Drawing Supply And Demand Zones: Easy Guide For Dummies

Okay, let’s cut the crap:

Drawing supply and demand zones shouldn’t feel like you’re deciphering ancient hieroglyphics.

It’s literally just drawing boxes on a chart!

But a shocking number of traders – from newbies to even many “SD experts” – screw this up, sending their whole supply and demand strategy down the drain.

That’s where I come in!

In this post, I’ll explain the right way to draw supply and demand zones, starting right from the source of your rally or decline and extending to the most recent swing low (for demand zones) or swing high (for supply zones). I’ll also explain how to identify the base to help you cover the right area when drawing zones.

Sound good?

Why Traders Draw Confusing Supply & Demand Zones (Hint: It’s Not Your Fault!)

Here’s the truth: Many so-called supply and demand “experts” draw confusing zones using ideas and concepts which don’t hold up.

It’s a bummer, but it’s true.

Just consider the following example:

Ever draw demand zones like this? (hopefully not!)

Clear base, steep rise… all signs of a solid zone.

What happens next?

Ooopsie – bye, bye stop loss!

See the problem now?

Using candle bodies ignores where smart money buying (demand) intially overcame selling (supply), creating the recent swing lows or highs.

Remember: Demand zones develop when a surge of buying interest overcomes selling pressure at the lows of candles. Buyers step in to push price back up, leaving behind lower wicks, sometimes forming pin bars or long lower shadow candlesticks.

Candle bodies simply show the distance price moved that day; nothing to do with smart money buying, which always comes in around highs or lows (peak buying/selling).

The Foolproof Guide to Drawing Supply and Demand Zones

Drawing accurate zones is one of the biggest challenges traders face. But what if there was a foolproof way to get it right every time?

Read on…

1) Identify The Base: The Birthplace of Supply/Demand Zones

Every supply and demand zone has a starting point, a foundation called the “base.”

It’s the small pause or consolidation seen right before the steep rally or decline. It might be just a few bullish or bearish candlesticks or a slightly longer sideways movement. Think of the base as a staging ground, where the smart money prepare and execute buy postions, setting the stage for the reversal pinpointing the supply or demand zone.

To draw zones correctly, you must include the base.

How to Find the Base: Look for a minor consolidation or pause in price action immediately before the beginning of a steep rise or decline.

See that little cluster of price action right before the market took off?

That’s what we call the “base.”

It’s where the smart money stepped in and started buying, creating the demand that fueled the rally. Buying also requires sellers, remember. The lows and wicks you see underneath the base? That’s sellers getting taken out, allowing the smart money to accumulate buy positions (demand) at cheaper prices.

2) Drawing Supply & Demand Zones: A Clear/Concise Guide

Phew, you’ve found the base!

That’s the trickiest part, believe it or not. But don’t get too comfy just yet… You still need to draw the supply or demand zone itself.

You’ll hear all sorts of “expert” advice on how to draw supply and demand zones. Some say you should draw them from candle bodies, others have their own fancy methods. There’s only one way to draw zones that truly captures where supply or demand enters the market.

Let’s go through some examples…

A surge of buying created this upswing, sending prices higher. So, a demand zone definitely lurks at the source of the rally (the base).

But how do you pinpoint the exact boundaries of the zone?

  1. Find the Low Point: Locate the most recent swing low near underneath the base.
  2. Spot the Calm Before the Storm: Identify the last small candlestick before price took off.
  3. Draw the Zone: Place your rectangle tool on the swing low and drag to encompass the small candlestick.

Pro Tip: Ever heard of Proximal and Distal lines? These terms are commonly used to refer to the edges of supply and demand zones: the distal line is the furthest edge, while the proximal line is the closest edge.

See? Not so complicated after all!

Your zone now covers the entire base, from the most recent swing low (distal line) all the way up to the little candlestick that marked the start of the rally (proximal line). If price returns to this area, keep your eyes peeled for potential long (buy) entries inside the zone!

But about drawing supply zones?

No worries, those are easy too!

  1. Find the High Point: Locate the most recent swing high above the base.
  2. Calm Before the Storm: Identify the last small candlestick before price plunged.
  3. Draw the Supply Zone: Place your rectangle tool on the swing high and drag down to the small candlestick.

Your zone now covers the entire base area, encompassing the consolidation highs down to the source of the decline, where price finally overwhelmed demand.

“But what about those zones with a single candle base?”

In this case, the single candle itself is the breakaway point.

  • For demand zones: Mark the zone from the candle’s open up to the most recent major swing high.
  • For supply zones: Mark the zone from the candle’s open down to the most recent major swing low.

Other than that, the drawing process is exactly the same.

3) Almost Ready: Check And Refine Your SD Zones!

Now, let’s check and refine your zones.

The whole point of identifying supply and demand zones is to capture where smart money buying or selling (aka demand or supply) entered the market. Your zones should encompass any minor highs or lows within the base or nearby; peak buyers or sellers exist here, making them hotspots where smart money disguised their buying or selling.

Tweaking the Distal Line: The distal line (furthest away from current price) might need a little adjustment too. Make sure it’s sitting right on top of the most recent swing high or swing low. This ensures your zone captures the full range of the smart money’s supply/demand activity.

Check the Proximal Line: The edge of the supply or demand zone closest to the current price (the proximal line) is critical for entry and stop loss placement. Ensure it drawn from the beginning of the steep rally or decline that created the base.

And there you have it!

The zone just sits horizontally, right next to the current price action. You’ll be able to spot when price jumps in and if any entry signals show up.

Easy, right?

Drawing SD Zones: Your Questions Answered (With Examples!)

Struggling to drawing supply and demand zones? This FAQ tackles the most common questions from our readers, providing multiple examples and practical tips to improve your understanding of how to draw supply and demand zones correctly.

The Bottom Line

Getting the hang of drawing supply and demand zones might take some time, but you know what they say—practice makes perfect.

Just keep at it, and don’t be afraid to go back and fix those wonky zones you drew before.

Give ’em a makeover with the tips I shared, and you’ll be a pro in no time!

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3 thoughts on “Drawing Supply And Demand Zones: Easy Guide For Dummies”

  1. Hi there, I have 2 questions:
    1) when the base consists of multiple small / medium sized candles – which candle should be taken as the small base candle from which we draw to the swing high / low? The last one before the price breakout? the second last one? The smallest one in the consolidation area? The resolution of pictures above is pretty low so it’s not that clear.

    2) Let’s say I’m trading of 5-15 min timeframe chart. I have found that in this case the zone should be drawn using 1D candles chart. But how many days should I take into consideration? Only the last day or two? Or a week?

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