How to Draw Supply and Demand Zone

How to Draw Supply Zone

In order to locate a supply zone, we need to find a nice strong drop in price or a group of bearish candles. The chart below shows how the price left the base (figure 28). The price has rallied up, paused for a little time forming a consolidation structure (base), then the price dropped from the base with very long bearish candles. This is a supply zone with a rally-base-drop type of structure.

As we know, we have two types of supply structures: rally-base-drop (RBD) and drop-base-drop (DBD). Once we identify these structures on a chart, the next step is to look at the base structure. The structure of the base is important for us to successfully draw a supply zone. The price has to spend as little time as possible in the base to be considered as a high probability setup (figure 29). A base with a range of one to six candles is considered an excellent base structure.

To draw the supply zone, we first identify the structure (RBD or DBD), then locate the base and draw two horizontal lines, one at the top of the basing candles including the tails (wicks), and the other line at the bottom of the basing candles including only the candles’ body (figures 30 & 31).

How to Draw Demand Zone

In order to locate a demand zone, we need to find a nice rally in price or a group of bullish candles. The chart below shows how the price has dropped down, paused for a little time forming a consolidation structure (base), then the price rallied up from the base with very long bullish candles creating a demand zone (figure 32).

Once we identify the demand zone on a chart, we also look at the base structure. A base with less than six candles is considered an excellent base to use.

To draw the demand zone, we draw two horizontal lines, one line at the top of the basing candles including only the candles’ body, and the other line at the bottom of the basing candles including the tails (wicks) (figures 33 & 34).