Supply & Demand Trading
Trade From the Source of Price Movement
Introduction: What Is Supply & Demand Trading?
Every price movement in every market begins at a single point: the moment when the balance between buyers and sellers becomes overwhelmingly unequal. Supply and Demand trading is the discipline of identifying those exact price levels where institutional participants — banks, hedge funds, pension funds, and central banks — placed orders so massive that they could not be filled in a single pass. When price returns to these levels, the remaining unfilled orders activate, and price reacts again.
This methodology was popularized by Sam Seiden, a former floor trader at the Chicago Mercantile Exchange. Seiden observed firsthand how institutional order flow moved markets. He watched as billion-dollar orders from banks and funds were placed at specific price levels, and he saw what happened when price returned to those levels days, weeks, or even months later: the unfilled portions of those orders would trigger, pushing price in the same direction as the original move.
The core principle is deceptively simple: price moves away from a level because of an imbalance between buyers and sellers, and when price returns to that level, the same imbalance is likely still present. The orders that caused the original move did not all get filled. They are sitting there, waiting.
Why Traditional Support & Resistance Falls Short
Most traders learn support and resistance as their first technical concept. They draw horizontal lines at previous highs and lows and wait for price to "bounce" off them. This approach has three fundamental problems:
1. Lines are not zones. Price does not react to a single pixel on a chart. Institutional orders are clustered across a price range. A single line fails to capture the depth of the order cluster.
2. Support and resistance relies on subjective placement. Ask ten traders to draw S/R levels on the same chart and you will get ten different answers. Supply and demand zones are derived from specific, identifiable price action patterns that leave far less room for interpretation.
3. Traditional S/R does not account for unfilled orders. A "support level" that has been tested five times is considered "strong" in classical analysis. In supply and demand methodology, a zone that has been tested five times is considered depleted — the orders have been consumed. Fresh, untested zones are the strongest.
| Feature | Traditional Support/Resistance | Supply & Demand Zones |
|---|---|---|
| Visualization | Thin horizontal lines | Price zones with width (proximal + distal lines) |
| Derivation | Previous highs and lows | Specific base formations before explosive moves |
| Freshness | More tests = "stronger" | More tests = weaker (orders consumed) |
| Precision | Subjective line placement | Defined by base candle range |
| Foundation | Pattern observation | Institutional order flow mechanics |
| Time decay | Lines last indefinitely | Zones lose potency after being tested |
The Institutional Order Flow Foundation
To understand why supply and demand zones work, you need to understand how institutions execute orders. When a bank wants to buy $500 million worth of a currency pair, they cannot simply place a market order. Doing so would cause massive slippage and move the price against them before they finish filling. Instead, they use limit orders at specific price levels, often breaking the order into smaller pieces across a range.
Here is what happens:
INSTITUTIONAL ORDER EXECUTION:
1. Bank wants to BUY $500M of EUR/USD at 1.0800
2. They place limit buy orders across a zone: 1.0790 - 1.0810
3. Price arrives at the zone, orders begin filling
4. But only $200M gets filled before price rockets upward
5. $300M in unfilled buy orders REMAIN at 1.0790 - 1.0810
6. When price returns to this zone = remaining orders trigger
7. Price rockets upward AGAIN from the same zone
Price
^
| /\
| / \ /
| / \ /
| / \ / <-- Second departure (remaining orders)
| / \ /
| / \ /
| / * <-- Price returns to zone
| /
| * <-- First departure ($200M filled, $300M remaining)
|/________________ DEMAND ZONE [1.0790 - 1.0810] ___
|
+-------------------------------------------------> Time
This is the fundamental mechanism. You are not trading a pattern or an indicator signal. You are trading the footprint left behind by institutional money.
Supply & Demand Basics
What Creates a Demand Zone?
A demand zone forms when there are significantly more buyers than sellers at a specific price level. The key characteristics:
- Institutional buy orders are clustered at a price range
- Price spends very little time at the level before exploding upward
- The speed and strength of the departure indicates the degree of imbalance
- Not all orders were filled during the initial visit, leaving unfilled buy orders waiting
Demand Zone = A price range where institutional buyers overwhelmed sellers, and unfilled buy orders remain.
DEMAND ZONE FORMATION:
Price
^
| /
| /
| / <-- Strong explosive move UP
| / (indicates massive buy imbalance)
| /
| _____|
| | | <-- Brief consolidation (BASE)
| |_____| This IS the demand zone
| \
| \
| \ <-- Price was falling
|
+-------------------------------------------------> Time
What Creates a Supply Zone?
A supply zone forms when there are significantly more sellers than buyers at a specific price level. The characteristics mirror demand zones:
- Institutional sell orders are clustered at a price range
- Price spends very little time at the level before crashing downward
- The speed and strength of the departure indicates the degree of imbalance
- Unfilled sell orders remain waiting at the zone
Supply Zone = A price range where institutional sellers overwhelmed buyers, and unfilled sell orders remain.
SUPPLY ZONE FORMATION:
Price
^
| \
| \ <-- Price was rising
| ________|
| | | <-- Brief consolidation (BASE)
| |________| This IS the supply zone
| \
| \
| \ <-- Strong explosive move DOWN
| \ (indicates massive sell imbalance)
| \
|
+-------------------------------------------------> Time
Why Zones Work: The Unfilled Order Mechanism
The persistence of supply and demand zones is explained by a single concept: unfilled institutional orders do not disappear. When a bank places a limit order to buy at a specific price and that order does not get completely filled, the remaining order stays active on the order book (or is programmed to reactivate when price returns).
Consider this sequence:
- A hedge fund places limit buy orders totaling $1 billion across the range of 1.2500 to 1.2520
- Price drops into this range. $400 million gets filled as price briefly touches the zone
- The sheer volume of buying overwhelms sellers and price rockets upward
- $600 million in buy orders remain unfilled at 1.2500 - 1.2520
- Days later, price drops back to the zone
- The $600 million in remaining orders activate
- Buying pressure once again overwhelms sellers, and price moves up again
This is why fresh zones (never revisited) are the strongest. Each time price returns to a zone, more of the unfilled orders get consumed. After enough visits, the orders are depleted and the zone "breaks."
Supply & Demand vs. Support & Resistance: Key Differences
| Concept | Support/Resistance | Supply/Demand |
|---|---|---|
| What it represents | Price memory, psychological levels | Actual unfilled institutional orders |
| How it is drawn | Connect previous highs/lows | Identify base before explosive move |
| Shape | Single line | Zone with upper and lower boundary |
| Strength over time | "Proven" by multiple tests | Weakened by each test (orders consumed) |
| Best condition | Tested multiple times | Fresh, never tested |
| Origin | Chart pattern observation | Order flow mechanics |
| Precision | Low (where exactly is the line?) | High (zone boundaries are defined by the base) |
The Auction Market Theory Connection
Supply and demand trading aligns with Auction Market Theory (AMT), which states that markets exist to facilitate trade between buyers and sellers. Price moves in search of equilibrium — the level where buying and selling are balanced.
