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

Nothing stirs up more debate than:

Supply/Demand vs Support/Resistance.

At first glance, Supply & Demand and Support & Resistance might seem like two peas in a pod. They’re both essential concepts for traders, and they both help us make sense of price action. But some subtle and crucial differences exist that set each strategy apart.

So, what are those differences?

And why do they matter?

Today, I’m putting both strategies under the microscope. Strap in, it’s time to help you understand which deserves a spot in your trading arsenal.

Ready to learn more?

Let’s do this!

What Is Supply And Demand, And Why Is It Similar To Support And Resistance

Supply and Demand trading is rooted in the fundamental economic principle that governs every single market: the relationship between supply (how much of something is available) and demand (how much people want to buy of something).

• When demand is high and supply limited, prices tend to rise.  
• When supply is high and demand low, prices tend to fall.  

Simple, right?

Supply and demand in action – price bounces from supply zone to demand zone (and so fourth!)

By deliberately upsetting the balance of supply and demand, the smart money (banks, hedge funds) create zones of hidden buying or selling pressure. These hotspots aren’t just random price patterns – they’re turning points where smart money may execute massive trading positions, triggering another surge of buying (demand) or wave of selling (supply).

So, SD zones aren’t like SR levels – they’re critical turning points where smart money supply or demand may re-enter the market.

Neat, huh?

Pro Tip: Download my all-inclusive supply and demand trading guide for a breakdown on how to idenitfy, draw, and trade institutional supply and demand zones.

Now, here’s where things get interesting:

The Connection to Support and Resistance

Support & Resistance levels use horizontal lines to connect previous market reversals. Drawn across prominent swing highs and lows, the levels act as ceilings and floors, preventing the market from reaching higher prices (resistance levels) or plunging to lower prices (support levels).

Resistance Levels: These are like ceilings, preventing price from rising further.

Gbp/Jpy 1-Hour Resistance Level: Who keeps selling to keep price below the 170.000 psychological level?

Resistance levels are prices where SM sellers (supply) previously stopped the market advancing, hinting another wave of selling may send prices lower in the future.

Support Levels: These are like floors, stopping price from falling further.

Eur/Jpy 1-Hour support level: Buyers stop price breaching the 138.000 psychological number.

Support levels are prices where buying pressure (demand) previously swooped in to halt a severe decline, suggesting similar demand might enter again if price returns.

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

Here’s the truth: Supply & demand and support & resistance, though mechanically quite similar, operate in very different ways:

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: SD Zones Usually Outperform SR Levels

No-brainer, isn’t it?

The biggest difference between supply & demand and support & resistance lies in how they identify potential reversal points:

• Supply and demand: Uses rectangle zones drawn at the source of steep rises and declines
• Support and resistance: Uses horizontal lines drawn across previous swing lows or highs.

Put yourself in the hot seat – which point would be your go-to for an easy short trade? The supply zone? Or the resistance level?

It’s a no brainer, right?

But why?

The supply zone is like a wide landing pad for the price, while a resistance level is more like a tightrope. Which one would you rather land on? Supply zones gives you a whole area where price could potentially reverse, but with a resistance level?

You must be spot on, or risk missing the entry.

If price doesn’t reverse exactly at that line, you’re probably out of luck.

That’s why trading supply and demand is less stressful than relying on support and resistance. You’ve got a more room for error (literally!), which reduces entry risk, and boosts your chances of a profitable trade. Supply and demand zones give you a wider target and a better chance of success.

Check out this support level on EUR/USD – it’s been holding strong!

But then, the market came back for a visit, and even though a bullish pin bar formed (a classic reversal signal), it developed just a few pips before reaching the support level. What’s the result?

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

Compare this with a demand zone…

See the difference?

This time, the pin bar formed within the zone, not just near it.

Our demand zone acted like a safety net, increasing the chances a pin bar (or engulfing pattern) would develop inside and lead to a valid long entry.

Key takeaway: Supply and demand zones give you a wider target area for entries, reducing the frustration of missing trades due to tiny price fluctuations.

Difference #2: Support And Resistance Levels Rely On Ancient 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 Market Psychology Behind Why S&R Levels and S&D Zones Form

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 understand the hidden market psychology that drives their formation? 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 are battlegrounds forged over time through repeated clashes between buyers and sellers. Levels represent price points where traders collectively believe the market is either “too cheap” or “too expensive.”

When price hits these levels, it triggers a flurry of buying or selling, causing price to bounce back in the opposite direction.

Sounds simple enough, right?

Important Clarification: Contrary to popular belief, support and resistance levels DON’T become stronger with multiple touches.

Quite the opposite, in fact – levels weaken over time.

Furthermore… historical bounces hold no relevance on whether a zone might prove successful in the future. Previous buyers/sellers behind old bounces either don’t exist anymore or simply hold different opinions to the past.

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 buying/selling always varies, of course, but smart money buying caused a zone to form. That’s more than we can say about support and resistance levels.

Does that make sense now?

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!