Charts and indicatorsUpdated 2 min readBy the FXNOD team
Supply and demand zones in trading
A demand zone is a price area that the market left with a sharp move up, suggesting strong buying there. A supply zone is one it left with a sharp move down. Traders expect a reaction if the price returns. They are drawn as areas, and differ from support and resistance mainly in being defined by the strength of the departure.
How to find one
Find a strong move
Several large candles in one direction, with little overlap.
Look at where it began
Usually a small pause or a few narrow candles, called the base.
Mark the base as a zone
From its high to its low.
Wait for the price to return
The first return is the one traders watch.
Supply and demand against support and resistance
| Support and resistance | Supply and demand zones | |
|---|---|---|
| Defined by | Repeated turns at a price | A sharp move away from an area |
| More touches | Make the level more visible | Are thought to weaken the zone |
| Drawn as | A level or narrow band | An area |
| Main idea | The market remembers a price | Orders were left unfilled there |
In practice the two overlap. Many supply zones are resistance levels described in different words.
What makes a zone stronger
- A fast, large move away from it.
- Little time spent in the zone before leaving.
- It has not been revisited yet.
- It lines up with the higher-timeframe trend.
Trading a zone
- Enter when the price returns and shows a reaction, not blindly at the edge.
- Place the stop beyond the far side of the zone.
- Target the next opposing zone, and skip the trade if it is too close.
The weak point
The story about unfilled institutional orders cannot be observed on a retail chart. What you actually have is an area the price moved away from quickly. That is useful evidence, and it is the same kind of evidence as a support level, with the same failure rate. Zones are also easy to draw generously enough that the price always lands in one.
On synthetic indices
There are no orders on a synthetic index, filled or unfilled. A zone drawn there has nothing behind it.
Questions people ask
- Are supply and demand zones the same as support and resistance?
- They overlap heavily. The difference is emphasis: zones are defined by how sharply the price left, levels by how often it turned.
- What is an order block?
- A term from smart money concepts for the last opposing candle before a strong move. It marks much the same area as a supply or demand zone.
- Which timeframe is best for zones?
- Find them on a higher timeframe than the one you trade, as with any level.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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