When price is at a level where no one wants to trade, it moves. It moves upward to find sellers (supply) or downward to find buyers (demand). The explosive moves away from supply and demand zones represent price leaving an area of imbalance and searching for equilibrium.
AUCTION MARKET THEORY + SUPPLY/DEMAND:
SUPPLY ZONE (sellers waiting)
═══════════════════════════════ <-- Price rejects here (too expensive)
^ |
| |
| v
| Price moves between
| supply and demand,
| searching for balance
| |
^ |
| v
═══════════════════════════════ <-- Price rejects here (too cheap)
DEMAND ZONE (buyers waiting)
Price oscillates between zones until one side's orders
are depleted, then price breaks through to find new
supply or demand at a different level.
The Four Zone Formation Patterns
Every supply and demand zone forms through one of four patterns. These patterns describe the price action sequence that creates the zone. Understanding them is critical for identifying zones in real time.
The four patterns use three price action components:
- Rally = Price moving upward
- Drop = Price moving downward
- Base = Brief consolidation or pause (this becomes the zone)
Pattern 1: Rally-Base-Rally (RBR) — Continuation Demand Zone
What it is: Price is rallying, pauses briefly to form a base, then continues rallying. The base is a demand zone because institutional buyers added to their positions during the pause.
When it forms: During an uptrend, as institutions accumulate more at a consolidation point.
Zone type: Demand (buy zone) — look for long entries when price returns.
RALLY-BASE-RALLY (RBR):
Price
^
| /
| /
| / RALLY (continuation)
| /
| /
| ______|
| | | <-- BASE = DEMAND ZONE
| |______|
| /
| /
| / RALLY (initial move up)
| /
| /
|
+-------------------------------------------------> Time
WHAT HAPPENED:
- Price was rallying (institutions buying)
- Institutions paused to accumulate more (base)
- Not all buy orders filled during the base
- Price continued rallying
- When price returns to the base = remaining orders trigger
Key identification features:
- The base should be narrow (few candles, tight range)
- Both rallies should be strong (large-bodied candles, little overlap)
- The continuation rally should be at least as strong as the initial rally
Pattern 2: Drop-Base-Drop (DBD) — Continuation Supply Zone
What it is: Price is dropping, pauses briefly to form a base, then continues dropping. The base is a supply zone because institutional sellers added to their short positions during the pause.
When it forms: During a downtrend, as institutions distribute more at a consolidation point.
Zone type: Supply (sell zone) — look for short entries when price returns.
DROP-BASE-DROP (DBD):
Price
^
|
| \
| \
| \ DROP (initial move down)
| \
| \
| |______|
| | | <-- BASE = SUPPLY ZONE
| |______|
| \
| \
| \ DROP (continuation)
| \
| \
|
+-------------------------------------------------> Time
WHAT HAPPENED:
- Price was dropping (institutions selling)
- Institutions paused to distribute more (base)
- Not all sell orders filled during the base
- Price continued dropping
- When price returns to the base = remaining sell orders trigger
Key identification features:
- The base should be narrow (few candles, tight range)
- Both drops should be strong (large-bodied bearish candles)
- The continuation drop should be at least as strong as the initial drop
Pattern 3: Drop-Base-Rally (DBR) — Reversal Demand Zone
What it is: Price is dropping, pauses briefly to form a base, then reverses into a rally. The base is a demand zone because this is where institutional buyers stepped in to reverse the trend.
When it forms: At market bottoms and trend reversal points. This is often the most powerful demand zone type.
Zone type: Demand (buy zone) — look for long entries when price returns.
DROP-BASE-RALLY (DBR):
Price
^
| /
| /
| /
| / RALLY (reversal move up)
| /
| /
| ______|
| | | <-- BASE = DEMAND ZONE
| |______| (REVERSAL - strongest type)
| /
| /
| /
| / DROP (prior move down)
| /
|
+-------------------------------------------------> Time
WHAT HAPPENED:
- Price was dropping (sellers in control)
- Institutional buyers stepped in HARD (base forms)
- Buying overwhelmed selling, reversing the trend
- Not all buy orders were filled
- When price returns to the base = massive buying resumes
Key identification features:
- The drop into the base should show momentum exhaustion (wicks, decreasing candle size)
- The rally out of the base should be explosive (large candles, little to no pullback)
- Reversal zones are strongest when they form at higher timeframe support levels
Pattern 4: Rally-Base-Drop (RBD) — Reversal Supply Zone
What it is: Price is rallying, pauses briefly to form a base, then reverses into a drop. The base is a supply zone because this is where institutional sellers stepped in to reverse the trend.
When it forms: At market tops and trend reversal points. This is often the most powerful supply zone type.
Zone type: Supply (sell zone) — look for short entries when price returns.
RALLY-BASE-DROP (RBD):
Price
^
|
| \
| \
| \
| \ DROP (reversal move down)
| \
| \
| |______|
| | | <-- BASE = SUPPLY ZONE
| |______| (REVERSAL - strongest type)
| \
| \
| \
| \ RALLY (prior move up)
| \
|
+-------------------------------------------------> Time
WHAT HAPPENED:
- Price was rallying (buyers in control)
- Institutional sellers stepped in HARD (base forms)
- Selling overwhelmed buying, reversing the trend
- Not all sell orders were filled
- When price returns to the base = massive selling resumes
Key identification features:
- The rally into the base should show momentum exhaustion (wicks, decreasing candle size)
- The drop out of the base should be explosive (large bearish candles, little to no pullback)
- Reversal zones are strongest when they form at higher timeframe resistance levels
Four Patterns Summary Table
| Pattern | Type | Zone | Trend Context | Strength |
|---|---|---|---|---|
| RBR (Rally-Base-Rally) | Continuation | Demand (buy) | Uptrend | Good |
| DBD (Drop-Base-Drop) | Continuation | Supply (sell) | Downtrend | Good |
| DBR (Drop-Base-Rally) | Reversal | Demand (buy) | Bottom/Reversal | Strongest |
| RBD (Rally-Base-Drop) | Reversal | Supply (sell) | Top/Reversal | Strongest |
Why reversal zones are stronger than continuation zones: Reversal zones represent a fundamental shift in institutional positioning. At a DBR, institutions did not just add to existing long positions — they overpowered the entire selling trend. This requires significantly more capital and conviction, meaning more unfilled orders remain.
How to Draw Supply & Demand Zones
Drawing zones correctly is one of the most important skills in this methodology. A poorly drawn zone will lead to missed entries or premature stops. Follow these steps precisely.
Step 1: Find the Explosive Move (Displacement)
The first thing you look for is NOT the zone itself — it is the displacement. A displacement is a strong, aggressive price move characterized by:
- Large-bodied candles with small or no wicks
- Little to no overlap between consecutive candles
- Clear directional intent — price is moving with purpose
- Often accompanied by increased volume
DISPLACEMENT IDENTIFICATION:
WEAK MOVE (NOT displacement): STRONG MOVE (IS displacement):
/\ /\ /\ |
/ \/ \/ \ |
/ overlap \ | Large candle bodies
choppy | Minimal wicks
| No overlap
|
|
|
If there is no displacement, there is no zone. The explosive move is the evidence that an imbalance existed. Without it, you are just looking at random consolidation.
