Supply and Demand: Big Volume Demand at Key Points – In Detail 1. What is Supply and Demand in the Stock Market? At its core: Supply = Sellers (people who want to sell a stock) Demand = Buyers (people who want to buy a stock) The interaction between supply and demand determines price movement: If demand > supply → price goes up (buyers compete, pushing prices higher). If supply > demand → price goes down (sellers undercut each other, lowering prices). 2. Supply and Demand Zones These zones are areas on a chart where the price had a strong reaction in the past, indicating high supply or demand. Demand Zone (Support) A price area where buying pressure exceeded selling pressure. Price drops into this area and bounces upward. Often seen with long wicks, strong green candles, or volume spikes. Example: A stock falls to $100, then suddenly reverses to $120. The $95–$100 zone is a demand zone. Supply Zone (Resistance) A price area where selling pressure exceeded buying pressure. Price r...
Breakout Trading Is the Most Underrated Trading Technique
How do you differentiate a genuine breakout from a false breakout?
What Is a Breakout?
"A breakout is a stock price moving outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support."
Image 1.1-Example of a breakout (break of the resistance trend line)
In Image 1.1, the price broke the resistance trend line with high volumes. Similarly, if the price breaks the support trend line, few recognize it as a breakdown.
To keep it simple, we will focus only on the breakout.
What Is a False Breakout?
A false breakout is also recognized as a 'failed break'. "A failed break occurs when a price moves through an identified level of support or resistance but does not have enough momentum to maintain its direction. Since the validity of the breakout is compromised, and the profit potential significantly decreases, many traders close their positions. A failed break is also commonly referred to as a false breakout."
Image 1.2-Example of a false breakout
In Image 1.2, you can see that the price showed the characteristics of a breakout. However, it failed in its attempt and broke on the opposite side.
Why Is This Information Important?
In my opinion, every trader (whether intraday, swing, positional, or scalper) should know how to differentiate between a genuine breakout and a false breakout.
Do you know why?
Because every entry and exit in any trade should come through a breakout or false breakout opportunity!
(This doesn't mean that other trading techniques will not work. My explanation holds good if a trader is looking for the best entry point and best exit point.)
Let me explain.
It's important to understand the two herds that exist in the market:
1. Smart money
2. Dumb money
Smart money refers to powerful institutional investors and big sharks who have the money and information, and who give direction and momentum to markets.
Dumb money refers to non-professional traders and retail traders who often try to make quick money.
Do you agree that it's always a good idea to follow the smart money?
If yes, then carefully check the chart below.
Image 1.3-Smart money's action plan (daily chart)
If you look at Image 1.3, the smart money has prevented
the fall three times with significant buying volumes.
Besides, the price has consolidated over eight trading days before the breakout. It indicates two things:
1. Smart money is not willing to sell at this price level.
2. Dumb money was exhausted with all the selling it did.
If you look at Image 1.4, it's evident that smart money had a clear action plan.
Image 1.4-The result of smart money's action plan (daily chart)
So it's always better to take entry when you get the confirmation from smart money (you can't make trades along with them unless you are one among them).
Besides, it's significant to plan an exit if you can judge that smart money is exiting.
A trading system should accommodate such entry and exit points, because only entry and exit decide the fate
of your trade, regardless of your reputation, experience, or qualifications!
This breakout trading system consists of three critical components:
1. Drawing proper trend lines
2. Identification of a real breakout
3. Trade execution
I will explain these concepts in detail separately in the subsequent chapters.
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