Supply and demand zones

Price moves when buy and sell orders are out of balance. A fast move away from an area shows that the imbalance there was large. A supply and demand zone marks the origin of such a move: the base, a few small candles before the large ones.

Demand is below price and is read as support. Supply is above price and is read as resistance. The method is usually credited to trader and educator Sam Seiden, and it is one of the sources of smart money concepts.

Zones come in four patterns. The diagram shows the two turning-point ones: drop-base-rally at the bottom and rally-base-drop at the top.

• Drop-base-rally – price falls, pauses and rallies. A demand zone at a turning point.
• Rally-base-rally – price rises, pauses and rises again. A demand zone inside an uptrend.
• Rally-base-drop – price rises, pauses and falls. A supply zone at a turning point.
• Drop-base-drop – price falls, pauses and falls again. A supply zone inside a downtrend.

On Charts the rectangle drawing tool is enough to mark zones. Replay mode lets you step through history and see how price behaved at the zones you drew.

• Find the move first: several large candles in one direction with little overlap, often with a fair value gap.
• Go back to where it started and find the base – one to a few small candles before the first large one.
• Demand zone – draw a rectangle from the lowest low of the base to the highest high of the base. A tighter version stops at the highest candle body.
• Supply zone – from the highest high of the base to the lowest low of the base, or to the lowest body in the tighter version.
• Extend the rectangle to the right until price returns.

• The move away – the faster and longer it is, the more weight the zone gets.
• Time in the base – a short base is preferred. A long sideways range is a different thing.
• Freshness – a zone that price has not returned to yet is called fresh. Each test is thought to use up some of the orders.
• What the move did – a zone whose move made a break of structure counts for more than one inside a range.
• Timeframe – daily and 4-hour zones are fewer and hold more often than 5-minute ones.

Support and resistance are levels where price turned several times. They are drawn through repeated highs or lows, and each extra touch is classically read as proof of the level.

A supply or demand zone is drawn from a single event – the base of one strong move – and it is an area, not a line. The logic of touches is reversed: the first return is the one traders want, and a zone tested several times is treated as weaker. In practice the two often coincide, and a zone that sits on a known level gets more attention.

An order block is the smart money version of the same idea with a narrower rule: the last opposite candle before a move that breaks structure. A demand zone covers the whole base and does not require a break of structure. On many charts the order block is the last candle inside the demand zone.

• Direction – longs from demand, shorts from supply, preferably with the trend of the higher timeframe.
• Entry – a limit order at the near edge of the zone, or a confirmation inside it: a rejection candle or a break of structure on a lower timeframe.
• Stop – beyond the far edge of the zone with a small margin.
• Target – the opposite zone or the nearest swing high or low. Many traders skip a trade when the distance to the target is less than twice the distance to the stop.

• Drawing a zone at every pause – without a strong move away there is no evidence of imbalance.
• Trading a zone on its third or fourth test as if it were fresh.
• Buying demand in a strong downtrend – zones against the trend break more often.
• Zones that are too wide – the stop becomes large and the trade loses its point. Use the tighter version or a lower timeframe.