adam

First, there is absolutely zero magic voodoo manipulation reasoning why prices react from these levels. The market is going up from the demand zone and down from the supply zone because large traders that move prices accumulate their positions slowly. If you want to accumulate a significant position, you can't just buy or sell wherever you want; you need to do it in an area with enough liquidity to avoid slippage. These liquid areas are often seen as sideways price action where there is enough two-way auction (plenty of buying and selling).

The optimal condition for large traders to buy is when a significant amount of traders are selling simultaneously. That way, they will ensure the best possible entry since there are plenty of counterparties for their orders in the market. To drive this point forward, we can use a cumulative volume delta, which shows executed market orders. As you can see, there was a lot of market selling while the market went sideways and also on the retracement. Why did the market not go down? Large traders were buying into sell orders until they were completely absorbed.

If you do not trust me, a research paper is dedicated to this price behaviour. You can read the abstract below, or google the full name with authors to find the whole thing.

I often see traders who are aware of these concepts calling every level and zone an order block, which leads to very sub-optimal results. The good supply or demand zone should consist of: Excess, which is an attempt to move to the opposite side, shows the ongoing dominance of one side. Price goes sideways for some time, showing clear signs of efficient price action, called base. Break of market structure, in other words, making a higher high or lower low. Moving from the base should be inefficient (illiquid), showing that one side overwhelms the other.,

In conclusion, this is price action, not quantum science. You are not Jim Simons; you are drawing lines on a chart and hoping for a specific outcome. Sometimes these things work, sometimes price just smashed through them like nothing. As much as I hate how overhyped these supply and demand zones are, I have been using them to narrow down my execution for years, and they have worked very well for me. You can trade them blindly, or preferably, they can be part of a more complex trading strategy that relies on more technical tools, fundamentals, or whatever helps you sleep at night.

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