Supply & Demand Zones are where there are price imbalances between buyers and sellers. It is by no means the same as Support & Resistance.
These zones provide excellent areas to dip buy or sell into.
Timeframes: 15m, 30m, 45m, 1hr, 2hr, 3hr, 4hr, Daily
Application: Basing candles before impulse move
Most of the time I use these basing candles, but they don't have to be specifically red or green basing candles, what's most important is the impulse move after the basing candles
Supply (green basing candle)
Demand (red basing candle)
Here are the 4 Different Types of Supply & Demand Zones:
Supply Zones:
1) Drop Base Drop (DBD):
2) Rally Base Drop (RBD):
Demand Zones:
1) Drop Base Rally (DBR):
2) Rally Base Rally (RBR):
Using Consolidation Areas:
There are also many instances where I use the entire consolidation zones as my Supply and Demand Zones especially for Small caps stocks:
Supply based on consolidation area
Demand based on consolidation area
Using Candlesticks & Price Action to determine the probability of bouncing/rejecting off Demand & Supply Zones:
The important factor in determining if these zones are VALID is by looking at how the candles respond when coming into the zones. What I usually look for are Wicks that occurs and rejects these zones:
Supply:
Demand
The effectiveness & strength of a zone is based on the amount of time spent in the zone.
Strong zones are reflected by how quickly they tap the zone and leave.
The zones that have price spending too much time lingering in it before leaving, are the weak zones that will eventually get breached. Below is a figure that visualizes what was said here.
source: https://dotnettutorials.net/lesson/how-to-trade-with-supply-and-demand-zone
Strong Zones:
Weak Zones:
How to know if zones are gonna be breached
Using Price Action & Candlesticks formation will help us determine if our zones will be breached. Price forming Higher Highs & Higher Lows in Supply, Lower Highs & Lower Lows in Demand likely lead to failure.
The (X Mark) is a representation of the build-up and price action leading to the failure of both zones.
(What to look out for) Indicates what is needed to happen and noted in order for both zones to be respected and bounce/reject for a higher probability trade.
Multiple Test of Zones:
The more times the zones get tested, the weaker it gets. This is because every time price comes back into that zone, the price imbalance and existing orders get eaten away. The best setups are those zones that have been untested and when it reaches that zones, taps it and that's where you should buy & sell.
The reason why Supply Zones Turn Demand and vice versa:
Sellers/Shorts caused a price imbalance. However, once these zones are taken out, those shorts that are underwater will want to get out for breakeven/losses when it dips back into the supply zone, which in turn becomes a buyer and increases buying pressure and results in supply turning into demand zones.
Symmetrical Supply zones that have been tested multiple times (rejected) attracts shorts and also clearly reflects that there is strong selling pressure currently present.
However, once price has sliced through it, it is very likely to flip to a demand zone. This can also be said for demand zones.
Such an example is $VRPX where the Supply zone was tested on 2 occasions & respected (look at the upper rejection wicks) and when it sliced through, it dipped back down with a lower wick rejection before continuing up.
And then we have the issue whereby these flipped zones do not hold as much weight as compared to those zones that are created due to demand and supply imbalances.
The zones which are respected, profitable, and likely to bounce/reject off are the ones that are created from proper imbalances as they have huge existing orders not yet filled as compared to the 1st thesis that longs/shorts are underwater & trapped.
When trading Supply/Demand Flipped zones do not add in too much size as it is not an A+ Setup, as compared to zones where it is created of concrete price imbalance.
In summary, supply & demand offers a extremely good strategy to be profitable. One must be able to recognize the impulse move before drawing their zones. My own strategy consist of supply & demand, support and resistance and several other indicators. A trader must also be versatile and recognize price action, volume and candlestick to see if their zones are respected.
Here is a video lesson I did on S/D zones a while back: https://www.youtube.com/watch?v=1UjXCYLOByY&t=3438s
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