What is a supply and demand zone?
In one line: A supply and demand zone is a price area where a strong move started. Demand zones sit below price where buyers took over; supply zones sit above, where sellers did.
A simple example
A stock trades sideways between $44.00 and $44.60 for a few candles. Then it jumps to $49 in two days.
That sideways patch, $44.00 to $44.60, is a demand zone. Buyers overpowered sellers there so hard that price left fast. If price drifts back down to $44.60, some traders expect buyers to show up again.
A supply zone is the reverse. Price pauses at $70 to $70.80, then drops hard to $64. That pause becomes a supply zone above the market.
How to draw one
- Find a strong move. Big candles leaving fast, not a slow climb.
- Look just before it. Find the small pause or base where the move started.
- Shade that base. From the bottom to the top of those candles, wicks included.
Why it matters
Zones give you a place to wait. Instead of chasing price after a big move, you plan for the first return to where the move began. The far side of the zone gives a natural Stop loss spot: below a demand zone, above a supply zone.
The faster price left the zone, the more traders tend to watch it. A zone that has been revisited many times is often weaker, since the orders there may be used up.
A common mistake
Drawing zones far too wide. A zone that covers $5 on a $45 stock isn't a level, it's half the chart. Wide zones also mean wide stops and small sizes. Keep them tight around the base.
The other mistake is ignoring direction. A demand zone in a clear downtrend is more likely to break. Check the bigger chart's Trend first. More in supply and demand zones.
Questions
What's the difference between supply and demand zones and support and resistance?
Support and Resistance mark where price turned around. Supply and demand zones mark where a strong move started. They often overlap. See support/resistance vs supply/demand.
Is an order block the same as a demand zone?
Very close. An Order block is usually one candle; a zone can be several candles of a base. Both mark where a strong move began.
How long does a supply or demand zone stay valid?
Until price closes through it with a candle body, or it's been tested so often that it stops reacting.
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