Price Action

Supply and Demand Zones Explained

Master supply and demand zones - identification, drawing techniques, fresh vs tested zones, and proven trading strategies

What are Supply and Demand Zones?

Supply and demand zones are price areas where significant order imbalances occurred, creating strong, impulsive moves. These zones represent areas where institutional traders placed large orders that weren't completely filled.

Demand zones form when aggressive buying overwhelms available sell orders, causing price to explode upward. When price returns to that zone, remaining unfilled buy orders can support price again.

Supply zones form when aggressive selling overwhelms available buy orders, causing price to drop sharply. When price returns, remaining unfilled sell orders can push price down again.

Unlike support and resistance lines based on historical bounces, supply and demand zones focus on the origin of moves and the institutional order flow that created them.

Core Concepts

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Demand Zone (Support)

An area where buyers overpowered sellers, creating a strong upward move. The zone is the basing area immediately before the rally.

What happened: Big buy orders entered, absorbed all sell orders, pushed price up aggressively

Why it works: Not all buy orders filled. Unfilled orders remain, providing support on return

How to trade: Buy when price returns to demand zone, targeting higher levels

🔴

Supply Zone (Resistance)

An area where sellers overpowered buyers, creating a strong downward move. The zone is the topping area immediately before the decline.

What happened: Big sell orders entered, absorbed all buy orders, pushed price down aggressively

Why it works: Not all sell orders filled. Unfilled orders remain, providing resistance on return

How to trade: Sell when price returns to supply zone, targeting lower levels

How to Identify Supply and Demand Zones

Valid supply and demand zones have three key characteristics. All three must be present:

Consolidation/Base Formation

Price forms a tight consolidation or base - a period of relatively small candles moving sideways. This is where large orders are being placed.

Look for: Tight range, small-bodied candles, sideways movement, often near structure (highs/lows)

Strong, Impulsive Move Away

An explosive, directional move erupts from the base. Large candles, momentum, clear direction. This proves the imbalance occurred.

Look for: Big candles, consecutive directional moves, minimal pullbacks, strong volume, quick departure

Speed of Departure (Minimal Wicks)

The move away from the zone happened quickly with minimal wicks poking back into the base. Quick rejection shows strong imbalance.

Look for: Few to no wicks back into the base, rapid exit, no hesitation or grinding

How to Draw Supply and Demand Zones

Drawing a Demand Zone (Support)

1
Find the explosive move up: Look for a strong rally with large green candles
2
Go back to the base: Find the consolidation immediately before the rally
3
Draw the zone: Top of zone = highest wick/body in the base. Bottom = lowest wick in the base
4
Verify the move: Ensure price left quickly without grinding or wicking back extensively

Drawing a Supply Zone (Resistance)

1
Find the explosive move down: Look for a strong decline with large red candles
2
Go back to the base: Find the consolidation immediately before the drop
3
Draw the zone: Top of zone = highest wick in the base. Bottom = lowest wick/body in the base
4
Verify the move: Ensure price left quickly without grinding or wicking back extensively

Fresh Zones vs Tested Zones

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Fresh Zone

A zone that hasn't been retested since it created the initial move. This is the highest probability setup.

Why powerful: Unfilled orders still waiting. Strong institutional interest remains.

How to spot: Price hasn't returned to the zone since the explosive move.

Trading edge: First touch has highest probability of bounce. Priority trade.

Risk: Zone could fail on first test, but odds are best here.

♻️

Tested Zone

A zone that has been touched before and still held. Proven but weaker with each test.

Why weaker: Each test fills more orders. Fewer unfilled orders remain.

How to spot: Price returned, touched zone, and bounced. Now coming back again.

Trading edge: Still tradeable if held strongly, but lower probability than fresh.

Risk: Higher failure rate. Orders may be exhausted. Use confirmation.

Rule of thumb: Trade fresh zones aggressively. Trade tested zones conservatively with confirmation.

Supply and Demand Trading Strategies

Demand Zone Long

Buying at Demand

Identify fresh demand zone - Find zone from explosive upward move that hasn't been retested

Wait for price to return - Be patient. Price must come back down to the demand zone

Watch for reaction - Look for bullish candles, wicks rejecting lower, volume increase

Enter on confirmation - Enter when price shows acceptance of zone - bullish engulfing, hammer, etc.

Stop below zone - Place stop loss just below the demand zone boundary

Target: Supply zone or structure - Take profit at next supply zone or resistance level

Supply Zone Short

Selling at Supply

Identify fresh supply zone - Find zone from explosive downward move that hasn't been retested

Wait for price to return - Be patient. Price must come back up to the supply zone

Watch for reaction - Look for bearish candles, wicks rejecting higher, volume increase

Enter on confirmation - Enter when price shows rejection of zone - bearish engulfing, shooting star

Stop above zone - Place stop loss just above the supply zone boundary

Target: Demand zone or structure - Take profit at next demand zone or support level

Advanced

Zone-to-Zone Trading

The highest probability strategy: trade from one zone type to the opposite zone type.