Step 2: Identify the Base (Consolidation Before the Move)
Once you have found the displacement, trace back to find where price consolidated immediately before the explosive move. This consolidation is the base, and it has specific characteristics:
- 1 to 5 candles typically (the fewer, the better)
- Small range relative to the displacement candles
- Can contain doji candles, spinning tops, or small-bodied candles
- The base is where the institutional orders were placed
IDENTIFYING THE BASE:
Price
^
| |
| | <-- Displacement (explosive move)
| |
| _____|
| | . . | <-- BASE: Small candles, tight range
| |. . .| 1-5 candles, dojis/spinning tops
| |_____|
| /
| / <-- Prior move into the base
| /
|
+-------------------------------------------------> Time
The BASE is where institutional orders sit.
The DISPLACEMENT is proof those orders existed.
Step 3: Draw the Zone From the Base
The zone boundaries are defined by the extreme candle(s) of the base:
- Proximal line: The edge of the zone closest to current price (where price will arrive first when returning)
- Distal line: The edge of the zone furthest from current price (beyond this = zone broken)
For a demand zone (base before an upward move):
- Proximal line = top of the base (highest body of base candles)
- Distal line = bottom of the base (lowest wick of base candles)
For a supply zone (base before a downward move):
- Proximal line = bottom of the base (lowest body of base candles)
- Distal line = top of the base (highest wick of base candles)
DEMAND ZONE DRAWING:
Price
^
| |
| | Displacement UP
| |
| - - - - - - - - - - - - - - PROXIMAL LINE (top of base bodies)
| | .H. |
| |. .L.| <-- ZONE (shaded area between the lines)
| | . . |
| - - - - - - - - - - - - - - DISTAL LINE (bottom of base wicks)
| /
| /
|
+--------|------|---------------------------------> Time
SUPPLY ZONE DRAWING:
Price
^
| \
| \
| - - - - - - - - - - - - - - DISTAL LINE (top of base wicks)
| | . . |
| |. H..| <-- ZONE (shaded area between the lines)
| | .L. |
| - - - - - - - - - - - - - - PROXIMAL LINE (bottom of base bodies)
| |
| | Displacement DOWN
| |
|
+--------|------|---------------------------------> Time
Zone Drawing Rules Summary
| Rule | Demand Zone | Supply Zone |
|---|---|---|
| Proximal line | Top of base candle bodies | Bottom of base candle bodies |
| Distal line | Bottom of base candle wicks | Top of base candle wicks |
| Include wicks? | Yes, wicks define the distal line | Yes, wicks define the distal line |
| Number of base candles | Use the entire base (1-5 candles) | Use the entire base (1-5 candles) |
| Stop loss goes | Below the distal line | Above the distal line |
Complete Zone Drawing Example
Here is a complete example showing how to identify and draw a demand zone step by step:
COMPLETE DEMAND ZONE EXAMPLE:
Step 1: Spot the displacement (explosive move up)
Step 2: Trace back to the base
Step 3: Draw lines at base boundaries
Price
^
| /
| / STEP 1: This explosive move
| / tells you a zone exists below
| /
| /
| /
| ════════════════════════ PROXIMAL (top of base bodies)
| ┌─────┐
| │ D │ Base STEP 2: These 2 small candles
| │ O │ Zone are the base (the zone)
| │ J │
| │ I │
| ════════════════════════ DISTAL (bottom of base wicks)
| /
| /
| / STEP 3: Zone = rectangle from
| / proximal to distal line
| /
|
+-------------------------------------------------> Time
LATER, when price returns to this zone:
| \
| \ Price dropping back toward zone
| \
| ════════════════════════ PROXIMAL <-- Price touches here
| ┌─────┐
| │ZONE │ BUY HERE (entry at proximal)
| │ │ STOP below distal line
| ════════════════════════ DISTAL
| /
| / Price bounces from zone
| / (unfilled orders activated)
|
+-------------------------------------------------> Time
Zone Quality Assessment
Not all zones are created equal. A disciplined supply and demand trader grades every zone before considering a trade. This section provides a systematic framework for evaluating zone quality.
Factor 1: Freshness
Freshness is the single most important quality factor. A fresh zone has never been revisited by price since it was created.
| Freshness Level | Description | Trading Action |
|---|---|---|
| Fresh | Price has NEVER returned to the zone since creation | Highest probability — trade with confidence |
| Tested once | Price returned once but respected the zone | Moderate probability — trade with caution |
| Tested twice | Price returned twice | Low probability — orders are being consumed |
| Broken | Price traded through the zone | Zone is dead — remove from chart |
ZONE FRESHNESS LEVELS:
FRESH (Best): TESTED ONCE: BROKEN (Remove):
/\ /\ /\ /\
/ \ / \ / \ / \
/ \ / \ / \ / \
=========== =========== \ ===========
| ZONE | | ZONE | \ | ZONE |
=========== =========== \ ===========
^ |
| Price went
Tested once, straight through
zone held = zone depleted
Why fresh zones are strongest: If price created a zone and has never returned, then 100% of the unfilled orders are still sitting there. Each return to the zone consumes some orders. After enough visits, the orders are depleted and the zone fails.
Factor 2: Strength of Departure
The strength of departure measures how explosively price left the zone. A stronger departure indicates a larger imbalance — meaning more unfilled orders remain.
| Departure Quality | Description | Score |
|---|---|---|
| Explosive | Multiple large-bodied candles, no overlap, extended move | 5/5 |
| Strong | Large-bodied candles with minor pullbacks | 4/5 |
| Moderate | Mix of large and small candles | 3/5 |
| Weak | Small candles, lots of overlap, grinding move | 2/5 |
| Failed | Price barely moved away before returning | 1/5 — skip |
DEPARTURE STRENGTH COMPARISON:
EXPLOSIVE (5/5): WEAK (2/5):
| /\
| / \ /\
| / \/ \
| / overlap \
| Huge gap, large choppy, slow
| candles, no overlap
|
========= =========
| ZONE | | ZONE |
========= =========
Factor 3: Time Spent at the Zone
Less time at the zone = stronger zone. If price spent a long time consolidating at the zone, it means orders were being filled gradually. If price barely paused before exploding away, it means orders overwhelmed the market so quickly that most remained unfilled.
| Time at Zone | Quality | Reasoning |
|---|---|---|
| 1-2 candles | Excellent | Orders so large that price could barely pause |
| 3-4 candles | Good | Normal institutional accumulation/distribution |
| 5-8 candles | Moderate | Some order filling occurred — zone is partially consumed |
| 9+ candles | Poor | Extended consolidation = most orders filled already |
Factor 4: Distance Traveled From the Zone
After price departs the zone, how far does it travel before the next significant pullback? Greater distance indicates a larger unfilled order footprint.
