09 · Foundations

Supply & Demand Zones

Wider than a line, and built on unfinished business left behind by the last big move.

Price only moves for one of two reasons: the market is balanced, with buyers and sellers roughly agreeing on value and trading sideways, or the market is imbalanced, with one side overwhelming the other and leaving orders unfilled behind it. A supply or demand zone marks the origin of that imbalance — the last area of calm before an aggressive, one-directional move.

Charting a Zone

To find a zone, first spot a sharp, fast move on the chart. Then look immediately before that move for the small basing period price built before it launched — that base is your zone. Draw a rectangle from the body of the base candle to the far edge of its wick. Because the move away from that base was so fast, there is a good chance not everyone who wanted to transact at that price got filled, which is exactly why price tends to react when it returns.

PLTR chart with a supply zone marked above price — PLTR. A supply zone is the area a sharp drop began from — the unfilled sell orders left behind when price left in a hurry. Zones, not lines.

MSTR chart with a demand zone marked below price — MSTR. The demand side: the base a sharp rally launched from. Price returning to it meets the buyers who could not get filled the first time.

Trading the Zone

Supply zone

Short when price returns to the zone and gets rejected. If price instead breaks through the zone, treat that as supply flipping into demand, and manage any remaining short with a stop above the zone.

Demand zone

Go long when price returns to the zone and bounces. If price instead breaks through the zone, treat that as demand flipping into supply, and manage any remaining long with a stop below the zone.

Zones are wider and more forgiving than a single support or resistance line, which makes them especially useful in choppier markets where price doesn’t respect a precise price point but still respects an area. Because a zone can be traded on the reaction or on the break, it gives you a plan either way price resolves — that flexibility is what makes this one of our favorite tools in a sideways tape.