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Supply and demand zones
Working definition
Supply and demand zones are price areas where a trader reads a past imbalance between buying and selling and expects a reaction when price returns.
Supply and demand zones are the areas a trader marks where a strong move began, read as the place an imbalance between buyers and sellers left its trace. The zone is drawn around the base the move departed from, a single candle or a small cluster, and its edges are set by a base rule or by eye, so two traders can mark different zones on the same chart.
The convention has close relatives, and they are often drawn on the same candles. The order block is the most tightly specified, because its rule names exactly one candle; the supply and demand zone is the loosest, because the base is chosen. Where zones from several conventions overlap, they are several descriptions of one area, not several confirmations of it.
What the site measures is whether a zone adds anything beyond recent momentum. The order block is ICT’s zone convention, drawn on the same candles, and controlled for momentum the order-block measure added nothing out of sample: redundant, not underpowered. Do order blocks predict anything? sets out the model: momentum first, then a recency-weighted measure of pressure at the level, fitted on the first 70% of the history by time and judged on the held-out remainder.
Redundant is a narrower verdict than useless. The same study found that what a level did on its most recent visit carries real out-of-sample information; what failed was the idea of a stored, accumulated pressure at the zone. The belief that a level with orders stacked at it is more likely to hold sits on the refutation index as unproven, because resting orders are invisible on retail data and no chart observation can contradict the claim as usually stated.
What a drawn zone cannot carry is a forecast. It records where a move started; whether price reacts there on the next visit is a separate question, which the drawing cannot answer and a held-out test can. Smart money concepts (SMC) use the same zone vocabulary, and the same distinction holds there. This entry states no rate at which zones hold and gives no rule for trading them.
Commonly confused with
Neighbouring concepts that get used interchangeably, and the distinction that actually separates them.
- Order block
An order block is selected by a rule that names one candle, the last to close against a qualifying move. A supply or demand zone takes the whole base a strong move left, one candle or a small cluster, with its edges set by a base rule or by eye. Drawn on the same candles, the two describe one area twice.
- Support and resistance
Support and resistance are levels, read from where price turned. A supply or demand zone is an area with a height, read as the trace of an imbalance at the start of a move. The level says where price stopped; the zone says why a trader expects it to stop again.
- Fair value gap
A fair value gap is the band a three-candle move left untraded between the first and third candles' wicks. A supply or demand zone is drawn from the base before the move, not from the gap the move left behind it.
How to measure it in your own data
A definition you cannot test is a definition you have to take on trust. This is the shortest honest route from the concept to a number you computed yourself.
- Records you need
Every return of price to the zones you have drawn, each with the outcome you would have traded, a reaction or a break, and the price behaviour in the bars before the return.
- What you compute
Model the outcome on recent momentum first, then add the zone's own measure. Fit on the earlier part of the history and judge on the later part you held back, so the question becomes what the zone adds once momentum is already in the model.
- What the answer tells you
A zone measure that improves the held-back fit carries information momentum lacks. One that leaves the fit where momentum put it was a second description of recent behaviour, which is the result the order-block study reached: redundant, not underpowered.
Questions and answers
What are supply and demand zones in trading?
Supply and demand zones are the areas a trader marks where a strong move began, on the reading that an imbalance between buyers and sellers started the move there and may show again when price comes back. The zone is drawn around the base the move left, so its edges are a drawing choice.
Are supply and demand zones the same as order blocks?
The two are drawn on the same candles and often mark one area. The order block names exactly one candle by rule; the supply and demand zone takes the whole base, chosen by a rule or by eye. Where the two overlap, they are one area described twice, not two confirmations of it.
How do you identify and draw supply and demand zones?
Around the base a strong move departed from: the last candle or small cluster before the move, with the edges set by a stated base rule or by eye. Writing the rule down before looking at what price did next is what turns a drawn zone into something that can be checked.
Is there a supply and demand indicator?
An indicator that marks zones applies a base rule to past candles, and the rule decides which bases count. What a zone drawn that way predicts is the question the site measured for the order block: once recent momentum was in the model, the zone's measure did not improve out-of-sample predictions.
Related terms
Derived from the links this entry makes and the entries that link back to it.