Levels and zones
Supply and demand zones
Areas where price left quickly, on the idea that large orders were left behind.
Widely taught. The Exchange can test it on public price history and will say what it finds.
No peer-reviewed test found. A widely shared 72% success figure has no source.
What it is
A common recipe: a small base of candles, then a sharp move away. Drop-base-rally and rally-base-rally mark demand; rally-base-drop and drop-base-drop mark supply. How small the base is and how sharp the exit must be are choices.
What it suggests
The theory is that a large participant could not fill everything at once and will defend the area later. Charts cannot show that.
How to check it
Write the rule for the base and the exit in the plan, and note that the zone gets weaker each time it is touched.
Common mistakes
- Drawing zones after the fact.
- Counting a zone that was already used.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: a base-and-exit pattern with stated size rules, then price returning to it
- Measure: share of returns that hold and average excursion
- Window: next 20 bars after the return
- Compared with: returns to random points of a similar move
Related lessons
Written in our own words. Education only, not financial advice.