What Are Supply and Demand Zones When Trading?

Symmetry, on the other hand, contributes with its consistency of behavior to the buildup of order flow around the key area, making the zone stronger. Everyone has some type of understanding of what risk means. https://day-trading.info/ When you trade stocks, you’re entering into a contract. In addition, many of the people I have helped reach their full potential in becoming financially free started off by watching this free 1-hour webinar.

supply demand zone

You can see how fast the price is moving once it reaches one of those levels. In this second example, I will show the daily chart of the GBPJPY. An alternative way to approach those levels is by using another tool for confirmation or another timeframe for confluence. For the sake of showing those levels, let’s first use an example. Let’s continue with the rules of entry, stop loss and take profit and then look at some more examples.

STEP 2: Look left on the chart

It is known as the zone where price create a base and then give explosive move. If that helps, you can even imagine supply and demand zones as large support and resistance areas with a huge concentration of buyers and sellers respectively. As explained before, support and resistance levels are very similar to the zones. The only difference is that zones encompass larger area. The other difference is the way to draw supply and demand zones, but we will come to this later. In the image above you see the German stock market DAX.

The demand zone is clearly defined by the upper and lower boundary. Let’s check a few other examples of supply and demand zones now. We have established the demand zone and next thing is to have a confirmation from price action . These are the so-called “inflection points” and they are the building blocks of the supply and demand zones. Very similar to the rally-base-rally, the drop-base-drop is a supply zone pattern.

supply demand zone

Thus the fresher the zone, the more focus the trader should put on it. For this reason, personally, I only draw 1 to a maximum of 3 zones on chart maximum, no more than that. The freshest and the strongest zones get priority, and those are to keep the focus on, once price retests them. This article will discuss how to draw demand and supply zones using our specific strategy and walk through an example of supply and demand zones marked on a chart. You can also reference this YouTube video below for additional examples and information. A support zone is an area of interest where traders and investors are making transactions.

How do you identify a strong supply and demand zone?

It might take some time, but demand and supply zones are a wonderful tool for the price action trader. Breakout strategies are another supply and demand trading strategy where prices cannot remain in a defined range and eventually move direction. Most traders look for ways through which they can gain favorable entry to the market. This website is intended for educational and informational purposes only and should not be viewed as a solicitation or recommendation of any product, service or trading strategy.

I have taken the liberty to rename it a little bit, but the term ‘supply and demand level zones’ still fits the definition. When I started trading, I watched quite a lot of traders working in the trading market. Plotting of zones should be done with some logical and robust approach. Often supply and demand traders tend to pollute charts with hundreds of levels, where the whole meaning of anticipating the rejections loses the value.

Supply Zones

In my experience, the best timeframes to spot supply and demand zones are the 4H and the Daily. In the chart above you can see a supply zone or in other words a very broad support level. As you can see every time price approaches the supply zone it quickly jumps back up. Supply and demand zones are very similar if not the same. There are certain rules though that make them stand aside and IMHO shine brighter than just support and resistance.

How to find accumulation zones

In the example above, we see the prices represented by the candlestick rebound at the demand zones. It shows that there were possibly many limit buy orders in that price range. Finding supply and demand zones is a trading strategy that can be used on any timeframe with great success. We want to see the market trade above or below these supply and demand accumulation zones. By understanding this, you will improve your odds as a forex trader because you will be trading with smart money by following the supply and demand areas to profit from. In forex trading, not many utilise these areas in the markets because they call them support and resistance levels.

Our aim is to make our content provide you with a positive ROI from the get-go, without handing over any money for another overpriced course ever again. We are sharing premium-grade trading knowledge to help you unlock your trading potential for free. So, once you have found the accumulation block, grab a rectangle tool and draw from the wick low to wick high, do not include the final candlestick with this. The pattern must be a total of 4-5 candlesticks – No MORE, no LESS.

As pointed out above, price action is very fast around those levels, so if there are opportunities they are quickly absorbed. For example, range traders selling above the supply zone can set up stops at the supply zone and targets at the demand zone. Knowing how to read candlesticks comes very handy when trading with supply and demand zones. Using supply and demand zones as part of a trading strategy means involving other trading methodologies as well as a sound risk management system. Supply and demand zones are typically drawn close to support and resistance levels (S&R levels) but are not quite the same. First, it’s important to understand that there can be several periods of accumulation during an uptrend and several periods of distribution during downtrends.

Supply and Demand Zones And Candlesticks

Level 2 tape / Bookmap / order books/market depth should be used to confirm if the round number is stacked and avoid guessing too much. The use of order flow tools decreases guessing and increases the edge for round numbers. For FX traders excellent substitute is using futures order data since FX brokers do not provide accurate order numbers. When all time high is broken and new high is created then previous high becomes a demand zone.

Price Action Course

Once you understand this concept, you’ll find yourself looking for impulses on a chart first. In summary, it’s always the Impulse that defines the zone, and defining the base has secondary importance. There are two major components of a Supply or Demand zone – the Impulse Move and the Base. Good stuff, enjoying your everything you explained I can visibly see it on my charts. In this article, I am going to discuss Supply and Demand Zone Trading in detail. Please read our previous article where we discussed How to Trade with Smart Money.

One factor that can enhance your odds is by looking at the type of return to the zone. When the market makes a slow channelled or rounded return back to the zone, it’s far more likely to work than if the market had immediately narrative and numbers the value of stories in business returned. When we see this fast move away from a consolidation area in just a few candles, it tells us there is big money involved. Now, as the market moved so quickly, you can bet that not all orders would have been filled.

The drawing tool can be used to draw price levels within the thinkorswim platform. Both supply and demand areas can be marked using the price level drawing tool. Below images shows the trend line and demand supply zone in the daily, weekly and monthly chart of HDFC bank. Other than Ninja Trader, all the trading platforms lack the necessary data to create SD Zones. The only common alternative seems to be the use of candle patterns, specifically spikes, which is generally seen as an imbalance between buyers and sellers in the market. The candlestick’s price can either touch or close within the supply and demand accumulation zone if it has retraced.

The retracement must be within a reasonable timeframe to reverse back otherwise it’ll become invalid. Once this is in play, we simply enter the trade at the break of the last candlestick’s high on the pattern . Once we identify the trade, we must the first candlestick that has retraced back towards the zone.

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