Supply and Demand Zones

What you will learn

• Why a zone describes real order flow better than a single line.
• How to draw a demand zone and a supply zone from a base.
• How to grade a zone with a four-point scorecard.
• How to place a stop with a buffer beyond the zone.

Explanation

A support line suggests price reacts at one exact price. In reality orders are spread over a price area. A zone is a price band where buyers (demand) or sellers (supply) were strong enough to move price sharply away.

• Demand zone: a small area of sideways candles (the base) followed by a strong move up.
• Supply zone: a base followed by a strong move down.

How to draw a demand zone

1. Find a strong move up: several large candles in a row.
2. Look at the small candles directly before that move. This is the base.
3. Upper edge (the proximal line, nearest to current price): the highest body of the base candles.
4. Lower edge (the distal line, further away): the lowest wick of the base.

For a supply zone, mirror the rules: the proximal line is the lowest body of the base, the distal line is the highest wick.

Grading a zone

Not every zone is equal. Score each criterion 0, 1 or 2:

• Freshness: untested = 2, tested once = 1, tested twice or more = 0. Each test may use up waiting orders.
• Departure strength: size of the move away from the zone compared with the average true range (ATR, the average candle range, see lesson 8). 3 ATR or more = 2, 1.5 to 3 = 1, less = 0.
• Higher-timeframe alignment: zone agrees with the HTF bias = 2, HTF neutral = 1, against = 0.
• Room to the opposing zone: at least 3R = 2, 2R to 3R = 1, less than 2R = 0.

A personal rule might be: trade only zones with 6 points or more out of 8. This is a way to be consistent, not proof that higher scores win more. Only your own testing (lesson 10) can show that.

Worked example

Hypothetical example: a share in €. ATR is €1.00. Fees, spreads and taxes are excluded.

• Base candles: highest body €99.40, lowest wick €98.50. Zone width: €99.40 − €98.50 = €0.90.
• Departure: from €99.40 to €103.40 in three candles = €4.00 = 4 ATR.
• Price has touched the zone once before (tested once).
• Daily chart is in a range (neutral).
• Opposing supply zone starts at €104.00.

Plan: entry at the proximal line €99.40. Stop below the distal line with a €0.20 buffer: €98.50 − €0.20 = €98.30.

1. Risk: €99.40 − €98.30 = €1.10 per share
2. Room to opposing zone: €104.00 − €99.40 = €4.60
3. Room in R: €4.60 ÷ €1.10 ≈ 4.2R

Scorecard: freshness 1, departure 2, HTF alignment 1, room 2. Total 6 out of 8. Under the personal rule above, this zone qualifies.

Common mistake

Practice activity

Hypothetical supply zone in $: base lowest body $45.00, highest wick $45.60. Move down from the zone: $3.00. ATR: $1.20. Untested. HTF bias: down. Opposing demand starts at $42.00. Use a $0.10 buffer. Grade the zone and calculate room in R for a short entry at $45.00.

Key takeaways

• Zones show areas of strong buying or selling; single lines are too exact.
• Draw from the base: proximal line at the bodies, distal line at the wicks.
• Grade freshness, departure, HTF alignment and room before trading.
• Place the stop beyond the distal line with a small buffer.

Next step

In the next lesson you will study classic chart patterns, their measured-move targets and why many of them fail.