Grading supply and demand zones

What it is

Supply and demand zones were popularised from the mid-2000s by educators such as Sam Seiden of Online Trading Academy. They grade a zone on a few things. Strength of departure: how fast and far price left the base; the stronger, the better. Time at base: fewer candles in the base is better. Freshness: a zone is strongest before price has returned to it at all, and weaker each time it's revisited. The base's shape also says what kind of zone it is: rally-base-rally and drop-base-drop are continuation zones, drop-base-rally and rally-base-drop are reversal zones.

Online Trading Academy combined these into a checklist of 'odds enhancers' (including the profit margin to the opposite zone, the trend and the position on the curve) that a zone must score well on before it's traded.

How to spot it

• Big candles leaving the base quickly: strong departure.
• One to three candles in the base: little time at base.
• No return since it formed: fresh.

How to use it

• Only trade zones that score well on all of these, with room to the opposite zone for a good risk-to-reward.
• Enter at the proximal line, with the stop beyond the distal line.

Common mistakes

• Trading a zone that has already been retested several times.
• Drawing zones from slow, grinding moves.

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