Supply and demand zones

How to draw a zone

1. Find the sharp move. Look for several large candles leaving an area quickly, ideally breaking a recent high or low on the way. A slow drift away doesn't count.
2. Find the base. The base is the one to three small candles just before the move, where price paused. If there is no pause, use the candle the move turned on.
3. Draw two lines. The proximal line is the edge of the base nearest current price; the distal line is the far edge, taken from the extreme wick. For demand, the proximal line is the top of the base and the distal line its lowest low.

The move before the base tells you the pattern. Drop, base, rally or rally, base, rally make a demand zone. Rally, base, drop or drop, base, drop make a supply zone. The first two of each pair are reversals; the second are continuations of a trend that paused.

What traders disagree on

• The proximal line. Some draw it at the top of the base's candle bodies, others at the top of the wicks. Bodies give a narrower zone and a tighter stop; wicks get filled more often.
• Fresh or tested. Many trade only fresh zones, ones price hasn't returned to. Others accept a second or third touch.
• How strong the move must be. Some want the move to break structure; others accept any fast move away.
• Zone or order block. Smart-money traders often narrow a demand zone to its order block, the last down candle in the base. Same idea, smaller box.

StraviFX's glossary uses the plain definition above. This page draws the distal line from the wick and counts a zone as broken only when a candle closes beyond it, the same close rule the rest of the glossary uses. Pick your own version of the rest and keep it fixed, so your journal can show whether it works.

A worked example

A 1-hour gold (XAU/USD) chart. The prices are an illustration, not real data.

• The zone: gold drops, pauses for three small candles, then rallies hard to 4,048, breaking the last lower high. The base's candle bodies top out at 4,020 (proximal line) and its lowest wick is 4,013 (distal line). The zone is fresh.
• The trade idea: a buy limit at 4,020, with the stop at 4,010, $3 below the distal line. That is a $10 stop. The target is the high at 4,048, $28 away: a 1:2.8 risk-to-reward.
• The size: one standard lot of gold is 100 ounces, so a $10 move is $1,000 per lot. On a $2,000 account risking 1% ($20), that is 0.02 lots, risking $20.

Buy at the middle of the zone instead, 4,016.50, and the stop shrinks to $6.50 and the ratio grows to about 1:4.8, but price may never trade that deep and you miss the trade. A close below 4,013 ends the zone either way. The lot size calculator handles gold and works out the size for any stop.

Why it matters

A zone turns "price might bounce around here" into two numbers: where to enter and where you're wrong. That is what a stop loss and a lot size need. It also keeps you from buying in the middle of nowhere: if price isn't at a zone, there is often no trade yet.

Common mistakes

• Zones everywhere. Marking every pause gives you a zone at every price, which means none of them tells you anything. Keep the ones with a sharp move away.
• Boxes that are too wide. A wide zone means a wide stop and a small position. If the base is huge, look for a tighter one on a lower timeframe or skip it.
• Trading against the bigger trend. Demand zones in a downtrend fail more often than the chart makes them look. Check market structure on the higher timeframe first.
• Using a broken zone. Once a candle closes beyond the distal line, the zone is gone. It may now work the other way, as a retest from the other side.
• The stop on the line. Price often wicks to the distal line exactly. Leave a little room beyond it.

Questions

Supply and demand in the app

The StraviFX glossary defines supply and demand zones so you can follow any reading that mentions one, and every term in an analysis links to its definition. An analysis gives an entry zone, a stop and two targets from the chart's structure; on Premium's extended analysis the stop goes just beyond the swing point or order block that would prove the idea wrong, and each target must offer at least 1.5 and 2 times the risk. The decision stays with you.

Related terms

• Market structure: The sequence of swing highs and lows a market prints: rising is bullish, falling is bearish, neither is a range.
• Break of Structure (BOS): A candle close beyond the last swing high or low in the direction of the trend. It signals continuation.
• Change of Character (CHoCH): The first break against the trend: an uptrend closing below its last higher low, or a downtrend above its last lower high.
• Market Structure Shift (MSS): The confirmed flip that can follow a CHoCH: a failed swing in the old direction, then a close beyond the next swing.
• Swing high / swing low: A candle whose high is above its neighbours, or whose low is below them. The pivots every structure reading is measured from.
• Higher highs / higher lows: The four swing labels (HH, HL, LH, LL) and what each combination says: uptrend, downtrend or range.
• Range / consolidation: Price moving between a ceiling and a floor with no new highs or lows beyond them. A reason to wait, or to trade the edges.
• Retest: Price coming back to a level it has just closed beyond, to see whether the level now holds from the other side.
• Liquidity: Resting orders, mostly stop losses, that pool just beyond obvious highs, lows and round numbers. Price is often drawn toward them.
• Liquidity sweep / stop hunt: A push past an obvious high or low that triggers the stops there, then closes back inside. A close beyond is a breakout.
• Buy-side / sell-side liquidity: Buy orders resting above price (BSL) and sell orders resting below it (SSL). The pools a move is likely to travel toward.
• Equal highs / equal lows: Two or more highs or lows at nearly the same price. A flat edge that collects stops, so a common sweep target.
• Order block (OB): The last opposing candle before a strong move away. A zone price may return to, with the stop just beyond it.
• Fair Value Gap (FVG): A three-candle gap where candle 1's high and candle 3's low don't overlap. Traded through fast, so often revisited.
• Breaker block: A failed order block that price closes through, then returns to from the other side, where it can act the opposite way.
• Mitigation block: A failed order block after a swing that fell short. Price breaks it, then returns from the other side as trapped traders exit.
• Premium / discount: A range split at its 50% midpoint, equilibrium. Buy in the discount half, sell in the premium half.
• Optimal Trade Entry (OTE): The 62–79% pullback of the last impulse leg. A deep entry that keeps the stop close and the target far.
• Entry: The price a trade opens at: market, limit or stop. With the stop and target fixed, it sets the risk and the reward.
• Stop loss: An order that closes the trade at a set price to cap the loss. It goes where the idea is proven wrong, plus a buffer.

See every term in the trading glossary.