Identify Supply & Demand Zones

How to Identify Supply & Demand Zones?

To identify supply and demand zones on a price chart, we look for big explosive moves that are represented by large bearish or bullish candles.

As we can see on the chart below:

- When demand exceeds supply, price rallies creating big green candles.

- When supply exceeds demand, price drops down with big red candles.

These price movements are telling us where the imbalance is located on the chart. These explosive price candles are known as ERC (Extended Range Candle).

There are 3 steps to properly identify supply and demand zones:

Step 1: Identify Current Price

We start at the current price then we look to the left until we find a big strong move up (for supply zones) or down (for demand zones).

Step 2: Look to the Left to find ERCs

In the second step, we look left from the current price to find ERCs. These candles have a large body with small or no wicks. The size of the body represents more than half of the candle’s range.

If the body’s length equals the length of the wicks, it is not an ERC.

Step 3: Origin of the Move

The third and last step consists of identifying the origin of the big move in price. This origin will form the base of the supply zone. The base is what we need to draw the zone.

In this example, we start at the current price and we look left to identify an explosive move either up or down. The explosive move on this chart is represented by the big bearish candles (ERCs) forming a drop-base-drop pattern.

Then we identify the origin of this bearish move to draw our supply zone around the basing structure.

Same thing for the demand zone. We start at the current price and look left to identify ERC candles. The next step is to identify the origin of the move to draw our demand zone around the basing structure.