What Makes a Strong Supply or Demand Zone?
Introduction to Strong Zones
In previous lessons, we've explored what supply and demand zones are and how they form. Now, we'll look into what makes certain zones stronger than others—giving you the edge to identify high-probability trading opportunities.
Not all supply and demand zones are created equal. Strong zones offer higher probability trading setups with better risk-to-reward ratios.
Characteristics of Strong Supply Zones
Supply zones represent areas where selling pressure overwhelms buying pressure. Strong supply zones typically show the following characteristics:
- Sharp Moves Away: The price drops rapidly after forming the zone, indicating strong selling pressure
- Low Time Spent: Price doesn't linger in the zone, showing decisiveness
- Fresh Zones: Zones that haven't been tested are stronger
- Higher Timeframes: Zones on higher timeframes generally hold more significance
- Psychological Levels: Zones with prices ending in 000, 0000 within hold more importantance
Characteristics of Strong Demand Zones
Demand zones are areas where buying pressure exceeds selling pressure. Strong demand zones typically display these traits:
- Sharp Moves Away: Price rises rapidly after forming the zone, indicating strong buying pressure
- Low Time Spent: Price doesn't linger in the zone, showing decisiveness
- Fresh Zones: Zones that haven't been tested are stronger
- Higher Timeframes: Zones on higher timeframes generally hold more significance
- Psychological Levels: Zones with prices ending in 000, 0000 within hold more importantance
Real-World Examples
Example 1: Strong Supply Zone
In this example, we can see a strong supply zone that formed on the daily chart. Notice the sharp rejection and rapid move down, with minimal time spent in the zone. When price returned to test this zone, it provided an excellent shorting opportunity.
Example 2: Moderate Demand Zone
This demand zone on the 4-hour chart shows moderate strength. While there was a decent move up from the zone, it wasn't explosive, and the zone had been tested previously.