Module 6
Module 6: Supply and Demand Zones
Supply and demand zones go deeper than traditional support and resistance by focusing on where institutional orders created imbalances that moved price significantly.[^16][^7]
What Creates Supply and Demand Zones?
When institutions (banks, hedge funds, large asset managers) place massive orders, they cannot fill them all at once. This creates price imbalances—areas where demand significantly exceeded supply (demand zones) or supply significantly exceeded demand (supply zones). Price is expected to react when it returns to these zones because unfilled institutional orders may still reside there.[^7]
Identifying Demand Zones
A demand zone forms when there is a strong upward price departure from a consolidation or basing area:[^7]
- Price consolidates or moves sideways (small candles, low volatility)—this is the base.
- Price explodes upward with large candles, a break of structure, and ideally high volume—this is the departure leg.
- The zone is the consolidation area that preceded the explosive move.
When price later returns to this zone, expect buyers to defend it.[^16]
Identifying Supply Zones
A supply zone forms when there is a strong downward price departure from a consolidation area:[^7]
- Price consolidates or moves sideways—the base.
- Price drops aggressively with large candles—the departure leg.
- The zone is the consolidation area before the drop.
When price returns to this zone, expect sellers to defend it.[^16]
Zone Strength Assessment
| Factor | Strong Zone | Weak Zone |
|---|---|---|
| Price Departure | Large, sharp move away from zone | Small, weak move[^17] |
| Volume | High volume on departure | Low volume |
| Freshness | Zone has never been retested | Zone tested multiple times[^17] |
| Timeframe | Appears on higher timeframe (daily, 4H) | Only on lower timeframes[^17] |
| Time at Base | Short consolidation before explosive move | Extended sideways action |
How to Trade Supply and Demand Zones
- Identify the trend using market structure (Module 2).
- Mark zones in the direction of the trend only—demand zones in uptrends, supply zones in downtrends.[^12][^10]
- Wait for price to return to the zone—do not chase price.
- Wait for confirmation at the zone: a bullish candlestick rejection at demand (hammer, bullish engulfing), or a bearish rejection at supply (shooting star, bearish engulfing).[^16]
- Enter the trade after confirmation.
- Place stop-loss just beyond the zone boundary.
- Set take-profit at the next opposing zone or swing high/low.[^10]
- Ensure minimum risk-to-reward of 2.5:1 or 3:1.[^11][^10]
Checkpoint Quiz
Quick self-check to lock in the concepts from this module.
Quiz coming soon.