What is zone trading?

First, let’s take a look at the structure of the market to understand better zone trading.

Zone trading consists of two main zones, the demand zone, and the supply zone

See here for the complete diagram for zone trading. 

The demand zone is the green zone, which signifies the buying or accumulating phase at or near the price support level. Notice that price action moves within a narrow range.

Then as demand zone trading matures, prices eventually breach the roof of the accumulation demand zone and start trending up. 

Put price action rarely moves for an extended period in one direction.

Zone Trading
S&P 500 returns 2019

“zone trading consists of two main zones, the demand zone, and the supply zone”

WEALTH TRAINING COMPANY

So as the demand zone peaks, price action hits a resistance price level. 

Then the demand zone is displaced by the supply zone, and the price dynamics in the latter zone result in price falls. 

In the early stage of the supply zone price action moves within a narrow range.

In the later stage of the supply zone price action falls through price support and then stabilizes to a new price support level.

The re-accumulation phase is the following trading zone, which is where volatility falls and where price action moves back to a narrow trading range.

Zone Trading - trend up smart money

TREND UP smart money aggressively moves prices up

WEALTH TRAINING COMPANY

Here are the key terms associated with Zone trading

ACCUMULATION smart money is removed the floating supply of stock by buying, this process is called accumulation

TREND UP smart money aggressively moves prices up.

DISTRIBUTION SM will take advantage of the higher prices obtained in the rally to take profits by beginning to sell the stock back to the uninformed traders/investors.

How do you spot zone trading points?

Try to identify successive large candles, which is an indication of significant price movements. 

Then work out the base, in other words, the sideways price action area from which the price started the quick move. 

“An example of the strongest zone trading signal is when the price gap-down from the zone moves down significantly. On a bar chart, this would look like three successive candles with long bodies moving in the same direction”
Wealth Training Company

What does the strength of the supply and demand zone in zone trading mean?

So the stronger the price moves away from a zone, the more out-of-equilibrium supply and demand are in that zone. The small club, so-called smart money, places large orders when the out-of-equilibrium supply is at its greatest.

And if you are a retail trader, that tends to be when your brokers mysteriously has technical problems, and you can’t log on and place an order.

Those familiar with trading have experienced this frustrating situation numerous times.

An example of the strongest zone trading signal is when the price gap-down from the zone moves down significantly. On a bar chart, this would look like three successive candles with long bodies moving in the same direction.

Zone trading in conjunction with Fibonacci Retracements could make a winning combination in technical analysis.

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