| Distance | Quality | Reasoning |
|---|---|---|
| 3x+ the zone width | Excellent | Massive imbalance — huge unfilled orders |
| 2-3x the zone width | Good | Significant imbalance |
| 1-2x the zone width | Moderate | Decent imbalance |
| Less than 1x zone width | Poor | Weak imbalance — avoid |
Zone Quality Scoring System
Use this scoring table to grade every zone before trading it. Only trade zones scoring 14 or higher out of 20.
| Factor | Weight | 5 Points | 3 Points | 1 Point |
|---|---|---|---|---|
| Freshness | x1 | Fresh (never tested) | Tested once | Tested 2+ times |
| Departure Strength | x1 | Explosive, multi-candle | Moderate, clear move | Weak, grinding |
| Time at Zone | x1 | 1-2 candles | 3-5 candles | 6+ candles |
| Distance Traveled | x1 | 3x+ zone width | 1.5-3x zone width | Less than 1.5x |
Example scoring:
| Zone | Freshness | Departure | Time | Distance | Total | Trade? |
|---|---|---|---|---|---|---|
| Zone A | Fresh (5) | Explosive (5) | 2 candles (5) | 4x width (5) | 20/20 | YES |
| Zone B | Fresh (5) | Strong (4) | 3 candles (4) | 2x width (3) | 16/20 | YES |
| Zone C | Tested once (3) | Moderate (3) | 5 candles (3) | 1.5x width (3) | 12/20 | NO |
| Zone D | Tested twice (1) | Weak (2) | 8 candles (1) | 1x width (1) | 5/20 | NO |
Zone Types & Timeframe Analysis
Higher Timeframe Zones vs. Lower Timeframe Zones
Not all zones carry equal weight. A demand zone on the weekly chart represents orders from institutions operating on a much larger scale than a demand zone on the 15-minute chart. The timeframe hierarchy is critical.
| Timeframe | Zone Significance | Typical Use |
|---|---|---|
| Monthly | Major institutional accumulation/distribution | Long-term bias, swing positioning |
| Weekly | Significant institutional zones | Swing trading direction, key levels |
| Daily | Primary trading zones | Core analysis timeframe |
| 4-Hour | Important intermediate zones | Swing trade entries and targets |
| 1-Hour | Refined entry/exit zones | Day trade and swing refinement |
| 15-Minute | Tactical zones | Day trade entries, zone refinement |
| 5-Minute | Micro zones | Scalping, precise entry timing |
The rule: Higher timeframe zones override lower timeframe zones. If a 15-minute supply zone sits inside a daily demand zone, the daily demand zone wins. Price is far more likely to respect the daily zone.
TIMEFRAME HIERARCHY:
Monthly Zone: ████████████████████████████████████████████
(Widest, most significant)
Weekly Zone: ██████████████████████████████
(Significant)
Daily Zone: ████████████████████
(Primary)
4H Zone: ██████████████
(Refined)
1H Zone: ████████
(Tactical)
Lower timeframe zones inside higher timeframe zones
= STRONGEST setups (nested zones)
Nested Zones: The Highest Probability Setup
A nested zone occurs when a lower timeframe zone forms inside a higher timeframe zone. This is the highest probability setup in supply and demand trading because you have institutional orders at multiple timeframe levels converging at the same price.
NESTED ZONE EXAMPLE:
══════════════════════════════════════ Daily Demand Zone (top)
║ ║
║ ════════════════════ ║
║ ║ 1H Demand Zone ║ ║ <-- NESTED: 1H zone
║ ════════════════════ ║ inside Daily zone
║ ║
══════════════════════════════════════ Daily Demand Zone (bottom)
WHY THIS IS POWERFUL:
- Daily zone: Large institutional buy orders
- 1H zone: Additional institutional buy orders
- Combined: Massive confluence of buying interest
- Entry at 1H zone: Tighter stop, better R:R
How to trade nested zones:
- Identify the higher timeframe zone (daily or weekly)
- Drop to a lower timeframe (1H or 15M)
- Look for a zone formation WITHIN the higher timeframe zone
- Enter at the lower timeframe zone boundaries
- Stop loss beyond the higher timeframe zone's distal line (or the LTF zone for tighter risk)
Curve (Trend) Analysis: Which Zones to Trade
Curve analysis is the supply and demand term for trend identification. The "curve" refers to the overall direction of price. You should only trade zones that align with the dominant curve.
| Curve Direction | Trade Demand Zones? | Trade Supply Zones? |
|---|---|---|
| Up (bullish) | YES — primary setups | Only at extreme levels |
| Down (bearish) | Only at extreme levels | YES — primary setups |
| Sideways | At range bottom only | At range top only |
CURVE ANALYSIS:
BULLISH CURVE: BEARISH CURVE:
(Trade demand zones) (Trade supply zones)
/\ /\ \ /\
/ \ / \ /\ \ / \
/ \/ \/ \ \ / \
/ \ / \ /\
/ \/ \
\
Trade HERE: Trade HERE:
═══════════ Demand zones ═══════════ Supply zones
that price is pulling that price is pulling
BACK to during uptrend BACK to during downtrend
The curve rule simplified: In an uptrend, only buy demand zones. In a downtrend, only sell supply zones. Trading against the curve drastically reduces your win rate.
Fresh vs. Tested vs. Broken Zones
Understanding zone lifecycle is essential for knowing which zones to keep on your chart and which to remove.
ZONE LIFECYCLE:
1. CREATION 2. FRESH 3. TESTED 4. BROKEN
Zone forms Zone exists, Price returned Price traded
from base untouched but respected through zone
| / /\ /\ /\ /\
| / / \ / V \ / \
═══|═══ ═══════════ ═══════════ ═══════════
|ZONE | | ZONE | | ZONE | | ZONE |
═══════ ═══════════ ═══════════ ═══|═══════
| ^ |
| Price went
Tested once through = DEAD
Orders partially
consumed
| Zone State | Action | Probability |
|---|---|---|
| Fresh | Trade it | Highest |
| Tested once | Trade with reduced size | Moderate |
| Tested twice | Remove from chart or avoid | Low |
| Broken | Delete immediately, zone is dead | None |
Entry Strategies
Once you have identified a quality zone, you need a strategy for entering the trade. There are two primary approaches, each with different risk/reward characteristics.
Strategy 1: Limit Order Entry (Aggressive — Set and Forget)
This is the purest form of supply and demand trading. You place a limit order at the zone and walk away.
