Demand and supply zones are areas on price charts where strong buying or selling activities occur, which lead to a reversal in price movements. Identifying demand and supply zones correctly can help you mitigate risk effectively.

Here is how demand and supply zones help in risk management.

1. Identifying entry and exit points

Instead of entering or exiting a trade on a whim, you can monitor the price movements and identify demand and supply zones. For example, a demand zone is the price area below the current market price with high buying interest. If the price enters this region, it may be a good opportunity to buy. Similarly, a supply zone is a price area above the current market price. If the price enters this region, then it may be profitable to sell.

2. Setting precise stop-loss and take-profit levels

Demand and supply zones help traders identify precise stop-loss and take-profit areas that limit losses and lock in profit. For example, if you are entering a long position in a demand zone, then your take-profit will be set at the next supply zone. Meanwhile, your stop-loss would be below the demand zone.

3. Confirming trade strength

It is recommended to validate the strength of the trade using other tools, like volume. A significant price move coupled with high volume confirms the trade strength and validity.

Learn to identify demand and supply zones correctly to find potential entry and exit points and manage risks.