few thousand retail traders sell?

No contest, right?

That’s a key reason why support and resistance levels are often unpredictable: the volume of retail traders buying or selling oscillates depending on the level.

With supply and demand, it’s a different story…

The magnitude of the banks’ actions at the zone varies, of course, but one thing’s certain: we know beyond a shadow of a doubt banks indeed caused a zone to form. That’s more than we can say about support and resistance levels.

Does that make sense now?

FAQ: Is Supply And Demand The Same As Support And Resistance?

No, they’re way different.

As explained, while support and resistance levels and supply and demand zones both cause reversals, the underlying pscholcogy behind the zones is not the same. This results in S/D zones having a far higher chance of success than S/R levels not to mention being easier to trade.

FAQ: Can You Use Supply And Demand Zones With Support And Resistance?

Absolutely!

Support and resistance levels can mesh with supply and demand zones to pinpoint those high-probability reversal points. Yes, compared to zones, levels might not hold as much sway, but when they align neatly with a zone?

Boom!

The probability of a successful reversal jumps!

But hold your horses!

This only rings true primarily for less significant support and resistance levels, or those that have seen at least two unbroken touches in the past. As for the major S/R levels, like those making headlines in the news or glaringly obvious on the chart?

They don’t necessarily boost the odds of a price reversal at the zones.

Wait, why not?

Well, here’s the catch: the banks have a much stronger incentive to breach the level and cause traders to lose, rather than helping them win by reversing the price.

Remember, Forex is a zero-sum game.

The only way for anyone (and yes, that includes the banks) to bag a profit is if other traders are losing money. And how does that happen?

When traders close their trades at a loss.

Here’s the deal: When traders decide to close, they have to use the opposite order:

  • Sellers close by buying back what they initially sold (but at a worse price).
  • Buyers close by selling back what they initially bought (again, at a worse price).

Therefore, it’s no surprise thatthe banks always aim to make as many traders lose as possible. Why? Because that’s how they profit from their positions – by triggering a stampede of traders closing their losing trades, which causes price to move in the opposite direction.

And where can the banks make masses of traders lose?

You’ve got it – at prominent S/R levels!

So, tread lightly when using obvious support and resistance levels alongside supply and demand zones. These levels may seem like they’re boosting the odds of the zone, but in reality, the banks will likely shove price through the level to make traders lose before steering the price the other way.

A little word of caution, folks.

That’s all!

The Bottom Line

Supply and demand zones versus support and resistance levels is a battle that might echo through trading forums for decades.

But, folks, we’ve got a knockout champ here:

Give it up for Supply and Demand Zones!

Yes, support and resistance levels have their merits, no denying that. However, when you’re looking to pinpoint market reversals and find perfect trading entries, supply and demand zones reign supreme. They’re a breeze to spot, a snap to mark, and their entry signals?

Simply top-notch.

Dive into my comprehensive course to unravel the mysteries of S/D trading.

Buckle up, you’re in for a thrilling ride!

Grab Your FREE E-Book:

5 Pro Rules For Trading Supply And Demand 

  • Master the core principles of supply & demand.
  • Advanced techniques for trading SD zones.
  • Exclusive new lessons/books/tools every week!

Sign Up Now To Download Your FREE Guide:

🛡️ Spam-Free Promise: No spam, ever. We'll only send you relevant updates and content. Unsubscribe at any time.

4 thoughts on “A Trader’s Guide: Supply/Demand vs. Support/Resistance”

  1. Hello my mentor

    I have been following your supply and demand levels and wonder on the following.

    How do u trade them, do u just execute a buy( sell) because price has entered a demand( supply) zone or is there a criteria to be followed e.g. pinbar/engulfing formations on lower time frames?

    What is the difference between demand zone ( supply zone) and buy zone ( sell zone)?

    Shou;d we take only first touches of the zones and ignored multiple touches of the zones. Most Demand & supply teacheers say we should only focus on “fresh touches: one touch”, is it the same with you?

    Thanks my mentor, eagerly waitig for your responses.

  2. As a beginner to hopefully intermediate free time trader….who read some books, follows fintwit daily, placed over one hundred trades and spent some decent time in the market for a beginner….I never met such a clear, well structured and well argumentez text about these concepts.

    I feel like I have a Eureka moment.
    Lots of misplaced SL or missed entries are explained rn.
    Bro, you’re a legend. My future rich kids will have a picture of you in their wallet forever.
    Respect and many thanks

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

🚀 Download My FREE 5 Pro SD Trading Rules Guide + Exclusive Weekly Trading Lessons/Books/Tools!