Supply and Demand Zones
Supply and demand zones mark areas where strong moves started, suggesting unfilled orders. Learn rally base drop patterns, zone quality, freshness and entries.
Supply and demand zones are price areas where strong moves began, suggesting that large buy or sell orders were present there and may not have been fully filled. A demand zone is a base from which price rallied sharply; a supply zone is a base from which price dropped sharply. When price returns to these areas, traders expect remaining orders to cause a reaction. The approach is a close cousin of support and resistance and the foundation for order blocks in smart money concepts.
The four zone patterns#
| Pattern | Sequence | Zone type |
|---|---|---|
| Drop base rally (DBR) | Price falls, pauses in a small base, then rallies strongly | Demand (reversal) |
| Rally base rally (RBR) | Price rallies, bases, then rallies again | Demand (continuation) |
| Rally base drop (RBD) | Price rallies, bases, then drops strongly | Supply (reversal) |
| Drop base drop (DBD) | Price drops, bases, then drops again | Supply (continuation) |
The base is a small cluster of candles, often one to six, where price paused before the strong move. The zone is drawn around the base, from its highest body or wick to its lowest.
What makes a high quality zone#
- Strength of departure: price left the zone fast, with large candles. Strong departures suggest big unfilled orders. See Displacement.
- Short time in the base: fewer candles in the base suggests orders were not fully filled.
- Freshness: zones that have not been retested are considered strongest. Each test may use up remaining orders.
- Reward to risk: the next opposing zone is far enough away to justify the trade.
- Higher timeframe alignment: zones on higher timeframes and in the trend's direction are more reliable.
Supply and demand vs support and resistance#
| Supply and demand zones | Support and resistance | |
|---|---|---|
| Based on | Where strong moves started | Where price reversed repeatedly |
| Number of touches | Fresh zones preferred | More touches seen as stronger |
| Shape | Zones around bases | Lines or zones at turning points |
The difference in how they treat retests is notable: support and resistance traders often see repeated tests as confirmation, while supply and demand traders see each test as using up orders. See Support and Resistance and Level Strength and Clustering.
Trading zones#
- Set and forget: place a limit order at the zone edge with a stop beyond it.
- Confirmation entry: wait for price to reach the zone and show a reaction, such as a lower timeframe change of character.
- Targets: the opposing zone or the most recent swing.
Order blocks: SMC's refinement#
Order blocks narrow the demand or supply zone to the last opposite candle before the move. The underlying logic is the same. See Order Blocks.
Common mistakes#
- Drawing zones around every pause, rather than only those with strong departures.
- Trading zones against a strong trend.
- Ignoring that zones fail; always use a stop.
- Drawing zones too wide, which makes the stop distance impractical.
Frequently asked questions#
What is a demand zone?#
A price area, usually a small base, from which price rallied strongly, suggesting buyers left unfilled orders that may cause a reaction on return.
Are fresh zones better?#
Many supply and demand traders believe fresh, untested zones are strongest because their orders have not yet been used up.
What is the difference between supply and demand zones and order blocks?#
Order blocks are a narrower definition: the last opposite candle before a strong move. Supply and demand zones cover the whole base.
Next, learn the method that inspired much of this thinking: the Wyckoff Method.
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Mentioned in
- Change of CharacterPrice Action