The Types of Supply & Demand Zones
Understanding Zone Classifications
Supply and demand zones are NOT created equal. Understanding the different types of zones and their characteristics is essential for making informed trading decisions. In this lesson, we'll explore the classification of zones based on their freshness and strength.
Classification by Freshness
Fresh Zones
Fresh zones are supply or demand zones that have not yet been tested by price action since their formation. These zones are particularly powerful because they represent untapped liquidity pools where major institutional orders are likely still waiting to be filled.
- Higher probability of respecting the zone
- Cleaner price reaction expected
- Ideal for entry points
Used Zones
Used zones have already been tested by price action after their formation. Each time a zone is tested, some of the orders that created it are filled, weakening its future influence on price action. However, used zones that continue to hold can demonstrate persistent strength.
- May have diminished strength after multiple tests
- Can still provide valuable support/resistance
- Multiple respects indicate institutional interest
Classification by Strength
Strong Zones
Strong zones are characterized by sharp, decisive price movements away from the zone, indicating a clear imbalance between buyers and sellers. These zones typically form after strong momentum and represent high-conviction market participation.
- Sharp and decisive movement away from the zone
- Often accompanied by increased volume
- Higher probability of being respected
Weak Zones
Weak zones form with less conviction, showing slower, more gradual movements away from the zone. They may represent less significant order blocks or diminished market participation. While still useful, they carry a lower probability of being respected.
- Gradual movement away from the zone
- Often accompanied by lower volume
- May be breached more easily
Combined Classification Matrix
By combining these two classification systems, we can identify four distinct types of zones, each with different trading implications:
| Zone Type | Characteristics | Trading Implications |
|---|---|---|
| Fresh Strong | Untested zones with sharp, decisive price movement away from the zone | Highest probability setups; ideal for high-conviction trades with tighter stops |
| Fresh Weak | Untested zones with gradual price movement away from the zone | Moderate probability; may require confirmation signals and wider stops |
| Used Strong | Previously tested zones that formed with sharp price movement | Still reliable if they've held on previous tests; watch for diminishing reactions |
| Used Weak | Previously tested zones that formed with gradual price movement | Lowest probability; best used in conjunction with other confluent factors |
Identifying Zone Strength in Real-Time
When analyzing potential supply and demand zones, consider these factors to assess strength:
- Price velocity: Faster movements away from the zone indicate stronger zones
- Psychological Levels: Prices ending in 000, 0000 within the zone boost strength
- Time spent in the zone: Less time spent in the zone typically indicates stronger conviction
- Previous reactions: How price has respected the zone in the past
Knowledge Check
Question 1:
Which type of zone typically has the highest probability of being respected when price returns to it?
Question 2:
What happens to a supply or demand zone after it has been tested multiple times?
Question 3:
Which of the following best indicates a strong zone formation?