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Apr 13, 2021

Supply and Demand

Supply and demand refer to the amount of goods or services suppliers are willing to produce and the amount consumers are willing to buy.

What Are Supply and Demand?

Supply and demand are both key factors in determining the price of a particular product in the market.

Supply refers to the amount of assets, goods, or services available in the market. This amount is what is being produced by suppliers and companies. Demand, on the other hand, refers to the amount of assets, goods or services offered by suppliers that consumers are interested in as well as the amount of money they are willing to pay for them.

Basic Trading Principles

Demand = Buyers

Buyers = Support

Supply = Sellers

Sellers = Resistance

Support will be the level at which demand will outweigh supply, causing the price to rise/increase.

Resistance will be the level at which supply will outweigh demand, causing the price to fall/decrease.

Supply and demand zones in trading are usually liquidity pools.

When an asset illustrates a sharp rise or decline, large institutional players (whales in the case of crypto) sometimes miss the entry or exit because of the size of the orders. When this happens, they leave pending orders to buy or sell at the base of the liquidity zones, with the expectation that the price will return there to fill the remaining orders.

A high price rise zone is the demand zone (support) and the zone where price has made a sharp decline is the supply zone (resistance).

Demand Zone (Buyers Present)

Technical Analysis Term = Support

Supply Zone (Sellers Present)

Technical Analysis Term = Resistance

Uptrend and Downtrend 

Both supply and demand zones have a finite number of buyers and sellers. The more a zone is touched, the weaker it becomes. This is evident from how price rebounds and makes lower highs off demand zones (support) and price drops less and less off supply zones (resistance), thus making higher lows.

Each time the price reaches the supply zone, the price is knocked down (falls/decreases), but each time buyers step in, they are bidding up the price, thus creating a higher low than before. This is a bullish price structure and is called an uptrend.

Each time the price reaches the demand zone, the price is bid up (rises/increases), but each time sellers step in, they are pushing the price down, thus creating a lower high than before. This is a bearish price structure and is called a downtrend.

See chart examples below.

* This content does not represent the views of Bybit. As such, it should be not be seen as trading and financial advice, it is merely an opinion. Trading is done at your own risk.