Understanding and Trading with Supply and Demand Zones

09 June 2025

Institutional buying and selling pressure tends to create levels where price reversals and continuations occur. As large players like banks and hedge funds execute large-volume trading orders, traders can see their activities using these levels on their price charts. These lasting footprints are clusters of pending orders and when the price touches these areas increased volatility drives the market either up or down. Rapid price shifts are great for traders to extract profits from markets. Forex price action traders are especially prone to using these zones as major points on the charts for potential setups. Knowing where the market might continue the current trend, reverse, or accelerate can be a game changer in online financial trading and these zones tend to work in all markets.
Supply and demand zones differ from traditional support and resistance levels as the latter show historical price points where reactions occurred, while supply and demand zones are the causes behind those reactions. By analyzing these zones traders can detect institutional order flow and get greater insights about price whereabouts. Let’s explain and provide supply demand forex trading tips in this extensive guide to learn how to spot high-probability setups using these zones.

How to spot supply and demand zones in Forex

When identifying supply and demand Forex is the most suitable market as it is open 24/5 and enables beginners to quickly learn this crucial trading concept. To spot those areas traders need to understand what these areas are and how they are created. First of all, supply and demand zones are areas and not lines. This is critical, price tends to touch these zones and decide what to do afterward and it often creates wide areas.

Key characteristics

Supply and demand zones are areas on the chart where bulls and bears clash, leaving clear traces on the chart. Traders look for three critical markets to spot demand and supply zones:

Sharp price movements (“Runs”)

These are explosive, near-vertical price spikes or plunges which are often 50-100 pips in size. They typically signal institutional activity where orders are filled aggressively. For example, a rapid fall of a EUR/USD pair indicates that a massive amount of sell orders have been executed, paving the way for a high-probability zone establishment.

Consolidation bases (“Bases”)

After the sharp move, the price stalls in a horizontal range for around 2-30 candles. This zone represents the institutional accumulation (demand) or distribution (supply) zone. The rule here is the wider the base the stronger the zone.

Volume Spikes

The volume also should agree during consolidation to confirm institutional participation. A demand zone with rising volume is typically a sign of accumulation (demand). If the volume is declining then it indicates distribution (supply).

Supply and demand Forex patterns

Popular supply and demand FX strategy revolves around two patterns, Rally-Base-Rally (RBR), and Drop-Base-Drop (DBD).

Rally-Base-Rally (RBR)

This is a bullish setup: A sharp spike followed by a consolidation base and finally continuation rally. The base is your demand zone.

Drop-Base-Drop (DBD)

conversely, a bearish setup looks like this: a sharp drop followed by a consolidation base then followed by a continuation drop.

Real-world scenario:

Let’s take a DBD pattern in the GBP/USD theoretical scenario: price drops from 1.28 to 1.2700, and the base is around 1.2700-1.2725 with a 3-day consolidation. The continuation drop occurs to 1.2650 which confirms a supply zone at the base.

Tools for supply demand forex analysis

While you can use naked charts for price action analysis to spot supply and demand areas, trading tools and indicators offer a good validation for these setups. Here are some of the most useful tools and indicators:

Fibonacci retracement - Technical traders often use Fibonacci levels as a confirmation for their supply and demand trading techniques. When the zone aligns with key Fibonacci levels, it is a higher probability setup.
Volume indicators - Volume indicators are a must when trading with supply and demand zones. Traders often use volume profiles to spot high-volume nodes (HVN) to check if they overlap with zones.
Candlestick patterns - Candlestick charts are powerful for spotting pin bars, and engulfing patterns, and when they align with supply and demand zones signals have higher chances of success.

Beginners might still struggle with defining supply and demand zones and to make it easier we will discuss a step-by-step process for drawing these areas.

Step-by-step guide to drawing zones

In financial trading, it is important to always rely on objective and scientific methods instead of gut feelings. Here is an institutional-grade process to spot supply and demand zones with high accuracy.

Step 1. Spot initial run

The first step is to identify a sharp movement of price which should be at least twice the size of the average candle range. This is your main zone formation. It is important to use indicators like the Average True Range to measure the average movement and compare it with initial run candles.

Step 2. Find the Base

Draw horizontal lines at the high and low of the consolidation phase after the initial run. These lines are similar to support and resistance lines and you can use trend lines on MT4 and MT5.

Demand zone - Base after a rally
Supply zone - Base after a drop

Step 3. Define zone boundaries

The demand zone has upper and lower boundaries. The upper boundary is at the start of the initial rally and the lower boundary is at the low of the consolidation base.

The supply zone's upper boundary is at the height of the consolidation base and the lower boundary is at the start of the initial drop.

Step 4. Validate

To make your analysis highly accurate try to always use “fresh” zones, which are zones that were untested previously or tested just once. Institutional traders love to place orders at round numbers and you should also follow them by adjusting boundaries to nearest round numbers like 1.0700 where orders tend to cluster. There are many indicators available free to deploy and define zones automatically.

