Supply and Demand Zones Strategy
A supply and demand zones strategy that trades the retest of institutional zones where price previously imbalance-rotated out of a base.
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Supply and Demand Zones Strategy
Overview
Supply and demand zones are price areas where institutional orders previously caused a sharp imbalance — a fast move away from a base. The theory is that unfilled orders remain at those zones, so price tends to react when it returns. This strategy marks fresh zones and trades the reaction, using confirmation to filter the strong zones from the weak ones.
Setup
- Instruments: forex majors, stocks, index ETFs, crypto
- Timeframe: 4H or daily for zones; 1H for entry
- Indicators: ATR(14), the zone base, the impulse leg away from it
- Market regime: any — but fresh zones react more strongly than old ones
A demand zone is a base of consolidation beneath a sharp rally up; a supply zone is a base beneath a sharp drop down.
Entry rules
- Identify a base (1 to 3 candles) followed by a strong impulse move away
- Mark the zone across the base's highs and lows
- Wait for price to return and retest the zone
- At demand: enter long on a bullish reversal candle that closes back above the zone
- At supply: enter short on a bearish reversal candle that closes back below the zone
- Favor zones that have not been tested yet — fresh zones are strongest
Stop loss
- Stop just beyond the far edge of the zone — below demand, above supply
- Alternative: 1 × ATR(14) beyond the zone edge
- Exit if a candle closes beyond the zone — the orders there are gone
Use the stop loss calculator to set the distance.
Take profit
- First target: the origin of the impulse move (the high/low it created)
- Take partial profits at 2R, trail the remainder with a 20 EMA
- Aim for a minimum 2R; strong fresh zones can deliver 4R or more
Confirm with the risk-reward calculator.
Risk management
- Risk 1% of account equity per zone trade
- Position size = risk amount ÷ (entry − stop). Verify with the position size calculator
- Maximum two zone trades open on correlated instruments
- Skip zones that have been tested twice already — they are likely depleted
When it fails
Supply and demand zones fail when traders mark every consolidation as a zone, or when they trade zones that have been tested repeatedly. A zone that has reacted twice already is weaker on the third test. The strategy also fails in fast, news-driven markets where zones are blown through with no reaction. Confirmation candles are mandatory, never optional.
Strategy is for educational purposes only. Not financial advice.