What Is Supply and Demand in Trading?

Look for a base — a small cluster of candles where price consolidated — followed by an impulsive departure. The base is the zone; the impulse is the evidence that an imbalance existed.

The stronger and faster the departure, the more significant the zone. A base followed by a slow drift indicates no meaningful imbalance and should be ignored.

The premise is that unfilled orders remain in the zone. Each time price returns, some of those orders are consumed, so the first retest carries the highest concentration and the strongest expected reaction.

By the third or fourth visit, most of the original interest is gone, which is why a zone that held twice frequently fails on the next test. This is the reverse of the common intuition that repeated tests strengthen a level.

The conventional method is from the open of the base's first candle to the extreme of the base — the low for demand, the high for supply. That produces a band with a defined entry edge and a defined invalidation on the far side.

Consistency matters more than which convention you pick. A method that produces wider zones has a higher fill rate and wider stops; a tighter method has better risk-reward and more misses. Both work; changing between them mid-trade does not.

Support and resistance levels are drawn from reaction points and can be tested many times. Supply and demand zones are drawn from origin points and are treated as a depleting resource.

In practice most traders combine them. A demand zone that sits at a long-established support level, aligned with the higher-timeframe trend, is far stronger than either signal alone.