For a demand zone (long entry):
- Place a buy limit order at the proximal line of the demand zone
- Stop loss below the distal line of the demand zone
- Set your target at the nearest supply zone (or opposing zone)
For a supply zone (short entry):
- Place a sell limit order at the proximal line of the supply zone
- Stop loss above the distal line of the supply zone
- Set your target at the nearest demand zone (or opposing zone)
LIMIT ORDER ENTRY — DEMAND ZONE (Long):
Price
^
| \
| \ Price approaching demand zone
| \
| ══════════\═══════════ PROXIMAL LINE
| ║ * ║ <-- BUY LIMIT ORDER here
| ║ DEMAND ZONE ║
| ║ ║
| ═════════════════════ DISTAL LINE
| [X] <-- STOP LOSS below distal
|
| Entry: Proximal line
| Stop: Below distal line
| Target: Next supply zone above
LIMIT ORDER ENTRY — SUPPLY ZONE (Short):
Price
^
| [X] <-- STOP LOSS above distal
| ═════════════════════ DISTAL LINE
| ║ ║
| ║ SUPPLY ZONE ║
| ║ * ║ <-- SELL LIMIT ORDER here
| ══════════/═══════════ PROXIMAL LINE
| /
| / Price approaching supply zone
| /
|
| Entry: Proximal line
| Stop: Above distal line
| Target: Next demand zone below
Advantages:
- Captures the maximum move from the zone
- Does not require screen time — set and forget
- Removes emotional decision-making
Disadvantages:
- Sometimes price does not reach the proximal line (misses entry)
- Sometimes the zone fails and stop is hit immediately
- No confirmation that the zone is holding
Strategy 2: Confirmation Entry (Conservative — Wait for Evidence)
Instead of blindly entering at the zone, you wait for price to arrive at the zone and then look for a confirmation signal on a lower timeframe before entering.
Confirmation signals include:
- Bullish/bearish engulfing candle at the zone
- Pin bar / hammer / shooting star at the zone
- Break of structure on a lower timeframe within the zone
- Divergence on RSI or MACD while price is in the zone
CONFIRMATION ENTRY — DEMAND ZONE:
Price
^
| \
| \
| ══════════\═══════════ PROXIMAL LINE
| ║ \ / ║
| ║ \ / * ║ <-- WAIT for bullish candle
| ║ \/ ║ THEN buy (confirmation)
| ═════════════════════ DISTAL LINE
| [X] <-- STOP below distal
|
| Step 1: Price enters zone
| Step 2: Wait for bullish reversal candle
| Step 3: Enter on close of confirmation candle
| Step 4: Stop below distal line
Advantages:
- Higher win rate (you see evidence before entering)
- Sometimes allows tighter stops (stop below confirmation candle)
- Avoids entries at zones that fail immediately
Disadvantages:
- Worse entry price (you enter further from the zone edge)
- Reduced risk:reward ratio
- Requires screen time to monitor
Strategy 3: Zone Refinement — Using LTF to Narrow the Entry
This advanced strategy combines elements of both approaches. You use a lower timeframe to find a smaller zone within the higher timeframe zone, giving you a tighter entry and better risk:reward.
ZONE REFINEMENT PROCESS:
DAILY CHART: 1-HOUR CHART (zoomed into daily zone):
══════════════════════ ══════════════════════ Daily proximal
║ ║ ║ ║
║ DAILY DEMAND ║ Zoom in ║ /\ ║
║ ZONE ║ --------> ║ / \ / ║
║ ║ ║ / \ / ║
║ ║ ║ / ══\═/════ ║
══════════════════════ ║ ║ 1H ZONE║ ║
══════════════════════ Daily distal
RESULT:
- Enter at 1H zone proximal (better entry)
- Stop below 1H zone distal (tighter stop) OR daily distal (safer)
- Same target as daily zone trade
- MUCH better risk:reward ratio
| Approach | Entry Point | Stop Loss | Typical R:R |
|---|---|---|---|
| Limit at HTF zone | HTF proximal line | Below HTF distal | 3:1 to 5:1 |
| Confirmation at HTF zone | Confirmation candle close | Below confirmation candle or HTF distal | 2:1 to 4:1 |
| LTF refinement | LTF proximal line (inside HTF zone) | Below LTF distal | 5:1 to 10:1+ |
Risk:Reward Calculation From Zones
Supply and demand zones provide natural stop loss and target levels, making risk:reward calculation straightforward.
RISK:REWARD CALCULATION:
TARGET (next supply zone) ─── ─── ─── ─── ─── Price: 1.1000
^
|
| REWARD = Target - Entry
| = 1.1000 - 1.0820
| = 180 pips
|
ENTRY (proximal line) ─── ─── ─── ─── ─── ─── Price: 1.0820
|
| RISK = Entry - Stop
| = 1.0820 - 1.0790
| = 30 pips
v
STOP (below distal line) ─── ─── ─── ─── ─── Price: 1.0790
RISK:REWARD = 180 / 30 = 6:1
RULE: Only take trades with minimum 3:1 R:R
Stop Loss & Target Rules
Proper stop loss placement and target selection are non-negotiable aspects of supply and demand trading. The zone structure gives you clear, objective levels for both.
Stop Loss Placement
The rule is simple: your stop loss goes beyond the distal line of the zone.
For demand zones (long trades): Stop loss below the distal line (the lowest wick of the base).
For supply zones (short trades): Stop loss above the distal line (the highest wick of the base).
Add a small buffer beyond the distal line (5-10 pips in forex, 0.1-0.5% in crypto/stocks) to account for spread and minor wicks.
STOP LOSS PLACEMENT:
LONG TRADE: SHORT TRADE:
═══════════════════ [X] Stop + buffer
║ DEMAND ZONE ║ ═══════════════════
═══════════════════ ║ SUPPLY ZONE ║
[X] Stop + buffer ═══════════════════
Buffer = small amount beyond distal line
- Forex: 5-10 pips
- Crypto: 0.3-0.5%
- Stocks: $0.10-0.50 depending on price
Why the distal line? If price trades through the entire zone, the institutional orders have been consumed. The zone has failed. There is no reason to stay in the trade. Placing your stop at the distal line means you exit precisely when your thesis is invalidated.
Common stop loss mistakes:
- Placing the stop IN the zone (will get hit by normal zone tests)
- Placing the stop too far beyond the zone (reduces R:R unnecessarily)
- Moving the stop closer after entry (emotional decision, not structural)
Target Selection
The primary target is the opposing zone. If you are buying from a demand zone, your target is the nearest quality supply zone above. If you are selling from a supply zone, your target is the nearest quality demand zone below.
TARGET SELECTION:
═══════════════════ SUPPLY ZONE (TARGET for longs)
║ TARGET ║
══ ═════════════════
^
|
| Trade travels from demand to supply
|
|
═══════════════════ DEMAND ZONE (ENTRY for longs)
║ ENTRY ║
═══════════════════
The distance between zones = your reward
The zone width = your risk
Reward / Risk must be >= 3:1
Target Priority Hierarchy
| Target Priority | Description | When to Use |
|---|---|---|
| 1st | Nearest opposing fresh zone | Default target |
| 2nd | Nearest opposing tested zone | If no fresh zones exist |
| 3rd | Key structural level (previous high/low) | If no clear opposing zone |
| 4th | Measured move (1:1 of displacement) | As supplementary target |
The Minimum 3:1 Risk:Reward Requirement
Never take a trade with less than 3:1 risk:reward. This rule exists because supply and demand trading does not produce a 90% win rate. A realistic win rate is 50-65%. With a 3:1 minimum R:R:
| Win Rate | Avg R:R | Result per 100 Trades (1R = $100) |
|---|---|---|
| 50% | 3:1 | 50 wins x $300 - 50 losses x $100 = +$10,000 |
| 50% | 2:1 | 50 wins x $200 - 50 losses x $100 = +$5,000 |
| 50% | 1:1 | 50 wins x $100 - 50 losses x $100 = $0 |
| 40% | 3:1 | 40 wins x $300 - 60 losses x $100 = +$6,000 |
| 40% | 2:1 | 40 wins x $200 - 60 losses x $100 = +$2,000 |
Even with a 40% win rate, a 3:1 R:R produces consistent profitability. This is why R:R matters more than win rate in supply and demand trading.
