Lesson 45 of 69
Supply and demand zones
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and describe where price stopped. Supply and demand zones describe where price exploded. A is the small area a sharp rally started from: so many buy orders arrived that sellers were cleared out in seconds. A is the area a sharp sell-off started from, for the mirror reason.
Zones, not lines
This is the practical difference from ordinary support and resistance. A level is one exact price and are constantly poking through it, which is how beginners get stopped out on trades that were basically right. A zone is a band with a top and a bottom — usually drawn from the of the last opposing to the extreme of its wick — so ordinary noise stays inside it.
How to identify a zone on a chart
- 1Find a sharp, near-vertical move on the 4-hour or daily chart. The move matters more than the base: no strong move away, no zone.
- 2Look back at the small cluster of the move launched from — often one or two tight candles, or a single opposing candle right before the surge.
- 3Draw a rectangle from the body of that last opposing candle to the wick extreme, and extend it forward in time.
- 4Mark it fresh. A zone that has not been touched since it formed is the strongest; each weakens it as resting orders get used up.
Why price returns to a zone
The move happened too fast for everyone who wanted in. Institutions could not fill their whole position at once, buyers who missed the move are waiting for a discount, and traders who were short into the rally want to exit at . All of those orders sit in the same area, which is why price so often pulls back into a zone before continuing.
Trading the return — beginner version
- Trade with the direction of the original move. A demand zone is a buying area in an , not a reason to catch a falling knife.
- Wait for inside the zone: a wick, a candle, a hammer. The zone gives you the where; the candle gives you the when.
- goes beyond the far edge of the zone, not in the middle of it. If price closes through the zone, the imbalance is gone and the idea is dead.
- Target the opposite zone or the previous swing. Zone to zone is a natural structure and often gives 1:2 or better.
| Support / resistance | Supply / demand zone | |
|---|---|---|
| Shape | One horizontal line | A band with a top and a bottom |
| Built from | Repeated touches over time | One sharp imbalance move |
| Best when | Tested many times | Fresh and untested |
| Invalidated by | A close beyond the line | A close through the whole zone |
Confluence is the point
A demand zone that also sits at a daily support level, in an uptrend, with a bullish engulfing candle printing inside it, is four independent reasons pointing the same way. One reason is a guess. Three or four is a setup.
Key takeaways
- Zones mark areas price left rapidly, suggesting unfilled orders remain.
- Demand zones sit below price; supply zones sit above it.
- Fresh, untested zones are generally stronger than heavily retested ones.
- Use zones as areas of interest, always with confirmation and a stop.
Knowledge check
3 quick questions — your best score is saved to your progress.
1. A demand zone is the area…
2. How do zones differ from simple lines?
3. What weakens a zone?
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