In order to answer this question, we should first start off with what is the difference between
zones and levels.Let’s have a look at the example below showing a level:
Let’s have a look at a supply and demand zone:
As you can see from the sketch above, a zone is the distance between two neighboring highs or lows. It is a wider region by definition that has more strength than just a single level. That makes supply and demand zones a better indicator of any future price movements than a price level.
Bear Traps with Supply Zones
First of all, what is a bear trap?
Bear traps are nothing more or less but a failed second low.
As the image above shows, after a second low, the price does not go any further, but starts a sharp climb upwards. I have a very detailed article on bull and bear traps, which you can check out HERE.
In the context of supply and demand, a bear trap is a very useful pattern. What I am usually
looking for when using supply and demand in my trading is a bear trap below a demand zone.
This is probably one of the strongest patterns in trading that combines price action and supply and demand zones. It is an area where a lot of stops and limits are hit and that is what makes it so powerful. It is also an area of an equilibrium that attracts more interest than any other area in trading.
Bull Trap with Demand Zones
The opposite of a bear trap is a bull trap.
It is the moment when a lot of breakout traders are piling up long positions betting that the price will continue its extent.
Unfortunately, their expectations are not met. Alas- quite the contrary!
In fact, price reverses action and takes a lot of those traders’ stops out.
On the other side, there are the supply and demand traders sitting on those same levels and
counter-meeting the long orders with short orders.
This war-of-tug battle is combined a lot of limit orders being hit, which in its turn accelerates the selling pressure and leads to a sharp move down.