Partial Profit Taking
While some traders advocate for "set and forget" (enter, set stop and target, walk away), partial profit taking can improve your trading psychology and lock in gains.
A common partial profit plan:
| At This Level | Action | Remaining Position |
|---|---|---|
| 1:1 R:R reached | Take 25-33% off | 67-75% remains |
| 2:1 R:R reached | Take another 25-33% off | 34-50% remains |
| Move stop to breakeven | Protect remaining position | Risk-free trade |
| Final target (opposing zone) | Close remaining position | 0% |
PARTIAL PROFIT PLAN:
TARGET (opposing zone) ─── ─── ─── ─── ─── Close remaining (34-50%)
^
|
2:1 R:R ─── ─── ─── ─── ─── ─── ─── ─── ─ Take 25-33% off
|
|
1:1 R:R ─── ─── ─── ─── ─── ─── ─── ─── ─ Take 25-33% off
| Move stop to breakeven
|
ENTRY ─── ─── ─── ─── ─── ─── ─── ─── ─── ─
|
STOP ─── ─── ─── ─── ─── ─── ─── ─── ─── ─
Trailing With Zones
For traders who want to capture extended moves, trailing your stop using zones is the most logical approach in this methodology.
How it works:
- Enter at a demand zone (long trade)
- Price moves up and creates a NEW demand zone (RBR pattern)
- Move your stop loss to the distal line of the NEW demand zone
- Repeat as price creates additional zones
- You are stopped out only when a demand zone fails
TRAILING WITH ZONES:
Price
^
| /\
| / \ <-- Eventually stopped out
| /\ / \ when zone 3 breaks
| / \ /
| ═══════════════/════\═════ Zone 3 (trail stop here)
| /\/
| /
| ══════════/═══════════════ Zone 2 (trail stop here)
| /\/
| /
| ══════/═══════════════════ Zone 1 (original entry + stop)
| /
| /
|
+-------------------------------------------------> Time
As each new demand zone forms during the move,
trail your stop to the new zone's distal line.
Step-by-Step Trading Strategy
This section combines everything into a complete, actionable workflow. Follow these steps for every trade.
Step 1: Draw Higher Timeframe Zones (Daily and 4H)
Open your daily chart and identify all visible supply and demand zones. Mark each zone and label it with:
- Zone type (supply or demand)
- Pattern (RBR, DBD, DBR, RBD)
- Freshness (fresh, tested once, etc.)
- Quality score
Then switch to the 4-hour chart and repeat the process. The 4H zones should nest within or align with the daily zones.
STEP 1 WORKFLOW:
DAILY CHART:
┌─────────────────────────────────────────┐
│ │
│ ════════ SZ: RBD, Fresh, 18/20 │
│ │
│ Current Price: $ │
│ │
│ ════════ DZ: DBR, Fresh, 17/20 │
│ │
│ ════════ DZ: RBR, Tested 1x, 12/20 │
│ │
└─── ──────────────────────────────────────┘
Mark all zones. Label them. Score them.
Remove zones scoring below 14/20.
Step 2: Identify the Trend Direction (Curve)
Determine the dominant trend on the daily and 4H charts:
| Check | Method |
|---|---|
| ☐ Higher highs and higher lows? | Uptrend = trade demand zones |
| ☐ Lower highs and lower lows? | Downtrend = trade supply zones |
| ☐ Price above/below key moving averages? | Confirms trend direction |
| ☐ Recent break of structure direction? | Shows current momentum |
Decision:
- Uptrend: Focus exclusively on demand zones for long entries
- Downtrend: Focus exclusively on supply zones for short entries
- Ranging: Trade demand at range bottom, supply at range top
Step 3: Wait for Price to Approach a Quality Zone
This is the hardest step because it requires patience. Do not force trades. Wait for price to come to your identified zones.
Set alerts at the proximal line of your highest-quality zones. When price approaches:
| Approaching a Demand Zone | Approaching a Supply Zone |
|---|---|
| Is this a fresh zone? | Is this a fresh zone? |
| Does it score 14+ on quality? | Does it score 14+ on quality? |
| Is the curve bullish (for demand)? | Is the curve bearish (for supply)? |
| Is the R:R at least 3:1 to the target? | Is the R:R at least 3:1 to the target? |
If any answer is NO, skip the trade.
Step 4: Drop to the Lower Timeframe for Entry
When price is near your HTF zone, switch to the 1-hour or 15-minute chart to refine your entry.
Look for:
- A lower timeframe zone forming inside the higher timeframe zone (nested zone)
- A confirmation pattern (engulfing candle, pin bar, break of structure)
- Volume increase as price enters the zone (indicates institutional activity)
STEP 4 DECISION TREE:
Price approaching HTF zone
│
v
┌─────────────────────┐
│ Is zone fresh and │
│ quality score 14+? │
├──────────┬──────────┤
│ YES │ NO │
│ │ SKIP │
v └──────────┘
┌─────────────────────┐
│ Drop to 1H/15M │
│ Is there a LTF zone │
│ or confirmation? │
├──────────┬──────────┤
│ YES │ NO │
│ │ WAIT │
v └──────────┘
┌─────────────────────┐
│ Is R:R >= 3:1? │
├──────────┬──────────┤
│ YES │ NO │
│ ENTER │ SKIP │
└──────────┴──────────┘
Step 5: Enter With Proper Stop Placement
Execute the entry based on your chosen strategy:
| Entry Type | Action | Stop |
|---|---|---|
| Limit order | Buy/sell limit at proximal line | Beyond distal line + buffer |
| Confirmation | Market order after confirmation candle | Below confirmation candle or distal line |
| LTF refinement | Buy/sell limit at LTF zone proximal | Beyond LTF zone distal or HTF zone distal |
Position sizing: Calculate your position size so that if your stop is hit, you lose no more than 1-2% of your account.
