Supply and demand zones

A supply zone is an area where price paused briefly and then dropped away sharply. A demand zone is the mirror image: a short pause followed by a sharp rise. What they share is that the move left the area fast and with little looking back.

The reasoning goes like this. If price left a level very quickly, one side overwhelmed the other there. When price returns to that area hours or months later, that side may step in again. It's a possibility, not a rule.

The difference from support and resistance is the angle. Support and resistance come from places price has turned many times; more touches make the level clearer. With supply and demand you look at where a move started, and the fewer times the zone has been touched, the fresher it counts. In practice the two often land on the same area.

First find the sharp move: a few long-bodied candles, small wicks, almost no pullback in between. Then look just before it. You'll usually see two or three small-bodied candles sitting close together. That pause is the zone.

An example: GBP/USD is in a downtrend. Price sits between 1.2710 and 1.2728 for three small candles, then falls to 1.2650 in four. You draw the supply zone from the lowest body of the pause to its highest wick: 1.2710 to 1.2728, an 18-pip box.

When price later corrects up and reaches 1.2715, you're inside the zone. There's no trade yet, only a place to watch. You wait for a candle that shows sellers coming back, such as one whose upper wick reaches into the zone and closes at 1.2705.

If you sell, the invalidation is clear: the top of the zone. The stop goes a little above 1.2728, at 1.2735. From an entry at 1.2705 that's 30 pips of risk; that distance is your 1R. A close above the zone means the idea that sellers were waiting there is broken.

A zone is an address, not a signal. Selling just because price reached it assumes sellers are there. Sometimes they are; sometimes the zone gets sliced through without a reaction. Without context, confirmation and a stop, a zone is just a box on the chart.

The second mistake is boxing everything. Count every small pause as a zone and price is always inside or next to one, and none of them tells you anything. Keep only zones that launched a genuinely sharp move and agree with the trend.

The third is drawing the zone too wide. An 18-pip box that becomes 60 pips stretches the stop with it. You either cut the position hard or your risk quietly grows. Limit the zone to the pause candles; don't include the sharp move itself.

Every return uses up some of a zone. If price is visiting a supply zone for the third time, some of the sell orders there were already filled on earlier visits. That's why the first return gets the most attention, but that too is a tendency, not a guarantee.

Zones against the trend are weak. Inside a strong rally, supply zones above are pauses, not stops. A supply zone in a downtrend points the same way as the structure, which is why it reads better.

Around news, zones lose meaning for a while: a big release can push through a zone in one candle and come back. And check the timeframe. A fresh supply zone on M5 that sits inside an H4 demand zone gives you two readings that disagree, and the bigger chart usually wins.