How many times have you drawn a supply or demand zone, only to watch price come back, tease a potential reversal, and then turn away without giving you a clear entry signal?
Ugh, it’s happened to all of us, hasn’t it?
It’s tempting to chalk it up to bad luck or some mysterious market force at play.
And sometimes, that might be true.
But in most cases, it’s because of a tiny mistake traders sometimes make when drawing the supply or demand zone in the first place.
Ready to learn what that mistake is and how to fix it?
Keep reading…
The Zone That Got Away: The Frustrating Reality of Missed Trades
Take a look at the supply zone below…
Looks fine, right?
The supply starts from the close of the last small candle before the steep decline, the upper boundary (distal line) sits on the highest swing high above the base, and the decline itself clearly had some money behind it. What happens when price returns?
Price attempts to revisit the supply zone but reverses just before hitting the lower boundary (proximal line), providing no entry, no reversal, and worst of all:
A missed trade that would’ve been profitable.
What’s the crack?
You might think it’s just bad luck, or some inexplicable market force at play.
But, in this case, that’s not it…
The real reason price didn’t reverse at that supply zone is simple: it was incomplete. It didn’t include the fresh swing highs that popped up later – points where the smart money likely piled on more sell trades to ride the downtrend even further.
Don’t Forget: Smart money often place multiple trades to create a zone.
This leads to drawing zones that are too small, missing out on key areas where the smart money was actively buying or selling to boost profits.
This supply zone wasn’t a one-and-done deal: the smart money actually entered five sets of sell trades to reverse price and create the zone.
Let’s break it down:
Sets 1 & 2: These put the brakes on the previous upswing and started the initial drop.
Sets 3 & 4: A few days later, price tried to fight back. SM stepped in again to shut down the comeback.
Set 5: The fifth set of sell trades triggered the major decline that reversed the market and formed our zone.
What does this mean?
Always include any nearby highs or lows within your supply and demand zones, especially those created just after the initial reversal. These represent potential entry points for the smart money,
How To Draw Supply/Demand Zones To Include Smart Money Buying Or Selling (Nearby Highs & Lows)
You need to identify and include any nearby highs and lows if you want to draw zones that accurately capture where the smart money entered or exited the market.
Here’s a quick guide:
Step 1: Identify And Mark Your Zone
Start by marking a supply or demand zone on your chart, just like you normally would.
Find a sharp move, identify the base, and draw your zone.
Pro Tip: Use SupdemV2 Indicator to quickly find and draw SD zones.
NEXT: Check if any recent swing lows (or swing highs for supply zones) developed after price created the zone.
Notice the 3 swing lows just above the original zone? (See the black arrows?)
These lows formed because smart money started buying – who else could suddenly reverse price and push it higher? Since SM might decide to trigger another surge of demand around these lows instead of the original demand zone lows, you should adjust your zone to include them.
How To Fix It: Extend your zone upwards to the bullish or bearish candlestick that created the highest nearby swing low after the demand zone formed.
Your demand zone now include the minor swing lows, creating a more accurate representation of where smart money accumulated demand for the rally.
Ready for a supply zone example?
Look for any nearby swing highs after the supply zone… see the minor swing high?
NEXT: Extend your demand zone down to include it.
Use the open or close (it doesn’t matter!) of the candlestick that created the swing high. This is where SM likely stacked additional sell orders, so make sure your supply zone includes the high to ensure any future selling comes in within your zone.
And there you have it!
The market soon returns and reverses within your newly re-drawn supply zone.
Keep in mind: Each zone is unique!
The highs and lows of these two zones won’t look identical for every zone you stumble upon.
But, if you follow these rules and draw the zone to the recent highs or lows hanging around nearby, you’ll nail it most of the time. And even if you’re a little off with your zone, it’ll still cover more points you might’ve overlooked otherwise, increasing your chances of getting it right.
The Bottom Line
Go back and revisit some old supply and demand zones on your charts. This time, redraw them using the step-by-step guide I’ve just covered. Include any nearby swing highs or lows where the smart money contributed further supply or demand to the zone.
Redrawing old zones will help you:
- Get a better feel for how to draw zones accurately and consistently.
- See how many potential trades you might have missed because your zones weren’t quite right.
- Realize why it’s important to include points where smart money entered additional trades when marking zones.
Remember, practice makes perfect!
By practicing this technique, you’ll become more adept at identifying and drawing accurate supply and demand zones, which will ultimately improve your trading performance.