In this post, you’ll discover my 3-factor checklist for identifying strong supply and demand setups.
Not every supply or demand zone is created equal. Some zones are clean, well-defined, and have the characteristics we want to see before considering a trade. Others may look valid at first glance but lack the qualities that make a zone worth trading.
This is where having a simple checklist can make a huge difference.
Rather than relying on gut instinct or taking every zone that appears on your chart, you can use these three key factors to filter out weaker setups and focus your attention on the zones that meet your criteria.
By consistently applying these three factors, you can:
- Filter out lower-quality zones before they become potential trades.
- Improve the consistency of your analysis by following the same process every time.
- Avoid forcing trades simply because a supply or demand zone is present.
- Identify stronger setups with characteristics that support your trading plan.
- Create a repeatable process that makes your decision-making more objective.
The goal isn’t to find more zones.
It’s to become better at identifying the right zones to focus on.
So, if you want to take a more structured approach to analysing supply and demand, let’s break down the 3 factors you should be looking for.
Let’s jump in!
Factor #1: Focus on RBD/DBR Zones
Not all supply and demand zones are created equal.
While all zones are worth monitoring, RBD (Rally-Base-Drop) and DBR (Drop-Base-Rally) zones tend to be much stronger than RBR (Rally-Base-Rally) or DBD (Drop-Base-Drop) zones. Why?
RBR/DBD zones always form during ongoing trends, after price has already been moving in the same direction for a while. By the time these zones form, many traders are already looking to enter in the direction of the current trend or existing price movement.
For example, consider an RBR zone forming after a price rally:
Price rises, and traders pile in with buy orders.
When price retraces slightly, fewer traders are willing to sell because the market is clearly trending upwards. Insitiutions can now only place limited buy orders since there aren’t enough sell orders (i.e., sellers) available to match with their enourmous long positions.
As a result, the RBR zone is weaker because the banks were unable to enter significant buy positions during its formation.
Notice Title
Key Point: Psychological levels can enhance your ability to pinpoint high-probability RBR (Rally-Base-Rally) and DBD (Drop-Base-Drop) zones. When an RBR or DBD zone aligns with a psychological level, the potential for price reversal or continuation is heightened, as these levels can provide sufficent orders for institutions to execute their large positions.
Now, contrast this with RBD/DBR zones…
RBD/DBR Zones: Form at Swing Points
RBD/DBR zones always form at major turning points, usually after price has been moving strongly in the opposite direction for an extended period of time.
At these points, most traders are still positioned in the old trend direction, giving banks and institutions an abundance of orders to take the other side of their trades. These orders allow the banks to enter much larger trading positions, increasing the chance price will reverse from the zone in the future.
Check out this DBR zone forming after a downtrend:
Price falls from 167.000 to 155.000, causing most traders to enter short.
The banks buy into these sell orders, entering enourmous buy positions to initiate a reversal. Because they’ve placed larger trades due to the abundance of sell orders, the resulting DBR demand zone is stronger, and the banks/institutions are more likely to defend their position at the zone when price returns.
Focus on RBD/DBR zones over RBR/DBD zones because they form from larger bank activity, making them higher-probability reversal points in the market.
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Key Point: Clues about the strength of a supply or demand zone can often be derived from the length and magnitude of the preceding move before the reversal. The stronger and more prolonged the prior trend, the more significant the capital and effort required to reverse it. For instance, reversing a downtrend that has persisted for months demands an enormous influx of institutional capital to absorb the existing selling pressure and drive prices higher.
Factor #2: Look for Zones with Long Preceding Moves
Have you heard the myth that strong zones always require sharp moves away? It’s false!
What actually determines the strength of a supply or demand zone is the move preceding the zones formation, not the steep move away we often see. The banks/institutions can only create a supply or demand zone if there are enough opposing traders to take the other side of their trades.
- To buy, banks need lots of sellers.
- To sell, banks need lots of buyers.
The longer the preceding trend or price movement, the more traders positioned in the opposite direction, providing major liquidity for the banks to enter large trading positions.
Look at this demand zone:
- Price has been falling for an extended period.
- The longer the fall, the more traders convinced the trend will continue downward.
So, when the banks decide to buy, they’re able to do so in higher quantities because of the massive number of sell orders available from traders selling to capture the downtrend. This creates a much stronger demand zone, as the banks wouldn’t commit so much capital to reversing a multi-day downtrend if they weren’t confident price would actually reverse.
When analyzing supply and demand zones, prioritize those with long preceding moves in the opposite direction vs zones with shorter or more shallow preceding moves.
Factor #3: Use Large Entry Patterns
The size of your entry signal is almost as important as the zone itself. Candlestick patterns with prominate features (e.g., pin bars with easily visible wicks, engulfing candles showing large bodies) usually signals stronger institutional activity, as their formation requires significant buy/sell orders to enter the market.
Examples:
Small Engulfing Pattern: A tiny bearish engulfing candle (-0.08% decline) forms inside a supply zone. Its small size indicates limited bank activity—likely not enough to initiate a major reversal. The larger engulf seen two days later (0.13% decline) creates a much stronger signal, and initiates the reversal away from the zone.
Here’s another large engulfing pattern:
The larger size (-0.20%) indicates significant insitutional selling, overwhelming the buyers and prior bullish momentum and causing price to reverse from the supply zone.
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Key Point: Did you know that the size of a candlestick can provide insight into market strength? Larger candles often signify strong buying or selling momentum, making their highs or lows more likely to act as key levels of support or resistance. This means there’s a much lower chance of these levels being broken, as they represent areas where institutional activity or strong market consensus has occurred.
Small Pin Bar Example:
A couple of small bullish pin bars forms at a DBR demand zone. The small wick and body of these candles suggest limited instiutional buying, making it a weaker signal for a reversal.
The result: Price breaks the demand zone and falls into the DBR zone below.
Two pin bars with larger wicks now form at the lower DBR demand, their long lower wicks standing out prominently from the recent price action.
The size and visibility of these wicks suggest strong institutional activity, as reversing the bearish momentum to form a long lower wick typically require substantial capital to create. This makes them a more reliable entry signal, indicating that major players are actively buying around the lows of these candles to initiate a bullish reversal.
Quick Recap: 3 Factors for Strong Setups
By incorporating these three factors into your supply and demand trading, you can create a more structured and consistent approach to identifying potential setups.
Rather than treating every zone as a trading opportunity, you’ll have a clear framework for filtering out weaker areas and focusing your attention on setups that meet your criteria.
Over time, consistently applying the same checklist can help you:
- Identify stronger supply and demand zones.
- Avoid lower-quality setups that don’t meet your criteria.
- Reduce unnecessary trades and losses caused by taking weak zones.
- Improve consistency by following a repeatable process.
- Build greater confidence in your analysis and decision-making.
Remember, the goal isn’t to predict every market move or eliminate losing trades entirely. No setup will work every time. The objective is to improve the quality and consistency of your decision-making by having a clear process to follow.
The more consistently you apply these three factors, the easier it becomes to recognise the difference between a zone that simply exists on your chart and one that genuinely meets your trading criteria.
With that covered, let’s move on to the next lesson!