Supply and Demand Zones: Where the Real Money Trades
Support and resistance show where price reacted. Supply and demand show where orders actually sit. This distinction transforms how you find high-probability entries.
The Institutional Problem
When institutions need to buy $50 million worth of EUR/USD, they face a problem: executing at once would move price against them.
Solution: Accumulate in ranges, spread orders across multiple candles.
The result: unfilled orders left behind at specific price levels. When price returns, those orders activate. That's why certain zones react so reliably—the orders are still there, waiting.
Demand Zones: Where Buyers Wait
Demand zones form where buying overwhelmed selling, causing an impulsive move up.
How to Identify:
- Find a strong bullish impulse (large bodies, minimal wicks)
- Locate where it started—that consolidation is your demand zone
- Draw from the lowest wick to the body open of the first impulse candle
Why They Work:
Institutions couldn't fill all buy orders before price moved. When price returns, remaining orders execute, creating buying pressure again.
Supply Zones: Where Sellers Wait
Supply zones are the mirror—areas where selling overwhelmed buying, causing impulsive moves down.
How to Identify:
- Find a strong bearish impulse
- Locate the starting point of that move
- Draw from the highest wick to the body open of the first impulse candle
Why They Work:
Institutional sell orders remain unfilled. Price return = order activation = selling pressure.
Zone Quality: Not All Zones Are Equal
High-probability zones have these characteristics:
1. Explosive Move Away
The stronger the impulse from the zone, the more unfilled orders remain. A zone that created a 100-pip impulse is stronger than one that created 20 pips.
2. Freshness
First touch = highest probability. Second touch = lower. Third touch = often fails. Each test fills more orders, depleting the zone.
3. HTF Trend Alignment
Demand zones in uptrends, supply zones in downtrends. Counter-trend zones can work but are lower probability.
4. Nearby Liquidity
Zones near liquidity pools (equal highs/lows) are stronger. Price often sweeps liquidity, then taps the zone.
5. Fair Value Gap Inside
An FVG within the zone adds confluence. Price tends to fill imbalances—if the FVG is inside your zone, price has extra reason to reach it.
Trading Zones: The Right Way
Don't: Enter blindly when price touches zone
Zones fail. Price can slice right through. Blind entries lead to many unnecessary losses.
Do: Wait for confirmation at the zone
Confirmation methods:
- LTF CHoCH: Drop to 15M/5M, wait for structure shift in your direction
- Rejection candle: Long wick into zone, close outside with body in trade direction
- Engulfing pattern: Full engulfing candle in trade direction at zone
- Liquidity sweep + rejection: Price sweeps below/above zone, then reverses
Stop Loss Placement
Beyond the zone. If your zone fails completely, you want to be out. Don't set arbitrary pip distances—set stops where your idea is invalid.
Take Profit Targets
- TP1: Previous swing high/low
- TP2: Opposing zone
- TP3: Opposite liquidity pool
Fair Value Gaps: Zone Enhancement
Fair Value Gaps (FVGs) are imbalances—gaps where candle ranges don't overlap.
When an FVG sits inside your zone:
- Price is even more likely to reach that level
- The specific FVG area is often where price reacts most strongly
- Draw zone around the FVG for precise entries
Common Zone Trading Mistakes
Drawing Too Many Zones
Not every consolidation is a zone. Require impulsive moves away. Quality over quantity.
Using Weak Zones
Zones with slow drift away (instead of impulse) are weak. Skip them.
Trading Against HTF
Counter-trend zone trades have lower win rates. Know when you're fighting the current.
No Confirmation
Blind zone entries eventually get burned. Patience for confirmation is essential.
Moving Stop Loss
If price is approaching your stop, your zone failed. Accept it. Moving stops turns small losses into account-damaging ones.
Zone Example: Step by Step
Daily chart: Clear downtrend (LH, LL structure)
4H chart: Identify supply zone where last significant down-move originated. Draw zone from high wick to impulse candle body.
1H approach: Price rallies toward zone. Note: liquidity sitting above recent swing high.
What to watch for:
- Price sweeps liquidity above swing high ✓
- Enters supply zone ✓
- 15M shows CHoCH bearish (lower low made) ✓
- Enter on retest of CHoCH level
Trade management:
- Stop: Above zone + sweep wick
- TP1: Recent swing low
- TP2: Next demand zone below
FAQ
Q: How many times can a zone be traded? A: Fresh zones are best. First retest is highest probability. After 2-3 tests, the zone is likely depleted—look for fresh ones.
Q: What timeframe should I draw zones on? A: 4H and Daily for major zones. 1H for refinement. Don't rely on 5M/15M zones for swing trades.
Q: What if zone and liquidity conflict? A: Liquidity often gets swept before zone is reached. Watch for sweep, then look for zone reaction. They often work together.
Q: Should I use pending orders at zones? A: Only if you accept the risk of no confirmation. Market orders after confirmation are generally safer.
Conclusion
Supply and demand zones show you where institutional orders rest. Combined with proper confirmation techniques, they provide high-probability entry points that no indicator can match.
Find quality zones. Wait for confirmation. Manage risk. The zones will do the rest.
Ready to master zone identification? Continue to Module 6: Points of Interest or practice with our Zone Drawing Exercises.