Buy at demand, sell at supply: Enter long at demand zone, exit at next supply zone above

Sell at supply, cover at demand: Enter short at supply zone, exit at next demand zone below

Why it works: Trading between areas of proven institutional interest

Advantage: Clear entry and exit points with defined risk

Supply/Demand vs Support/Resistance

Supply & Demand Zones

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Areas not lines - rectangles showing zone
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Origin-focused - where moves started
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Order imbalance - unfilled institutional orders
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Fresh zones best - untested has highest probability
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Weaken with use - each test fills more orders
•
Context matters - requires explosive move to validate

Support & Resistance

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Lines - horizontal levels where price bounced
•
Bounce-focused - where price reversed multiple times
•
Psychological - round numbers, historical reactions
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Multiple touches - more touches = stronger level
•
Strengthen with use - more tests = more significant
•
Simpler concept - easier for beginners to spot

Can you use both? Yes! Many traders mark both S/R levels and S/D zones. When they align (supply zone AT resistance), you have stronger confluence.

What Makes a Strong Zone?

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Fresh & Untested

Zone hasn't been revisited since creation. First touch has highest probability of reaction.

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Explosive Departure

The stronger the move away from the zone, the bigger the imbalance, the more reliable the zone.

📊

High Volume

Large volume during zone formation confirms institutional participation and order flow.

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Quick Exit

Price left zone rapidly with minimal wicks back. Shows strong rejection and imbalance.

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Confluence

Zone aligns with other structure: previous swing high/low, Fibonacci level, round number.

⏱️

Higher Timeframe

Zones from daily/weekly charts are stronger than 15-minute zones. Bigger players involved.

Common Supply and Demand Zone Mistakes

Avoid these errors when trading zones:

Trading tested zones like fresh - Each test weakens a zone. Fresh zones deserve aggressive entries. Tested zones need confirmation. Don't treat them the same.

Drawing zones without explosive moves - Not every consolidation is a valid zone. Must have strong, impulsive move away to prove imbalance occurred.

Making zones too wide - Zone should cover the base before the move, not the entire swing. Tight zones give better risk/reward.

Ignoring higher timeframes - A 5-minute zone means little if you're hitting a daily supply zone. Always check higher timeframes for conflicts.

No stop loss - If zone fails, orders are filled or market changed. Must use stops just outside zone. Never hold hoping zone resurrects.

Trading against trend - Supply zone in strong uptrend will likely fail. Demand zone in strong downtrend will likely fail. Trade with trend direction.

Pro Tips for Zone Trading

Quality over quantity - Don't mark every consolidation. Only mark zones with explosive moves. 3-5 good zones per chart is plenty.

Delete old zones - Once a zone is tested multiple times or broken, remove it. Cluttered charts reduce clarity.

Flip zones - Broken demand becomes supply. Broken supply becomes demand. Old support becomes new resistance and vice versa.

Use alerts - Set price alerts when price approaches your zones. Don't miss fresh zone tests while away from charts.

Combine with candlestick patterns - Zone + hammer/engulfing = high probability. Zone + confirmation = better than zone alone.

Mark zones on higher timeframes first - Start with daily/weekly zones. Then zoom to lower timeframes for entries. Top-down approach works best.

Frequently Asked Questions

What are supply and demand zones?

Supply and demand zones are price areas where significant imbalances between buyers and sellers occurred, causing strong directional moves. Demand zones (support) are where buying overwhelmed selling. Supply zones (resistance) are where selling overwhelmed buying.

How do you identify a supply or demand zone?

Look for: 1) A consolidation area (basing). 2) A strong, impulsive move away from that area (breakout with momentum). 3) Minimal wicks in the base - quick rejection. The base that created the explosive move is your zone.

What is the difference between supply/demand and support/resistance?

Support/resistance are lines where price bounced multiple times. Supply/demand zones are areas where price originated strong moves due to order imbalance. Zones focus on WHY price moved (unfilled orders), while S/R focuses on WHERE price bounced (historical levels).

What is a fresh zone in trading?

A fresh zone is a supply or demand area that hasn't been retested since it created the initial move. Fresh zones are more likely to hold because unfilled orders remain. Once tested, zones weaken as orders get filled.

Can supply and demand zones fail?

Yes, zones can fail when: orders are filled on first retest, market conditions change, stronger zones exist nearby, or momentum is too strong. Use confirmation and stops. Fresh zones have highest probability but aren't guaranteed.

Information accurate as of December 2025. Verify current rates and terms with providers directly.

Last updated: December 2025