We’ve all been there.
You spot a promising supply or demand zone, enter a trade with high hopes, and then… poof… price blows right through it like it wasn’t even there.
It’s enough to make any trader question their sanity.
But there’s a specific price action signal that often appears right before a supply or demand zone breaks. If you can recognize this signal, you can exit your trades sooner or adjust your stops, potentially saving yourself from losses.
In this post, I’ll reveal this signal and show you how to use it to your advantage.
The Key Signal A Zone Could Be About To Break
For a supply or demand zone to fail, price needs to break through and keep moving.
But here’s the thing: Most traders only focus on the breakout itself. They miss the subtle price action and candlesticks clues that often appear right before the zone gives way.
Think of it like a dam about to burst.
The water level rises, putting pressure on the dam. You might see cracks forming or water leaking through before the final collapse. Similarly, there are often telltale signs in the price action just before a supply or demand zone inevitably fails and collapses.
So, what’s this signal?
More often than not, it’s a large range candle appearing within the zone.
This is a big, bold candlestick that pushes the price aggressively towards the zone boundaries, signaling a potential shift in the supply and demand balance within the zone.
The bearish large range candle was a clear indication sellers were taking control.
The initial bounce was just a temporary retracement. But once that powerful bearish candle appeared, it signaled an impending breakdown.
And as you mentioned, this pattern isn’t a one-off. You’ll see it repeatedly across different markets and timeframes. It’s a universal signal that traders can use to anticipate zone failures and protect their capital.
Before this demand zone failed, a bearish large range candle formed.
At first, the price entered the zone and bounced around for a while, which is common for most supply and demand zones. However, once the bearish large range candle formed, everything changed, and the price suddenly plunged lower, breaking the zone.
This pattern isn’t unique to this zone, either…
We see the same price action play out again.
The price enters the zone, meanders, then reverses and breaks the zone immediately after the large range candle forms.
So, why does this happen?
Why do large range candles usually precede a zone failing?
Traders use large range candles to gauge the direction and strength of price movements.So, when someone who bought during a retracement sees a large range candle forming against their position, it triggers alarm bells. This often leads to a wave of selling as traders rush to close their positions en masse, adding more fuel to the fire and further propelling price downward.
It becomes a self-fulfilling prophecy:
The large range candle signals weakness, prompting traders to sell (supply), which in turn strengthens the downward momentum and increases the likelihood of a demand zone breakdown.
Pro Tip: The above also explains why engulfing candles, which are essentially large range candles preceded by a smaller opposing candle, make such excellent entry signals for supply and demand trades. They often signal smart money have entered the market with force, causing a cascade of retail traders to exit.
Responding to Large Range Candles Inside SD Zones: A Two-Step Process
While large range candles don’t always precede a zone breakdown, they’re a common and reliable signal. If you spot one, here’s what to do:
1: Look for a Failed Reversal From The Zone
Most large range candles that lead to a zone breakdown occur after a failed reversal attempt.
Price tries to bounce off the zone (from the SD imbalance), but it lacks the strength to sustain the move. This failed reversal often creates a small pullback, which many traders view as a reversal from the zone, followed by a large range candle that signals the impending breakdown.
Don’t Forget: Large range candles define price direction and movement strength.
For traders who bought during the small retracement, seeing a bearish large range candle form against their long position causes them to close en-mass, resulting in the downmove through the zone.
The bigger their losses, the more frantic the selling, and the larger the LRC candle becomes. This price action indicates the market has trapped eager buyers and is poised for a further decline.
So, if you see a large range candle form after a failed reversal, it’s a strong sign price will break through the zone and continue in the same direction. The candle shows thousands of retail traders are beginning to close losing trades, making a continuation against the zone highly likely.
This candle isn’t just about price movement; it reflects a clear shift in market psychology.
#2 Check The Size Of The Large Range Candle
Now, let’s talk about the size of these candles.
While any large range candle signifies a notable price move, the ones that truly signal a supply or demand zone breakdown are those showing convincing price shifts.
But how large should a LRC be?
Think of it this way: The candle needs to scream “This zone is toast!” It should be a visually striking outlier that leaves no doubt about the opposing pressure entering the market.
There’s no magic number, but here are some factors to consider:
- Relative Size: Compare the candle to recent price action. Does it dwarf the surrounding candles? Does it engulf multiple previous candles? If so, it’s likely significant.
- Percentage Change: Look at the percentage change within the candle itself. A 1-Hour candle showing a 0.25% or greater price swing (especially against the prevailing trend) carries more weight.
Relative Size: Compare the large range candle to recent price action. Does it dwarf the surrounding candles? Does it engulf multiple previous candles?
If so, expect a zone break.
Let’s compare it with another similar candle:
Check out the size difference between the previous example and the bearish large range candle above.
Both candles show a clear decline, but the candle above is dramatically smaller.
The smaller range (Open – Close) suggests fewer long traders are exiting their positions at a loss, likely because the short-lived bullish retracement failed to incite any substantial buying.
Think of it like this: The first LRC candle (previous example) represents a stampede for the exits, while the second is more like a casual stroll due to the smaller size. This difference in intensity hints the demand zone might hold. The selling pressure simply isn’t strong enough for the candle to signal a definitive breakdown.
Lo and behold, the demand zone held!
Despite the initial downward pressure from the bearish large range candle, buyers stepped in and defended the demand zone. Selling pressure was limited because the short-lived bullish retracement lacked the strength to attract significant buying interest.
Without that buying pressure, the subsequent decline didn’t trigger a wave of panic selling.
Make sense?
Unfortunately, I can’t give you exact measurements for how big a large range candle should be. You must use your judgment and eyeball the candle.
Here’s a few guidelines to help…
- If a candle exceeds a 0.25% rise/decline, you’re probably looking at a legit LRC.
- If a candle takes up less than half the zone, the LRC likely formed due to profit-taking.
These aren’t foolproof, but they should help you identify and filter when a valid large range candle has formed, so you can anticipate when price might break a zone. Seeing a large range candle doesn’t mean you should close your trade ASAP, but it does call for caution.
It’s a good time to:
- Reassess the trade: Consider the overall market context and any other technical signals.
- Adjust your stop-loss: Tighten your stop-loss to reduce your risk in case the zone fails.
- Monitor price action closely: Be prepared to exit the trade if the price shows further signs of weakness.
By understandinglarge range candles and how they relate to institutional activity, you can gain a valuable edge in the markets.
You’ll be able to anticipate potential zone breakdowns and make more informed trading decisions.
The Bottom Line
By understanding LRC candlesticks and how they relate to institutional activity, you can gain valuable information on when/where a supply or demand zone may break.
While there aren’t many definitive signals that scream “zone breakdown imminent!”, the Large Range Candle (LRC) is one to watch out for. It’s a strong hint a zone might be on the verge of failing, and whatever intial supply or demand imbalance has now reversed.
You’ll be able to anticipate potential zone breakdowns and make more informed trading decisions.