Identifying Quality Supply and Demand Zones
Not all supply and demand zones are created equal. Here's what makes a high-quality zone:
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Fresh Zones: Zones that haven't been tested recently carry more potential energy.
Strong Departure: The stronger and more rapid the price movement away from a zone,
the more the imbalance.
Psychological Level: Zones containing a price ending in 000 or 0000 within carry major
potential.
Limited Time at Zone: The less time price spends creating the zone, the stronger it tends
to be.
Higher Timeframe Zones: Zones on higher timeframes (4H, Daily, Weekly) typically have
more influence than zones on lower timeframes
Supply and demand zones can be classified in two
primary ways: based on their freshness (fresh vs. used)
and their strength (strong vs. weak). These classifications
directly impact the probability of a zone being
respected when price returns to it
Fresh Zones
Fresh zones are supply or demand zones that have not yet been
tested by price action since their formation. These zones are
particularly powerful because they represent untapped liquidity pools
where major institutional orders are likely still waiting to be filled.
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Higher probability of respecting the zone
Cleaner price reaction expected
Ideal for entry points
Strong Zones
Strong zones are characterized by sharp, decisive price movements
away from the zone, indicating a clear imbalance between buyers and
sellers. These zones typically form after strong momentum and
represent high-conviction market participation.
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Sharp and decisive movement away from the zone
Often accompanied by increased volume
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Higher probability of being respected
Untested zones with sharp,
decisive price movement away
from the zone
Fresh Strong
zone
Highest probability setups; ideal for
high-conviction trades with tighter
stops
Prioritize fresh, strong zones for your highest conviction
trades.
Characteristics of a Valid Supply Zone:
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Shows a sharp rejection with increased volume
Contains the origin of a strong move down
Has minimal price action within the zone
Price Action Entry Triggers
1. The Rejection Candle
One of the most reliable entry triggers is the rejection candle. This
occurs when price enters a supply or demand zone and then creates
a candle with a significant wick showing rejection from the zone.
2. The Engulfing Pattern
An engulfing pattern at a supply or demand zone provides a strong
entry signal. Look for a candle that completely engulfs the previous
candle in the opposite direction of the trend, signaling a potential
reversal.
Zone Decision Framework
Use this simple framework to decide whether to adjust, keep, or
delete a zone:
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Adjust: When price action suggests the zone is valid but not
perfectly positioned
Keep: When the zone has shown respect but hasn't been fully
tested yet
Delete: When the zone has been invalidated or has lost
relevance over time
Higher Timeframe: Market Context
The higher timeframe provides the overall market context and bias:
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For day traders: Daily or 1-hour charts
Day Trading Strategy
For traders who open and close positions within the same trading
day:
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Higher: 4-hour or daily chart
Intermediate: 1-hour chart
Lower: 15-minute or 5-minute chart
Timeframe Overload
Analyzing too many timeframes can lead to analysis paralysis.
Stick to three timeframes maximum for most trading strategies.
Ignoring Higher Timeframes
One of the most common mistakes is trading solely based on
lower timeframes without considering the higher timeframe
context.