Trading glossary
What are supply and demand zones?
Supply and demand zones are price areas where a strong move started, which traders watch for a reaction when price returns.
A demand zone is the base a strong rally left from; a supply zone is the base a strong drop left from. The idea is that unfilled orders may remain there.
They differ from classic support and resistance mainly in how they are drawn: around the base of a move, rather than along repeated turning points.
How traders use it
- Draw the zone around the small consolidation just before the strong move.
- Fresh zones, ones price has not yet returned to, are usually treated as stronger.
- Look for a reaction at the zone rather than entering blind.
Example
A stock trades sideways between 40.00 and 40.80 for three days, then jumps to 46.00. The 40.00 to 40.80 base is a demand zone. A first return to that area is the one many traders watch most closely.
Frequently asked questions
Are supply and demand zones better than support and resistance?
They are a different way of drawing similar areas. Neither is better in general.
How many times can a zone be used?
Each return can use up orders, so many traders treat a zone as weaker after one or two tests.
Related terms
Often confused with
Educational content only, not financial advice. Chart patterns describe probabilities, not certainties, and every pattern can fail. See our disclaimer.