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How to Draw Supply and Demand Zones?

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To draw supply and demand zones correctly, you need to place two lines around the origin of the move or the basing structure. Once you successfully identify the zones you want to trade, you draw your lines around the base, you place your orders and wait for price to return to triggers them.

Trading forex with supply and demand consists of identifying and drawing your zones correctly. These two steps are the pillars of the supply and demand strategy. This is why, as a trader, you need to spend as much time as you need to learn how to find these price levels on a price chart.

In this article, I will show you the different ways you can draw supply and demand zones based on the price action of the basing structure and your risk tolerance.

1. Distal and proximal lines

In order to draw supply and demand zones, we use two lines that we place around the base of the zones. The first line is called the distal line and the second one is called the proximal line.

Both lines are placed around the base to form our supply or demand zones.

The distal line is the outer line of the zone placed away from the current price. The proximal line is the inner line of the zone placed near current price.

draw supply and demand zones

2. The structure of the base

A base must have:

  • less than six candles,
  • the candle’s body is less than or equal to 50% of the candle range,
  • the price has left the base with at least 2 ERC,

Here’s an example of valid base structures to consider when drawing supply and demand zones.

draw supply and demand zones

A base must not have:

  • more than six candles,
  • only doji candles,
  • candles with long tails or wicks,
  • stair step candles,

If the base has more than 6 candles, we ignore it. We need to find a basing structure that has less than 6 candles. More candles simply means that supply equals demand and that most orders are filled.

Less than 6 candles shows great imbalance and that more unfilled orders are still waiting for price to retrace back and fill them.

draw supply and demand zones

If the basing structures have only doji candles, we also ignore them. Look how price ignored the zone and continued moving up.

draw supply and demand zones

When the base has candles with long tails, it simply means that the level is a reaction to a previous supply or demand zone. In this example, we have long tailed candles that are reacting to the previous demand zone below.

The tails show that market participants went all the way down to look for unfilled orders. They kept going back and forth until they got enough strength to push prices higher.

draw supply and demand zones

Also, a base structure that has stair step candles is a low probability zone. The stair step structure is formed by:

  • one candle closing below the close of the previous candle for a supply zone,
  • one candle closing above the close of the previous candle for a demand zone.
draw supply and demand zones

3. How to draw supply and demand zones

When it comes to drawing supply and demand zones, everyone has his own method and his own style.

In general, there are three different methods of drawing your proximal and distal lines based on your risk appetite and how conservative you are in your trading.

In this section, I will show you the 3 methods you can use to draw supply and demand zones properly. You can choose the right method that better suits your trading and your risk tolerance.

3.1. Supply zones

Supply zones can be either rally-base-drop or drop-base-drop structures. If you need to learn about identifying supply and demand zones, click here.

There are three ways of drawing a supply zone:

The Conservative Method

The distal line is placed at the highest wick of the base and the proximal line at the lowest body in the basing structure.

draw supply and demand zones

The High Risk Method

The distal line at the highest wick of the base and the proximal line at the lowest wick of the basing structure.

draw supply and demand zones

The Low Risk Method

The distal line at the highest wick of the base and the proximal line at the highest body in the basing structure.

draw supply and demand zones

3.2. Demand zones

We are going to do the same thing as we did for supply zones but in the opposite way. We start by identifying the basing structure to draw our zone, then we draw the proximal and the distal lines using the three methods of drawing.

The Conservative Method

The distal line is placed at the lowest wick of the base and the proximal line at the highest body in the basing structure.

draw supply and demand zones

The High Risk Method

The distal line at the lowest wick of the base and the proximal line at the highest wick of the basing structure.

draw supply and demand zones

The Low Risk Method

The distal line at the lowest wick of the base and the proximal line at the lowest body in the basing structure.

draw supply and demand zones

3.3. Gaps

Gaps are very strong price action structures. When it comes to drawing supply and demand zones that have gaps, it is important to know where we need to place our distal and proximal lines.

As a rule of thumb, we always draw our zones at the origin of the gap and not after it. Here’s how we place our lines with a gap structure:

draw supply and demand zones

Examples

In the following examples, we’ll cover all the three methods of drawing supply and demand zones on the charts.

Example 1

On the next chart, price rallied up, paused for a little time creating a base structure with one candle, then price dropped creating a rally-base-drop structure.

In this example, the distal line is placed at the highest wick of the basing structure, and the proximal line at the lowest body of the basing candles. 

draw supply and demand zones

Example 2

On this example we have a drop-base-drop structure. The same rule applies here. We place the distal line at the highest wick of the basing structure and the proximal line either at the lowest body or at the lowest wick of the basing candles.

draw supply and demand zones

Example 3

In this example we have four candles in the base with long wicks. To draw the supply zone, we place the distal line at the highest wick of the basing structure.

For the proximal line, we could either place it at the lowest body or at the lowest wick of the basing candles as shown on the charts below.

draw supply and demand zones
draw supply and demand zones

Example 4

On the chart below, the price created a drop-base-rally structure with a one base candle. To draw the demand zone, we placed the distal line at the lowest wick of the basing candle and the proximal line at the highest body of the basing structure.

draw supply and demand zones

Example 5

On the chart below, we have a rally-base-rally structure with two candles at the base. To draw the demand zone, we place the distal line at the lowest wick of the basing structure.

For the proximal line, we either place it at the highest body or at the highest wick of the basing candles.

draw supply and demand zones
draw supply and demand zones

Example 6

On this example we have a drop-base-rally structure. We place the distal line at the lowest wick of the basing structure and the proximal line is placed at the lowest body of the basing candles.

draw supply and demand zones

Conclusion

It takes time and a trained eye to identify and draw supply and demand zones like a professional. It seems easy but in reality it requires time and patience to master these two steps as they are considered the most important in trading supply and demand.

You must spend as much time as you need in front of your charts to train so that it becomes second nature to you.

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