Identifying supply zones

Where the selling began

A supply zone is the origin of a strong sell-off. To find one, you do not look for the dramatic falling candles themselves. You look at what came just before them. That cluster of small or sideways candles before a big drop is where the supply zone lives. It is the place sellers quietly stacked their orders before the avalanche started.

Here is the step by step. First, scan the chart for a strong bearish move. You will know it when you see it. The candles are big, mostly red, and the move covers a meaningful distance in a short number of bars. Second, scroll your eyes back to where that move started. You will see two or three small candles, sometimes a tiny consolidation, just before the drop. That is your origin cluster. Third, draw a rectangle from the highest wick of that cluster to the lowest close. You now have a supply zone.

What makes a supply zone high quality? Three things. First, the move out of the zone is impulsive. Big bodies, few wicks, momentum visible at a glance. A lazy drop does not produce a strong zone. Second, the cluster before the drop is tight. A short consolidation with small candles tells you sellers were absorbing buy orders quietly before unleashing. Third, the zone is fresh. Price has not yet returned to test it. Untested zones are more likely to react cleanly than zones price has already chipped away at.

A common beginner mistake. Drawing the supply zone at the lowest red candle in the move, where the move ended. That is not the supply zone. That is just where exhaustion happened. The supply zone is at the top, where the selling started. Get that direction right and the rest of the chapter clicks into place. Get it backward and every retest will look like a failed zone.

Recap: supply zones live at the origin of strong sell-offs. Find the drop, then draw the rectangle on the cluster of candles immediately before it. Impulsive moves and tight clusters produce the cleanest zones.