Shall we test supply and demand?

Testing Supply and Demand: The Key to Understanding the Market

When a market maker forms a position for buying, it becomes a strategically important point in the market. At this stage, the key is to determine whether there are still active sellers who could resist the upward movement. If supply persists, it will inevitably create obstacles for price growth. But how can you confirm that the market is ready to continue its trend? The answer lies in testing supply and demand.

---

How Do Market Makers Test Supply?

To check for the presence of sellers, market makers intentionally push the market into a price range where high volumes were previously observed on bearish bars. This strategy allows them to analyze the market’s reaction and determine if supply remains.

If prices in this range are attractive to sellers, they will re-enter the market and increase volume. However, if volumes remain low or do not increase compared to the previous bar, this is a clear signal that major sellers are no longer present, and the market is ready to move higher. A bar characterized by low volume and closing in the middle or upper part is called a test bar.

---

Successful Test for Absence of Supply

In a successful test, you’ll see a bar with a narrow spread located in the zone of previous high volume. This bar should have extremely low volume, confirming a lack of interest in selling. This is a strong indication that the market is ready to rise and that resistance is no longer a factor.

Example: A bar with low volume and a narrow spread, closing in the upper part, indicates a successful test. When supply is absent, the price will confidently move upward.

---

Unsuccessful Test for Absence of Supply

If traders continue to sell within the test range, the volume on the test bar will increase. This signals that supply is still present. Such a bar warns that price growth is unlikely, and the market is likely to start declining.

Example: A bar with high volume formed in the zone of previous high volume indicates active sellers. In this case, expect the price to fall.

---

Testing Demand: Are There Buyers in the Market?

Testing demand is used to assess buyer strength. In a downtrend, it’s essential to determine whether there is demand in the market that could hinder further price declines. To test this, the market maker pushes the price upward into a range where high buying volumes were previously observed.

If volumes in this range remain low and price growth halts, this indicates a lack of strong buyers. Such a test bar is characterized by low volume and closing in the middle or lower part.

---

Successful Test for Absence of Demand

In a successful test, you’ll see a bar with low volume formed in the zone of previous high volumes. This confirms that there is no significant buyer activity, meaning the downtrend can continue.

Example: A bar with a small spread and low volume, closing in the lower part, confirms the absence of strong buyers. The price will likely continue to decline.

---

Unsuccessful Test for Absence of Demand

If volumes begin to grow in the test range, this indicates active buyers entering the market. Such a bar signals that the market is gaining strength for an upward movement, and the downtrend may be ending.

Example: A bar with increased volume formed in the zone of previous high volume warns of an imminent price increase.

---

Summary: Testing Supply and Demand as a Market Analysis Tool

Testing supply and demand is a powerful tool that helps traders determine whether the market is ready to move up or down.

• A successful test for absence of supply signals the market is ready to rise.
• A successful test for absence of demand indicates that the decline is likely to continue.
• Unsuccessful tests provide the opposite signals, warning of potential trend reversals.

This knowledge helps traders make informed decisions and avoid errors related to premature market entries.

---

What’s Next?

 

The next step in our analysis is to explore buying and selling climaxes — moments when the market reaches peak activity before reversing direction. Stay tuned for our materials to learn more about these critical market signals!