How To Draw Supply & Demand Zones – The Right Way!
There are two major components of a Supply or Demand zone – the Impulse Move and the Base.To get more news about Forex, you can visit wikifx.com official website.
Contrary to popular opinion, the Impulse Move is what defines the zone. Without an Impulse, there is no zone – just an area of consolidation!
What do I mean by that？ Well, lets take a look…
In the diagram below, we can see two representations of a move out of a base.
The (imaginary) market makes a fast, impulsive move out of the first base. The market doesnt look back – it shoots straight up, caused by an imbalance of buyers vs. sellers. This impulsive move confirms that the base IS indeed a Demand Zone.
The second illustration represents a market that moves slowly out of a base, making numerous “back and forth” retests. This is not a Demand Zone and will very likely fail if the market comes back to the base again.
In summary, its always the Impulse that defines the zone, and defining the base has secondary importance.
Once you understand this concept, youll find yourself looking for impulses on a chart first. I havent drawn the zones yet, because I want you to notice the fast impulse moves identified on the chart below. Notice how quickly the market moved up or down at the areas marked by arrows. The moves occurred in a short period of time, using a small number of candlebars and minimal (or zero) retraces:
Once we have identified a fast impulse move, it becomes a lot easier to find the base of the zone.
Heres the Supply and Demand zones associated with those impulse moves. You can see the edge of the zone starts exactly where the market shot up or down.
Note, that we‘ve kept it real here, by including zones that both worked and failed.To sway the odds of a successful zone further in your favor, you’ll need to learn about market structure, price action and filters that I teach in my courses as advanced topics. But let‘s attack this one step at a time… Rome wasn’t built in a day and for now, I want you to concentrate on learning the basic building blocks of my trading strategy.Drawing Supply Zones
Were going to zoom in to one of those zones and see how the upper and lower bounds of the zone are drawn.
In the Supply Zone on the EURUSD chart below, the lower bound is the exact point the market dropped very quickly out of that small range.
The upper bound always uses the highest candle wick of the range.
Finally, when the market retraces to the zone, we can enter a short trade with a stoploss above the zone.
In the chart below, I‘ve marked a Demand Zone. This time, there are a few more candles to mark a distinct base. However, the method for drawing the zone doesn’t change.
The fast impulse move away, marks the top bound of the Demand Zone and the lowest candle wick marks the lower bound.
When the market returns to the zone, we can buy (go long) the market with a stoploss below the zone.