What you are about to learn is nothing like you have ever been taught on How to Draw Supply and Demand Zones.
If you speak with different traders, you will find that many have different approaches to identifying supply and demand zones. Some day traders draw zones based upon the highs and lows, including the candle wicks, and other traders may not include them.
In the Maurice Kenny (MK) trading program, we have specific processes to draw zones that are simple and clear, which is one reason why our students thank us for how we have simplified day trading for them. You are probably reading this because you want to understand how to draw demand zones correctly.
This article will discuss how to draw demand and supply zones using our specific strategy and walk through an example of supply and demand zones marked on a chart. You can also reference this YouTube video below for additional examples and information.
What are Supply and Demand Zones?
Supply and demand zones are locations on a chart where there is an agreement between the buyers and sellers on a stock or equity price. Zones are simply an agreement between the green buyers and the red sellers on the current price.
Stock prices are usually known to react to these zone areas when the price reaches these points on the stock chart. They act as magnets for stock prices to target. Zones are known as high probability areas for day traders to enter trades.
So, let’s discuss where you can locate these areas on the stock chart.
Price Chart Setup
Within the Maurice Kenny (MK) day trading program, the 5-minute chart is used to draw zones. The 5-minute and 1-minute charts are set up within our trading platform (e.g., thinkorswim). Zones are drawn based on the 5-minute, and trade entries and exits are taken based on the 1-minute chart. Visibility to these zones is needed when viewing the 5-minute and 1-minute charts for the same stock.
You can use whatever trading platform you prefer as long as you can access a 5-minute and a 1-minute chart. The charts should be visible on the same screen so that you can see them at the same time.
Click HERE to obtain the exact chart setup (thinkorswim workspace) used in the MK trading program.
See this example below of the 5-minute and 1-minute on the same screen.
Once you have your 5-minute chart ready, let’s start drawing supply and demand zones.
How to Draw Zones
1. Open SPY 5-Minute Chart
Let’s open your trading platform and pull up the 5-minute chart for the ‘SPY’ ticker. SPY is the ticker symbol traded within our program due to its liquidity and the overall market. We will discuss in another article why SPY is one of the favorite tickers to trade.
2. Identify Price Movement on the 5-Minute Chart
Once you have your 5-minute SPY chart available, begin looking 1 hour after the beginning of the trading day to identify zones. The NYSE opens at 9:30 AM (EST), so in this case, you begin identifying supply and demand zones around 10:30 AM (EST).
It’s okay if you are past that time today. You can always scroll back in time in your trading platform to 10:30 AM (EST) or later to identify zones. Also, note that zones get formed throughout the trading day. However, it is essential to give them time to develop when trading in the morning.
You are looking to identify a red and green candle combination where the open and close price is the same or near in price for the trading day.
See the example below. The level identified is where a red and green candle meet.
Supply and Demand Price Agreement Example
When the close price of a green candle is near the open price of a red candle, a supply zone forms because of the price drop that occurred.
When the close price of a red candle is near the open price of a green candle, a demand zone forms because the price rose from this area.
With this method, supply and demand are not determined based on the size of the wicks of candles. The focus is on the close and open prices on the 5-minute chart and how the red and green candlesticks form.
3. Draw Supply and Demand Price Levels
The next step taken on the 5-minute chart is to draw a price level for each supply and demand price point that we identified. For example, if the close price of the red candle was 410.05 and the next candle was green, and it opened approximately around 410.05, the price level drawn would be at 410.05 for the demand zone.
Use the same process to determine the supply zone, except you would look for the close of a green candle and the next candle to be red with similar prices.
The drawing tool can be used to draw price levels within the thinkorswim platform. Both supply and demand areas can be marked using the price level drawing tool.
Price Level Example
4. Draw the Supply and Demand Zone From the Price Level
Once the price levels are identified on the 5-minute chart, a zone is added to each level. In the case of SPY, a $0.10 range is identified for each price level. Draw the $0.10 area using the rectangle tool in Think Or Swim.
For a demand zone, if the price level drawn was 410.05, then $0.10 is added so that the rectangle drawn includes a range from 410.05 to 410.15. You can make the rectangle green to identify the demand zone more quickly since buyers have jumped in to raise the stock price.
Drawing supply, if the price level drawn was 410.05, then $0.10 is subtracted so that the rectangle drawn includes a range from 409.95 to 410.05. You can make the rectangle red to identify the supply zone more quickly since sellers have jumped in to lower the stock price.
Why $0.10? Our team has performed countless back testing and analysis on zones and determined this is the best zone range for SPY. This range may differ from other tickers traded.
Supply Zone Example
Demand Zone Example
5. Identify Major and Minor Supply and Demand Zones
Now that you have supply and demand zones drawn on your chart let’s identify major zones. Major zones represent the demand and supply zones around the high or low prices of the day.
Minor zones are supply or demand zones in the middle of the high or low prices of the day (or in between the major zones). We identify major zones and minor zones since major zones tend to have a better probability than minor zones and are easier to trade from.
See the examples below of major zones vs. minor zones.
Major and Minor Zone Example
So, that is how to draw zones using the MK Trading strategy. If you took the time to draw zones, were you able to see how price reacted to the zones? See the example above of where price came to the supply zone below and tested it several times before moving away.
If you were trading supply, then you may have opted to take a short position in SPY or purchased a put options contract.
The above represents how the supply and demand strategy works. Additional criteria are taught in the MK Trading Strategy to know precisely when to buy or sell on the 1-minute chart based upon the zones identified on the 5-minute chart. If you allow them, the supply and demand zones will show you what to do, when to do it, and how.
So give it a shot yourself on SPY and tell us what you think. Draw these zones exactly how they are shown for any day. Try to see if you don’t find a potential trade based on the zones. This approach is how easy it is. Let’s try not to make day trading more complicated than it needs to be.
Check out this Youtube video to review supply and demand zones and watch us draw them live.
Maurice Kenny is a profitable day trader and coach that is available to assist you in learning how to draw zones and use the demand trading strategy to tackle the financial markets. Maurice is here to help you become a profitable day trader and realize the profit potential you desire.
In addition, many of the people I have helped reach their full potential in becoming financially free started off by watching this free 1-hour webinar.
Also download a ( FREE E-BOOK ) by Maurice Kenny DAY TRADE LIKE A MILLIONAIRE.