How To Draw Supply And Demand Zones ?

In this blog post, I will show you how to draw supply and demand zones using pin bars as your reference candlesticks.

A pin bar is a one-price bar, typically a candlestick price bar, which represents a sharp reversal and rejection of price.

The pin bar reversal, as it is sometimes called, is defined by a long tail, also referred to as the shadow or wick.

The area between the open price and the close price of a pin bar is called the real body.

Generally, pin bars have small real bodies in comparison to their long tails.

Look at the illustration below to see how a pin bar looks like.

This is a bullish pin bar. When it forms as a basing candle in a demand zone, we simply draw the proximal line at the upper shadow and the distal line at the lower shadow to outline the demand zone.

Look at the example below:

As you can see, by drawing a proximal line and a distal line, we delineate a potential demand zone.

Note that if the pin bar doesn’t have a nose, we can draw the proximal line at the close price of the candle.

Now, let’s see a real chart example to show you how to draw a demand zone when dealing with a pin bar as basing candle.

Check out the chart below:

As you can see in the chart above, there is a very strong move made by a bank or another financial institution.

Retail traders can’t move the market this way, so it must be from a big player in the market.

We don’t bother ourselves with fundamentals to understand the reasons behind this move.

Who cares? All we want to know, as price action traders, is that this move was made by a financial institution, and the zone has become very attractive in the market.

When the price goes back to test the zone, the market is likely to go up.

To draw this zone, we should look at the basing candle, and in this case, we have a bullish pin bar as a basing candle.

So, we draw the proximal line at the upper shadow and the distal line at the lower shadow to get a correct demand zone.

As you can see from the chart, when the market went back to test it, it was rejected and buyers drove the price up.

Look at another example below:

This is a EUR/JPY daily chart. Notice the clear Drop-Base-Rally Demand Zone — the basing candle is the last candle that was formed before the strong move up.

When you identify the basing candle, you simply draw the proximal line at the upper shadow of the pin bar (nose) — if there is no nose, you draw the proximal at the close of the candle — and the distal at the lower shadow to get the demand zone.

So, by drawing a proximal line and a distal line, we get a nice demand zone.

Look at another example in the AUD JPY H1 chart below:

This is a clear demand zone; you don’t need to waste your time to decide whether it is a Drop-Base-Rally Demand Zone or a Rally-Base-Rally.

These terms are used only to help you identify the zones. When you open your charts and spot patterns like this with a strong upward move (big blue candles), you should have no doubt that there is a bank behind the move. So, you look at only the last candle that was formed before the strong upward move. In this case, the nice bullish pin bar is our basing candle.

To delineate the demand zone, you draw the proximal line at the nose of the candle and the distal at the lower shadow. Notice that when the market retraced to test the demand zone, it moved up again as was expected.

Look at another example below:

This is a USD/CAD daily chart, and the demand zone that was formed is a drop-base-rally pattern — bullish pin bar that formed the basing candle was the last candlestick formed before the rally.

To draw the zone, you simply draw the proximal line at the nose and the distal line at the end of the lower shadow.

As you can see, drawing demand zones using pin bars as basing candles is not complicated.

Now, let’s move to the next part of this lesson: how to draw supply zones using the pin bar pattern (this time, bearish pin bar) as a basing candle.

This is a bearish pin bar. When it forms as a basing candle in a supply zone, we simply draw the distal line at the upper shadow and a proximal line at the lower shadow.

Look at the example below:

In the chart above, we identified a strong down move that was made by a bank; the reason behind the explosive move was an economical news.

But as price action traders, this piece of information was not important to us.

We don’t try to analyze news and how it will affect the market. What matters for us is that this move was made by a big player and when the market tests the zone, there is a high probability that the market will go down.

The bearish pin bar was the basing candle, and as I explained, when it comes to a bearish pin bar, we draw the distal line at the end of the upper shadow and the proximal line at the lower shadow. This way, we get a correct supply zone.

As you can see in the chart, when the price tested the supply zone, the market went down strongly because there were many sell limit orders placed in that zone.

Let’s take a look at another example below:

This one is the USD/JPY H1 chart. The market formed a nice supply zone, and the last candle that was formed before this strong downward move was a pin bar.

So, to establish the supply zone, you simply draw the proximal line at the lower shadow of the candle and the distal line at the upper shadow (nose).

Notice that when the market retraced back to test the supply zone, the price moved down as expected.

Look at another chart example in this GBP/USD H4 chart below:

This is another supply zone that was formed during a downtrend. When you identify the zone, look at the last candle that was formed before the strong downward move.

If it is a bearish pin bar pattern, you do the same thing we did previously — draw the proximal line at the lower shadow and the distal at the upper shadow.

Now, here’s our last example. See this AUD/USD H4 chart below:

As you can see, the market formed a rally-base-drop supply zone. For chart pattern traders, the chart shows a double top continuation pattern.

However, what will make the difference between you, as a supply and demand trader, and a chart pattern trader is the timing. You will not wait for the neckline of the double top pattern to be broken or for a pullback after the breakout to place a trade.

Because you know that this is a supply zone, you will be in the market before chart pattern traders.

All you have to do is to delineate the zone by drawing a proximal line at the nose of the pin bar and a distal line at the upper shadow.

So, when the price returned to test the zone, forming the nice double top pattern, you will enter the market with confidence without waiting for any neckline breakout.

Now, here’s your homework: open your charts and try to find supply and demand zones with pin bars as basing candles.

This exercise will help you learn how to identify and draw the zones easily when the basing candle is a pin bar. 

Conclusion

In this post, I have shown you how to identify and draw supply and demand zones with a pin bar as the basing candle. You can learn more about supply and demand and other profitable trading strategies from our free Telegram channel where we interact and share more knowledge. I also give out 2 to 3 live Forex signals per week for free in that channel.