There are few sights worse than seeing price move into a supply or demand zone, provide a nice entry signal, but then break the zone soon after.
Wouldn’t you agree?
But what if you could tell a zone was about to fail…
If price was now unlikely to reverse and instead move the other way and break the zone.
Well, as it turns out, there is…
Right before most supply and demand zones fail, a specific price action signal appears that hints price could be about to break the zone. The signal gives you an early warning signal the zone might fail, giving you a chance to exit sooner or adjust stops.
In this post, I’m going to teach you why this signal appears and how to use it to aid your trading.
Ready to get started? Let’s jump in…
If You See Price Do This, Get Ready…
For a supply or demand zone to fail, the price must break the zone and start moving away. We all know this; it’s evident from the charts.
But let me ask you…
Have you ever studied what happens right before the price breaks the zone?
What kind of price action appears just before the zone breaks and the price moves in the opposite direction?
If you examine failed zones, you’ll notice that similar price action occurs before almost all zone breaks. The price will enter the zone, stall or even move out slightly, and then break the zone when this price action signal appears.
And that signal is…
Usually, a large range candle.
A large range candle – basically a big bearish or bullish candle – forms and pushes the price against the zone, triggering the inevitable break.
Here’s an example…
Before this demand zone failed, a bearish large range candle formed.
At first, the price entered the zone and bounced around for a while, which is common for most supply and demand zones. However, once the bearish large range candle formed, everything changed, and the price suddenly plunged lower, breaking the zone.
This pattern isn’t unique to this zone, either…
We see the same price action play out again.
The price enters the zone, meanders, then reverses and breaks the zone immediately after the large range candle forms.
So, why does this happen?
Why do large range candles usually precede a zone failing?
The answer lies in what the candles signify in the first place. Large range candles are significant because they show a sudden, substantial change in price. This can happen for many reasons but typically indicates retail traders closing positions as banks enter large positions.
That’s why engulfing candles, which are essentially large range candles preceded by a small candle, make great entry signals into supply and demand zone trades:
They indicate banks have entered massive trades, causing retail traders to close.
So, when a large range candle appears inside a supply or demand zone, it’s a strong signal the banks have placed a large position to push the price the other way. They don’t want the price to reverse from the zone; instead, they want it to continue in the current direction.
For us, this serves as an excellent signal that the zone is about to fail.
If the banks are entering the opposite direction, they obviously want the price to break the zone.
Therefore, seeing a large range candle warns us that the zone could be about to fail. It doesn’t mean we should immediately close the trade, but it does alert us to be cautious and perhaps adjust our stop slightly in case the price breaks the zone.
If You See A Large Range Candle, Here’s What To Do
Large range candles don’t always form before a price breaks a zone, but they are quite common and have a high probability of predicting the zone’s break.
If you see a large range candle, follow these two steps…
#1 Check if the candle forms after a failed reversal
Most large range candles that lead to a price breaking a supply or demand zone form after some kind of failed reversal out of the zone.
For example:
Before price broke this demand zone, a bearish large range candle formed – which was also an engulf. But before the break, we saw price spike the zone and attempt to move higher.
It was only AFTER this failed we saw the large range candle form
Why, you ask?
Because that’s when the retail traders who entered long on the break expecting a reversal began closing their trades.
Take our scenario:
Price breaks higher, retail traders buy in, thinking it’s a reversal. Then come the banks, who sell into all the buying. Price now falls sharply, and retail traders are left holding their long trades open at a loss.
So, they start closing, and price declines further.
The bigger the losses, the larger the candle, and the more the banks probably sold.
So, if you see a large range candle form after a failed reversal, it’s a strong sign price will break through the zone and continue in the same direction. The candle shows thousands of retail traders are beginning to close losing trades, making a continuation against the zone highly likely.
#2 Check The Candle Size
Now, about the size of these large range candles. They represent a sizable price change, hence the name. But to signify a zone failure, the candle has to show a serious price shift.
What’s the ideal size?
It’s hard to say… it varies, really.
My advice: Keep an eye out for obviously large candles which flag a significant price swing against the zone.
Something like what we saw in the last example…
These are the candles I’m talking about – Large Range Candles (LRC).
This large range candle clearly shows a sudden, steep decline has taken place. One quick look and it’s clear price has nosedived. I mean, the candle’s nearly the same size as the demand zone itself!
But hold up a sec…
Let’s compare it with another candle:
Notice the size difference?
Sure, the second candle also indicates a significant price change, but it’s way smaller than our first example.
It takes up less than half the zone!
Now, this small size suggests few retail traders are closing their positions. And that could mean the banks haven’t sold massive amounts. Instead of selling to execute sell trades, they might just be selling to pocket some profits.
Which is a clear hint the zone might not fail after all.
As you can see, after the LRC forms, we see price reverse and bounce back out of the zone. Unfortunately, I can’t give you exact measurements for how big an LRC should be.
You must use your judgment and eyeball the candle.
Here’s a few guidelines to help…
- If a candle takes up most of the zone, you’re probably looking at a legit LRC.
- If a candle takes up less than half the zone, the LRC likely formed due to profit-taking.
These aren’t foolproof, but they should help identify when a valid or invalid LRC has formed, so you can anticipate when price might break a zone.
The Bottom Line
To wrap up, not many signals suggest a supply or demand zone might be about to break. But if you see a Large Range Candle forming against the zone, pay attention. It’s a strong hint the zone could be on the brink of failure.
So, keep an eye out for an LRC when you’re trading a zone.
These candles won’t always show, but when they do, it’s a strong indication the zone could be about to crack.