# Supply and demand zones: a strategy to learn and test | DT Academy > Mark where price left a base fast, then trade its first return to that zone. [Strategy Library](https://www.thedtterminal.com/academy/strategies) Zones # Supply and demand zones A sharp move starts where buying and selling were badly out of balance. The small pause before that move (the base) marks the price. When price first comes back to it, orders may still be waiting there. Sam Seiden taught this approach. Intermediate Any market; higher timeframes carry more weight London and New York for intraday M15, H1, H4, D1 [Use this strategy](https://www.thedtterminal.com/login?signup=true&from=academy&entry=strategy_use&redirect=%2Fjournal%2Facademy%2Fstrategies%2Fsupply_and_demand) [Practice it](https://www.thedtterminal.com/login?signup=true&from=academy&entry=strategy_practice&redirect=%2Fjournal%2Facademy%2Fstrategies%2Fsupply_and_demand) Example 01 ### Supply and demand zones on a chart AUDUSD · H4 Fresh demand drop, base, rally, return Demand zone: 0.6598 to 0.6611Entry: 0.6611Stop: 0.6592Room to supply: 1 : 3.8Sample candles, not market data Price left the base fast and came back to it for the first time. The stop sits beyond the far edge, where the zone would be broken. ### The rules Setup Find a strong move away: large candles or a gap, not a slow drift Mark the base before it, from its high to its low, using wicks or bodies the same way every time Drop-base-rally and rally-base-rally make demand; rally-base-drop and drop-base-drop make supply Prefer zones price has not come back to yet Entry Either: a limit order at the near edge of the zone Or: wait for a rejection candle inside the zone Stop Just beyond the far edge of the zone Target The next opposite zone, as long as it leaves enough room Manage Some traders trail the stop once price leaves the zone ### Common mistakes - Drawing zones differently each time. Two traders can draw the same zone differently. Write down your rule. - Assuming zones hold. Price breaks through zones all the time, even on the first return. - Trading against the trend. A demand zone in a downtrend has less behind it. - Trusting a clean backtest. Zones look cleaner in hindsight than they did live. ### When it's off - The zone is broken once a candle closes beyond its far edge - Skip zones price has come back to several times ### Words to know Supply and demand zones Areas price left quickly: a demand zone is one price rallied away from, a supply zone one it dropped away from. Each is drawn from its base (one to a few small candles), and a close beyond the far (distal) line is the usual sign it failed. Demand zone An area price rallied away from quickly, drawn from the base (one to a few small candles) before the move up, with the proximal line at the base's near edge and the distal line at its far wick. A candle closing below the distal line is the usual sign it failed; rally-base-rally and drop-base-rally are both demand zones. Supply zone An area price dropped away from quickly, drawn from the base (one to a few small candles) before the move down, with the proximal line at the base's near edge and the distal line at its far wick. A candle closing above the distal line is the usual sign it failed; rally-base-drop and drop-base-drop are both supply zones. Base candle A small-bodied candle, or a short run of them, where price pauses between two bigger moves. A supply or demand zone is drawn from the base, and the base candles can be either colour. Fresh zone A fresh zone is one price has not come back to since it formed; it becomes tested (some say mitigated) once price trades back into it. Supply and demand teaching treats each return as using up orders. Risk to reward The planned distance to the target compared with the planned distance to the stop: risking 20 pips to make 40 is 1:2. It means nothing without the win rate; the win rate needed to break even is 1 / (1 + reward to risk), before costs. Departure The strong move away from the base. Odds enhancers Sam Seiden's checklist for grading a zone (how price left, time at the level and room to the next zone). When you make it yours, I'll ask what the rules above leave open. Start with one of these: - How many candles can a base have, and what counts as a strong move away? - Do you draw the zone with wicks or with bodies? - Do you trade fresh zones only? How many returns before you drop one? [Ask Edge in DT Terminal](https://www.thedtterminal.com/login?signup=true&from=academy&entry=strategy_question&redirect=%2Fjournal%2Facademy%2Fstrategies%2Fsupply_and_demand) ## From DT Academy - [Identifying supply and demand](https://www.thedtterminal.com/academy/supply-and-demand) - [Market structure](https://www.thedtterminal.com/academy/market-structure) ## What testing exists No independent test was found. The sources call the zones descriptive, not predictive: structure, not certainty. ## Before you trust a backtest - Many professional traders risk under 1% of their account on one trade idea, and the common guideline is 1 to 2%. - The more versions of a rule you try on the same data, the more likely a good backtest is luck. Decide your rules before you test. - Include spread and commission, and practice on dates you have not looked at, before you trust a result. ## Sources - [Lessons from the pros (Sam Seiden, 2015) (opens in a new tab)](https://www.fxstreet.com/education/lessons-from-the-pros-201506090000), FXStreet - [Sam Seiden on supply and demand (2011) (opens in a new tab)](https://moneyshow.com/articles/daytraders-24494), MoneyShow - [Supply and demand trading explained (opens in a new tab)](https://www.cmcmarkets.com/en-gb/trading-strategy/supply-and-demand-trading-explained), CMC Markets - [Controlling risk (opens in a new tab)](https://www.ig.com/en/ig-academy/money-management/controlling-risk), IG Academy - [Forex risk management (opens in a new tab)](https://www.cmcmarkets.com/en-gb/forex/forex-risk-management), CMC Markets - [Pseudo-mathematics and financial charlatanism (Notices of the AMS, 2014) (opens in a new tab)](https://scholarworks.wmich.edu/math_pubs/40/), Bailey, Borwein, López de Prado and Zhu - [What is backtesting? (opens in a new tab)](https://www.ig.com/uk/trading-strategies/what-is-backtesting-and-how-do-you-backtest-a-trading-strategy--220426), IG DT Academy is education, not financial advice. Nothing here is a recommendation to buy or sell any instrument. Trading carries a high risk of losing money, and past results, examples and backtests do not guarantee future results. [Risk disclosure](https://www.thedtterminal.com/risk-disclosure) --- Risk disclosure: Futures, forex and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one's financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. [Read the full risk disclosure](https://www.thedtterminal.com/legal/risk-disclosure). 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