An area where selling pressure previously overwhelmed buying pressure, causing price to decline sharply.
Deep Dive
A supply zone is a price area where significant selling previously occurred, causing a sharp decline. When price returns to this zone, unfilled sell orders and traders looking to sell at the same level often create selling pressure again. This makes supply zones act as resistance.
Supply zones are similar to resistance levels but are drawn as zones rather than lines, acknowledging that institutional orders are distributed across a price range, not a single price point. They are identified by looking for sharp price drops that originated from a consolidation area - the consolidation area becomes the supply zone.
The strength of a supply zone depends on several factors: how quickly price left the zone (faster = stronger), how far price traveled from the zone, and whether the zone has been tested before (fresh zones are strongest). Once a supply zone fails to hold price, it often flips into a demand zone.
Why It Matters
Supply zones act as resistance and potential reversal areas for short entries.
Related Terms
- Order Block — Order Block is a trading concept. Order Block: A specific candlestick or series of candlesticks on a chart that represents a key institutional order flow point
- Distribution — A phase where institutional investors gradually sell an asset before a significant price decline
- Resistance — A price level where selling pressure is strong enough to prevent the price from rising further. It acts as a ceiling for the price.
- Demand Zone — An area where buying pressure previously overwhelmed selling pressure, causing price to rise sharply.