Supply vs. Demand Zones
In SMC trading, supply and demand zones are the specific price levels where institutional traders have entered positions. Demand zones are where buyers entered (support), and supply zones are where sellers entered (resistance). These zones are far more powerful than traditional support/resistance because they're backed by institutional capital.
Identifying Demand Zones (Bullish Zones)
Demand zones form at the bottom of downtrends where smart money was aggressively buying. To identify them:
- Look for the bottom of a sharp downmove
- Find where price created a reversal (lowest lows)
- This zone acts as strong support moving forward
- The wider the zone, the more institutional participation
- Draw a horizontal box around this area on your chart
Identifying Supply Zones (Bearish Zones)
Supply zones form at the top of uptrends where smart money was distributing and selling. To identify them:
- Look for the top of a sharp upmove
- Find where price created a reversal (highest highs)
- This zone acts as strong resistance moving forward
- The wider the zone, the more institutional participation
- Draw a horizontal box around this area on your chart
Trading Supply and Demand Zones
Trading Demand Zones (Going Long):
- Wait for price to pull back and approach the demand zone
- Watch for rejection signals (pins, engulfing candles)
- Enter LONG on the rejection with stops below the zone
- Target the next supply zone or order block above
- Risk/reward should be favorable (1:2 or better)
Trading Supply Zones (Going Short):
- Wait for price to rally and approach the supply zone
- Watch for rejection signals (pins, engulfing candles)
- Enter SHORT on the rejection with stops above the zone
- Target the next demand zone or order block below
- Risk/reward should be favorable (1:2 or better)
Zone Strength Hierarchy
Not all zones are equally powerful. Stronger zones have:
- Multiple tests (3+ bounces) without breaking through
- Fresh zones (created within last 1-3 months)
- Wide zones (multiple candle bodies worth of space)
- Confluence with order blocks or FVGs
- Higher volume on the reversal from the zone
Weak vs. Strong Zones
Weak Zones: Zones that get broken on the first attempt or second attempt often indicate smart money has abandoned that level. Once broken, they become less reliable for future trades.
Strong Zones: Zones that consistently bounce (3+ times) indicate strong institutional interest. These zones can be traded multiple times.
Real-World Supply/Demand Example
USD/JPY pulls back to a previous demand zone at 150.50 that was created 2 months ago. Price approaches this zone and forms a pin bar with increased volume. We enter LONG with our stop just below 150.40, risking 10 pips. Our target is the supply zone overhead at 151.50, giving us a 100 pip target and a 1:10 risk/reward ratio. Price bounces exactly from the demand zone and reaches our target in 3 days.
FAQ
A: Zones typically range from 20-50 pips wide depending on the timeframe and volatility. Include the entire reversal area in your zone.
A: If price closes cleanly beyond your zone, it's invalidated. This signals smart money has shifted positions, and that zone is no longer reliable for trades.