Lesson 18: Advanced Price Action - Supply and Demand Zones
Part of Module 6: Advanced Strategy & Smart Money Concepts
Introduction: Beyond Support and Resistance
In Module 3, we learned about Support and Resistance as lines where price reacts. Supply and Demand is a more advanced way of looking at these areas. We focus on the zones where a massive imbalance between buyers and sellers caused a strong, explosive price move.
Analogy: Line in the Sand vs. A Deep River. Think of basic Support and Resistance as a line in the sand. Think of Supply and Demand zones as a deep, wide river. Price might dip into the river (enter the zone), but it's much harder to cross. These are stronger areas.
Demand Zones (Where Institutions Bought)
A Demand Zone is a price area where a sharp, explosive upward move began. This indicates that institutional buying pressure was so immense that it overwhelmed all the sellers, leaving a footprint of many unfilled buy orders behind.
- How to Identify It: Look for a small area of consolidation or a few small candles that occurred right before a very large, powerful bullish (green) candle. That small area is your Demand Zone.
- How Traders Use It: When price returns to this zone, traders anticipate that the remaining buy orders will be triggered, causing the price to rally again.
Supply Zones (Where Institutions Sold)
A Supply Zone is the opposite. It's a price area where a sharp, explosive downward move began, indicating overwhelming selling pressure.
- How to Identify It: Look for a small area of consolidation right before a very large, powerful bearish (red) candle. That area is your Supply Zone.
- How Traders Use It: When price returns to this zone, traders expect the unfilled sell orders to be triggered, causing the price to drop again.
Why is this "Advanced"?
The strength of a zone is determined by the speed at which price leaves it. A slow move away from an area means it's a weak zone. A fast, explosive, and imbalanced move away tells you that a major institution was involved, making it a very strong and high-probability zone to watch.