Incorrectly identifying demand and supply zones can result in incorrect entry or exit points, missed trade opportunities, and substantial losses.

Here are some problems that traders face when identifying demand and supply zones.

1. Subjectivity in drawing zones

There is no universal rule that guides how to draw demand and supply zones. Every trader draws different zones based on their judgment of what is a reversal or consolidation area.

2. Defining the zone boundaries

Traders often find it challenging to identify the beginning and ending of a zone. If you draw a zone too wide, it will impact its precision, and drawing it too narrow may result in missing valid price movements.

3. False signals

Traders often fall for false zones and ‘fake-outs’ when identifying demand and supply zones. These zones don’t always guarantee a price reversal. When traders enter a position in a zone without waiting for confirmation from price movement, they often encounter false signals.

4. News & economic events

Unexpected news or economic events can cause the prices to break out of the zone, making previous technical analysis inaccurate.

5. Ignoring the major trend

If you observe a major long-term trend, trading against it even if a valid zone appears is highly risky.

6. Need for confirmation

It is recommended to combine demand and supply analysis with other indicators to confirm the zones.

7. Poor risk management

When a trader doesn’t have a clear understanding of where to place stop-loss and take-profit orders when trading in a zone, he/she is exposed to high risk.

Trading in demand and supply zones will be fruitful only if you’re able to avoid making these common mistakes.