A trading zone is the area between the supply zone and demand zone. The supply and the demand zones are similar. They even have a relationship to the zone or resistance and zone of support. Trend lines that are hard or sticky to break on either side are called support and resistance levels. Broad price levels of support or resistance are indicative of supply and demand.
These are the price points where buyers and sellers tend to crowd. These support and resistance levels are used in some trading strategies to trigger stop losses.
Market volatility will determine whether you trade in the zone, or if you decide to breakout trade (execute buy/sell orders when prices exceed the zone of support or resistance). To stay in the trading zone, you can check if the movement is range bound. As you can see in the graphic, markets trade within a range. This is a directional market where traders know the direction of price movements. In a range-bound marketplace, traders believe that support and resistance zones will remain stable. Then traders can place stop losses at breakout prices.
This means that traders will only buy when the price is within the support zone. The support level is the lowest price point, which is the upper limit of the zone. The next price level the stock has not yet reached below is the lower limit. This is the demand area, which is shown in green on the chart above. There is a lot demand for these levels but there may not be enough supply. This is because buyers want to buy at the lowest possible price before prices rise again, and sellers will wait to sell to get a better price.
The resistance zone also includes the resistance line at the bottom and the highest stock price traded over a specified number of sessions. This is the top of the resistance zone. It is shown in the chart in red. This is called the supply zone, as the stock's supply exceeds the demand. Because traders want to sell the stock at the highest possible price before they see prices drop below their highs, However, buyers won't be as many as they would like.
Investors can use trading zones to determine when and where prices will peak or fall and which entry and exit points are best for stock investments.