How to Identify Supply and Demand Zones
So, how we identify the major types of supply and demand formations. As pointed out above, you need to follow the three steps in order to identify the supply and demand zones.
• Look at the chart and try to spot successive large successive candles.
• Establish the base
• Draw the zone
As already outlined, it is hard to draw a precise zone- it takes time and practice to be able to spot those areas. What you need to do is just follow the rules and practice enough until you feel confident in drawing these levels.
Don’t forget that this is how everyone else using those levels successfully has learnt it. After a while, it will become natural and you will be able to spot them quickly. Let’s check a few other examples of supply and demand zones now.
The first example is a 4H chart of the USDCAD:
It is important to note here that a demand/supply zones can and often is including the tails of the candles. As you can see from the demand zone above, there is a large lower tail that is included in the zone.
The next image is taken from the daily chart of the AUDUSD. As you can see, this is a typical UpBaseUp (UBU) pattern.
The next setup is taken from the Daily chart of the USDCAD. In it, you can see a typical DownBaseDown (DBD) pattern.
Entry, Stop Loss and Take Profit
For the sake of showing those levels, let’s first use an example.
In the image above, you can see the supply and demand trading rules. This is just one way you can trade with supply and demand zones. Different traders will have different rules, but what is important to note here is that you should always be aiming at higher rewards than the risk taken.
In the example above, the ratio is 1:3. The entry is usually the middle of the supply or demand zone. The stop is usually 5-10 pips below the demand zone, as indicated by the red line. Your target should be at least 2x or 3x your risk (as indicated by the image above).
These are just indicative parameters. In order to achieve mastery in trading, you will need to spend more time and practice than reading just a single article. If you are interested to learn more about my professional trading strategy and join the rest who did, you can get it HERE.
Example 1 of Supply and Demand
Let’s give another example of supply and demand, so it can become more clear to you.
This example is taken from the USDJPY daily chart. You can see that we have a UpBaseUp (UBU) pattern above. The demand zone is clearly defined by the upper and lower boundary.
An alternative way to approach those levels is by using another tool for confirmation or another timeframe for confluence.
Again- different traders will use different strategies, what matters in the end is your P/L.
Example 2 of Supply and Demand
In this second example, I will show the daily chart of the GBPJPY.
You can see two supply and demand zones. The demand zone is where all the big buyers are located.The supply zone is where all the big sellers are located.
You can see how fast the price is moving once it reaches one of those levels.
I can continue giving more and more examples, but in the end of the day it comes ultimately down to you to start spotting those area. You need to practice until you get the hang of it. It might take some time, but demand and supply zones are a wonderful tool for the price action trader.