POSITION SIZE FORMULA:
Position Size = Account Risk / (Entry Price - Stop Price)
Example:
- Account: $10,000
- Risk per trade: 1% = $100
- Entry: 1.0820
- Stop: 1.0790
- Distance: 30 pips = $300 per standard lot
Position Size = $100 / $300 = 0.33 lots (33,000 units)
Step 6: Manage the Trade to Targets
Once you are in the trade, follow your management plan:
| Price Level | Action |
|---|---|
| Trade moves against you to stop | Accept the loss. Zone failed. Move on. |
| Price reaches 1:1 R:R | Take 25-33% profit. Move stop to breakeven. |
| Price reaches 2:1 R:R | Take another 25-33% profit. Trail stop. |
| Price reaches target (opposing zone) | Close remaining position. |
| New same-direction zone forms during the move | Trail stop to new zone's distal line. |
Complete Workflow Summary
SUPPLY & DEMAND TRADING WORKFLOW:
┌─────────────────────────────────┐
│ 1. MARK HTF ZONES (D1, 4H) │
│ - Score each zone │
│ - Remove weak zones (<14) │
└───────────────┬─────────────────┘
│
v
┌─────────────────────────────────┐
│ 2. DETERMINE CURVE (TREND) │
│ - Up = demand zones only │
│ - Down = supply zones only │
└───────────────┬─────────────────┘
│
v
┌─────────────────────────────────┐
│ 3. WAIT FOR PRICE AT ZONE │
│ - Set alerts at zones │
│ - Be patient │
└───────────────┬─────────────────┘
│
v
┌─────────────────────────────────┐
│ 4. DROP TO LTF FOR ENTRY │
│ - Look for nested zone │
│ - Or confirmation pattern │
└───────────────┬─────────────────┘
│
v
┌─────────────────────────────────┐
│ 5. EXECUTE ENTRY │
│ - Proper stop placement │
│ - 1-2% account risk max │
│ - Minimum 3:1 R:R │
└───────────────┬─────────────────┘
│
v
┌─────────────────────────────────┐
│ 6. MANAGE TO TARGET │
│ - Partial profits │
│ - Trail with zones │
│ - Close at opposing zone │
└─────────────────────────────────┘
Supply & Demand Trading Checklist
Use this checklist before every trade. Print it out or keep it next to your screen.
Pre-Trade Analysis
| # | Check | Status |
|---|---|---|
| 1 | ☐ Identified all HTF supply and demand zones on daily chart | |
| 2 | ☐ Identified all HTF zones on 4H chart | |
| 3 | ☐ Scored each zone using the quality scoring system | |
| 4 | ☐ Removed all zones scoring below 14/20 | |
| 5 | ☐ Determined the curve (trend) direction | |
| 6 | ☐ Confirmed I am only looking at zones that align with the curve |
Trade Setup
| # | Check | Status |
|---|---|---|
| 7 | ☐ Price is approaching a quality zone (scored 14+) | |
| 8 | ☐ The zone is fresh (never tested) or tested only once | |
| 9 | ☐ The zone formation pattern is clear (RBR, DBD, DBR, or RBD) | |
| 10 | ☐ Dropped to LTF and found nested zone or confirmation signal | |
| 11 | ☐ Risk:reward ratio is at minimum 3:1 | |
| 12 | ☐ No major news events in the next 30 minutes |
Execution
| # | Check | Status |
|---|---|---|
| 13 | ☐ Entry order placed at the correct level (proximal line or confirmation) | |
| 14 | ☐ Stop loss set beyond the distal line with buffer | |
| 15 | ☐ Position size calculated — risking no more than 1-2% of account | |
| 16 | ☐ Take profit level(s) set at opposing zone(s) | |
| 17 | ☐ Partial profit plan defined (1:1, 2:1 levels) |
Post-Trade
| # | Check | Status |
|---|---|---|
| 18 | ☐ Recorded the trade in journal (entry, stop, target, R:R, zone score) | |
| 19 | ☐ Noted whether the zone held or broke | |
| 20 | ☐ Updated zone status on chart (tested/broken) | |
| 21 | ☐ Reviewed execution — did I follow my rules? |
Common Mistakes
Even experienced traders make these errors. Recognizing them is the first step to eliminating them from your trading.
Mistake 1: Trading Tested Zones as if They Were Fresh
The error: A zone gets tested and holds. The trader thinks "this zone is strong because it held" and puts even more emphasis on it next time. In reality, each test depletes orders.
The fix: Track zone freshness religiously. Fresh > Tested Once >>> Tested Twice. After two tests, remove the zone from your chart.
Mistake 2: Drawing Zones From Weak Moves
The error: The trader identifies a small consolidation before a mediocre move and draws a zone. There was no real displacement — just normal price action.
The fix: If the move away from the base is not explosive (large candles, no overlap, clear directional intent), there is no zone. The displacement is the proof that the imbalance existed. Without proof, do not draw the zone.
NO ZONE: YES ZONE:
/\ /\ |
/ \/ \ <- Weak, choppy move |
/ \ No displacement | <- Explosive displacement
======== | Large candles, no overlap
| Base | Do NOT draw zone ========
======== | Base | YES, draw this zone
========
Mistake 3: Ignoring the Curve (Trading Against the Trend)
The error: The trader sees a "perfect" demand zone but price is in a clear downtrend. They take the long trade anyway because the zone looks good. The zone gets broken as the trend continues.
The fix: Always check the curve first. In a downtrend, demand zones are much more likely to be broken. Only trade supply zones in a downtrend and demand zones in an uptrend. Exception: extreme HTF reversal zones (monthly/weekly DBR or RBD patterns).
Mistake 4: Making Zones Too Wide or Too Narrow
The error: Drawing zones that include too many candles (making the zone too wide and the stop too far) or too few candles (cutting off part of the base and getting stopped out on normal tests).
The fix: The zone is defined by the BASE candles only. Include the full range of the base (bodies define the proximal line, wicks define the distal line). If the base is 3 candles, your zone covers those 3 candles — no more, no less.
Mistake 5: Chasing Price Into a Zone
The error: Price enters the demand zone and the trader waits "just a little more" for a better price. Price reverses from the proximal line and takes off without them. They then chase the entry at a much worse price with a larger stop.
The fix: Decide your entry method BEFORE price reaches the zone. If you are using limit orders, place them in advance and accept the entry. If you are using confirmation, define exactly what signal you need and enter immediately when you see it.
Mistake 6: Moving the Stop Loss
The error: Price enters the zone, triggers the entry, then starts moving toward the stop. The trader moves the stop further away to "give the trade room." This turns a controlled loss into a catastrophic one.
The fix: Your stop loss is structural — it sits beyond the distal line for a reason. If price reaches your stop, the zone has failed. Accept the loss. Moving your stop is the single most destructive habit in trading.
Mistake 7: Not Tracking Zone Performance
The error: The trader draws zones, takes trades, but never records which zones held and which broke. They never learn from their zone selection criteria.
The fix: Keep a trading journal that records:
- Zone type and pattern
- Quality score
- Freshness at time of trade
- Whether the zone held or broke
- The R:R achieved
- Review this data monthly to improve zone selection
Mistake 8: Overloading the Chart With Zones
The error: The trader marks every possible zone on every timeframe, creating a cluttered, confusing chart with overlapping zones everywhere.
The fix: Be selective. Only mark zones that score 14/20 or higher. Focus on the daily and 4H timeframes for analysis. Remove tested and broken zones immediately. A clean chart with 3-5 quality zones is far more effective than 30 mediocre ones.