Simulated case study for AUD/USD forex demand zone:

Engine - Price rallies from 0.6480 → 0.6580 for 100 pips straight
Base - 3-day consolidation at 0.6520–0.6540
Zone - 0.6520 (lower) to 0.6580 (upper)
Trigger - Bullish engulfing candle at 0.6525 → Rally to 0.6620

With this theoretical scenario, it is easier to understand how the whole thing works and how well-established rules can protect traders from subjective trading which is important with complex concepts such as supply and demand zones trading.

Trading strategies using supply and demand zones

When trading supply zones FX is a suitable market as it operates 24/5 and provides many trading signals throughout the day. One good way to capitalize on these zones is to develop and test the supply and demand FX strategy. Traders have to develop entry and exit strategies to ensure they follow a strict plan and not emotions.

Entry Tactics

The retest - Retests are robust setups where the price retests the current level and then decides which direction to go. Traders wait for the price to return to the zone boundary after the initial reaction. Entry is on a reversal candle within the zone.
Breakout pullbacks - If the price breaks the zone but quickly pulls back into it, it is typically a great time to trade the reversal into the original zone’s direction. As false breakouts are occurring constantly traders should be careful.
Aggressive entry (not recommended) - Entry is on the first touch of a fresh zone (untested!) with a confirming candle close. This setup gives traders higher potential rewards but risks are also higher.

Stop-loss techniques

Stop loss is a crucial part of risk management.

Demand zones - FX trading demand zones without stop-loss is a super risky behavior and traders should place the stop-loss order at 5-15 pips below the lower boundary.
Supply zone - Conversely, stop-loss goes to 5-15 pips above the upper boundary.
Intuition - A clean break of the zone invalidates your trading setup and it is a good idea to cut losses as early as possible. 5-15 pips is enough room for the price to decide where it wants to go.

Take profit targets

Take profit is a useful order type which is the opposite of stop-loss orders.

Previous swing highs/lows - This is by far the most reliable and widely used target.
Measured moves - You can also project the distance of the initial run from the base and aim around 80% of its pips distance.
Next major zone - Targeting the next major supply or demand zone on a higher timeframe is a popular method as well.
Risk-reward ratio method - Try to always aim for at least twice the stop loss to account for trading costs and ensure consistent profits in the long run.

The bottom line is to spot a strong, fresh forex demand zone, then wait for the price to re-enter the zone, then open a trading position, set a stop-loss, and try to have a 1:2 target.

Advanced techniques for validation

A multi-layered approach is always better. The first and most common method is a multiple timeframe analysis. Supply and demand zones on daily and 4-hour charts are the strongest and devoid of market noise. When a daily or 4-hour zone aligns with lower timeframes like 1-hour, the chances of success are much higher.

Confluence with support and resistance levels

Round numbers and other important levels also tend to increase the probability of a successful setup when trade opportunity in supply and demand zones coincides with key levels. Some traders also use moving averages and watch whether the price reacts with the zone and a key moving average like 50, 100, or 200 EMA. Fibonacci retracement is another popular tool where traders check whether there is a confluence with 61.8% or 38.2%, which tends to increase probability. Combining supply and demand zones trading with market structure analysis is a powerful technique as well. Zones at swing highs and lows or break of structure points are more powerful.

Common mistakes

Here are common mistakes to avoid when employing supply and demand analysis:

Trading weak zones - Zones with thin bases, with no significant volume, or multiple prior tests are called weak zones and traders should avoid such zones.
Ignoring major trends - Trading zones in the opposite of a major trend can prove fatal and end up in losses.
Too wide zones - Zones should encapsulate the base, not the entire move and beginners often make the mistake of drawing too wide zones.
Chasing the market - Many traders fall victim to FOMO and start to chase the markets by entering too late. Entering far beyond the zone boundary is super risky.
Overtrading - Not all zone touches are valid setups and traders should wait for confirmations.

Disregarding risk management is another common mistake of novices. Seasoned traders never risk more than 1-2% of their account on any single trade, which is a powerful risk management trick to protect your capital and stay in trading for the long term. It is advisable to always prioritize fresh, untested zones as the effectiveness decreases with each test.

Major news events tend to create false supply and demand zones by painting large candles. Those large movements are not caused by smart money order clusters but rather by market participants reacting to major news. Impactful news can be found in economic calendars.

Psychology and discipline

As with every other FX trading strategy, supply and demand zones too, require strict discipline from traders.

To implement the supply and demand FX strategy traders should be patient and disciplined. Not every zone will work and losing focus is easy especially when starting to trade these zones. By journaling every trade, traders can later analyze their performance and assess how reliable and profitable their strategy is. Many beginners tend to revenge trade, meaning they become upset by losses and start to risk more, which is never a good idea. This is why backtesting and forward testing are necessary. Testing your strategy on historical data and checking it in the live market on a demo account, ensures you have reliable stats about win rate.