Supply and demand trading looks for the price areas where large orders entered the market and caused a sharp move. The idea is that some of those orders may remain unfilled, so price often reacts when it returns to the area.
How a zone forms
A demand zone is a small base of candles (a pause) followed by a strong, fast move up. The base is the zone: buyers overwhelmed sellers there. A supply zone is a base followed by a strong move down.
What makes a good zone
- A strong departure: big candles leaving the base, ideally breaking a previous high or low.
- A short base: one to four candles. Long consolidations are weaker.
- Fresh: price has not returned to it yet. Each revisit consumes orders.
- In line with the higher-timeframe trend.
Trading the zone
- Draw the zone from the base's highest body to its lowest wick (for demand).
- Place a limit order at the top of the demand zone, or wait for a rejection candle inside it.
- Stop a few pips below the zone.
- Target the next opposite zone or at least 2R.
Mistakes to avoid
- Marking every small pause as a zone.
- Trading zones that have already been tested several times.
- Buying demand zones in a strong downtrend.