Mistake 9: Forgetting to Account for Spread and Slippage
The error: The trader places a buy limit exactly at the proximal line, but spread causes the actual fill to be several pips away. Or the stop is placed exactly at the distal line, and normal spread/slippage causes premature stopout.
The fix: Always add a buffer. For entries, place the limit order a few pips/points inside the zone (slightly beyond the proximal line toward the distal line). For stops, add 5-10 pips or 0.1-0.5% beyond the distal line.
Mistake 10: Expecting Every Zone to Hold
The error: The trader becomes emotionally attached to their zones and is devastated when they break. They might even double down or revenge trade.
The fix: Zones are probabilities, not certainties. Even the best zones break sometimes. A 60% win rate with 3:1 R:R produces outstanding returns. Accept that 4 out of 10 trades will be losers. The math is in your favor over a large sample size.
Practice Exercises
These exercises will help you develop and refine your supply and demand trading skills. Complete them in order, as each builds on the previous one.
Exercise 1: Zone Identification Drill
Objective: Train your eye to identify the four zone formation patterns.
Instructions:
- Open any liquid market on a daily chart (EUR/USD, S&P 500, Bitcoin, Gold)
- Scroll back at least 6 months
- Without drawing anything, scan the chart for explosive moves (displacements)
- For each displacement, trace back to find the base
- Classify each zone by pattern: RBR, DBD, DBR, or RBD
- Draw the zones on the chart with proper proximal and distal lines
Target: Identify at least 10 zones. Classify each correctly. For each zone, note:
| Zone # | Pattern | Zone Type | Proximal Price | Distal Price | Fresh? |
|---|---|---|---|---|---|
| 1 | |||||
| 2 | |||||
| 3 | |||||
| ... | |||||
| 10 |
Success criteria: Can you explain why each zone formed? Can you identify the displacement that proved the zone exists? If you cannot clearly see the displacement, remove the zone.
Exercise 2: Zone Quality Scoring Practice
Objective: Practice grading zones using the quality scoring system.
Instructions:
- Using the 10 zones from Exercise 1, score each one using the quality assessment framework
- Grade each factor: Freshness, Departure Strength, Time at Zone, Distance Traveled
- Calculate the total score for each zone
- Rank the zones from highest to lowest quality
- Identify which zones you would trade and which you would skip
Fill in this table for each zone:
| Zone # | Freshness (1-5) | Departure (1-5) | Time (1-5) | Distance (1-5) | Total (/20) | Trade? |
|---|---|---|---|---|---|---|
| 1 | ||||||
| 2 | ||||||
| 3 |
Success criteria: Your highest-scoring zones should be the ones where price reacted most strongly upon return. If not, re-examine your scoring criteria. Cross-check: did price actually return to any of these zones? What happened?
Exercise 3: Nested Zone Identification
Objective: Practice finding high-probability nested zones across multiple timeframes.
Instructions:
- Identify a quality demand zone on the daily chart
- Switch to the 1-hour chart and zoom into the daily zone
- Look for a 1-hour demand zone (RBR or DBR) forming INSIDE the daily demand zone
- Mark the nested zone on both timeframes
- Repeat for a supply zone: find a daily supply zone, then locate a 1H supply zone inside it
Draw this on your chart:
DAILY ZONE:
══════════════════════════════════
Can you find a 1H zone in here?
Mark it with proximal and distal lines.
══════════════════════════════════
Success criteria: The nested zone should have clear proximal and distal lines that are entirely within the boundaries of the daily zone. The nested zone gives you a tighter entry point with a better risk:reward ratio.
Exercise 4: Full Trade Simulation (Paper Trade)
Objective: Execute the complete supply and demand trading workflow on a paper trading account or trading simulator.
Instructions:
- Choose one market and one timeframe combination (e.g., EUR/USD on the daily + 1H)
- Complete the full workflow:
| Step | Action | Completed? |
|---|---|---|
| ☐ Step 1 | Draw all HTF zones on daily chart. Score them. | |
| ☐ Step 2 | Determine the curve direction. | |
| ☐ Step 3 | Identify the highest quality zone in the direction of the curve. | |
| ☐ Step 4 | Set an alert at the proximal line of the zone. | |
| ☐ Step 5 | When price approaches, drop to 1H for entry refinement. | |
| ☐ Step 6 | Calculate position size (1% risk). | |
| ☐ Step 7 | Place the entry order with stop loss and take profit. | |
| ☐ Step 8 | Manage the trade to target using the partial profit plan. | |
| ☐ Step 9 | Record the trade in your journal. |
- Take at least 10 paper trades using this system
- Calculate your statistics:
| Metric | Your Result |
|---|---|
| Total trades | |
| Wins | |
| Losses | |
| Win rate | |
| Average R:R on winners | |
| Average R on losers | |
| Net profit/loss (in R) |
Success criteria: After 10 trades, you should have a win rate above 45% and an average winner larger than your average loser. If not, review which zones failed and why. Adjust your zone quality criteria.
Exercise 5: Historical Backtesting
Objective: Validate the supply and demand methodology on historical data.
Instructions:
- Pick a market you want to trade
- Open the chart and go back 12 months
- Start from the left side and move forward candle by candle (use the replay feature if your platform supports it)
- Apply the full trading workflow as if trading live
- Record every trade you would have taken
- Track at least 30 trades for statistical significance
Record each trade:
| # | Date | Zone Pattern | Score | Entry | Stop | Target | Result | R Multiple |
|---|---|---|---|---|---|---|---|---|
| 1 | W/L | |||||||
| 2 | W/L | |||||||
| ... |
After 30+ trades, analyze:
- Overall win rate
- Average R:R on winners vs. losers
- Which zone patterns performed best (RBR, DBD, DBR, RBD)?
- Which quality score threshold produced the best results?
- Were nested zones more profitable than standalone zones?
Success criteria: You should see a positive expectancy (average win x win rate > average loss x loss rate). If not, your zone selection or entry criteria need refinement. This is normal — adjust and re-test.
Final Thoughts
Supply and demand trading strips away the noise of indicators, oscillators, and pattern names to focus on the one thing that actually moves price: the imbalance between buyers and sellers at specific price levels. When you trade from institutional supply and demand zones, you are not predicting — you are positioning yourself at the source of the move and letting unfilled orders do the work.
The methodology requires three things from you:
-
Discipline in zone identification. Not every consolidation is a zone. Only draw zones backed by explosive displacements and score them rigorously.
-
Patience in waiting for price. The best zones may not be tested for days or weeks. Setting alerts and walking away is more productive than staring at a screen.
-
Consistency in risk management. Every trade uses the same risk (1-2%), the same R:R minimum (3:1), and the same stop placement logic (beyond the distal line). No exceptions.
The exercises above will take you from understanding the theory to executing the strategy in real markets. Start with identification, progress to scoring, practice with paper trades, and validate with backtesting. The data will tell you whether this methodology works for your chosen markets — trust the data over feelings.
Supply and demand trading is a methodology rooted in institutional order flow mechanics. Like all trading approaches, it involves risk and does not guarantee profits. Always use proper risk management and never trade with money you cannot afford to lose.