Supply and Demand Zones

Sep 8

Script Introduction:

I have spent a long time searching for the perfect supply and demand zone indicator, but most of the ones I found were based on lines instead of proper zones, which didn’t quite meet my needs. After much trial and error, I decided to build my own indicator that generates clear and reliable supply and demand zones based on price swings and volatility. This indicator dynamically adjusts to market conditions, creating zones that are more responsive to price movements. Whether you're day trading or swing trading, this indicator will help you identify key price levels where buying and selling pressures exist.

Overview:

This indicator identifies supply and demand zones based on swing highs and lows, combined with market volatility. These zones represent areas where price is likely to experience reversals due to buying or selling pressures. The zones are displayed as rectangles (boxes) rather than lines, making it easier to visualize the areas of interest on the chart.

How the Indicator Works:

1. Supply Zones (Red Box):
- A supply zone is identified when the price forms a swing high (a local high point) and there is sufficient volatility (using ATR). The zone represents an area where sellers are likely to step in and push the price down.

2. Demand Zones (Green Box):
- A demand zone is identified when the price forms a swing low (a local low point) and volatility is sufficient. The zone represents an area where buyers are likely to step in and push the price up.

3. Extension Direction:
- You can control whether the zones extend to the left, to the right, or both directions. This lets you choose how far back or forward you want the zones to appear on the chart.

4. Volatility Filter (ATR Multiplier):
- The indicator uses the Average True Range (ATR) to filter out minor price movements. The ATR multiplier is hardcoded to 0.25, meaning that the indicator is more responsive to smaller price swings. This setting helps the zones adjust dynamically to changing market conditions.

How to Use the Indicator:

1. Adding to Chart:
- After publishing, you or invited users can apply the script to any chart. The indicator will automatically generate supply (red) and demand (green) zones.

2. Settings:
- Swing Length (Look-back Period): This controls how many bars back the script looks for significant swing highs and lows. Increasing this value will create zones based on larger swings.

- Extend Zone Horizontally (Bars): This controls how far the zones extend horizontally (left or right). You can adjust this to make the zones extend more or less on the chart.

- Extension Direction: Choose whether the zones extend to the left, right, or both directions. This gives flexibility on how you want the zones to display on the chart.

- Supply Zone Color: You can customize the color and opacity of the supply zone (default is red).

- Demand Zone Color: You can customize the color and opacity of the demand zone (default is green).

Best Practices for Trading:

- Combine with Other Indicators: While supply and demand zones are powerful on their own, combining this indicator with other tools like moving averages, volume analysis, or momentum indicators can provide further confirmation of potential price reversals.

- Watch for Price Action in Zones: When price approaches a supply or demand zone, watch for price action signals such as candlestick patterns (e.g., pin bars, engulfing candles) that can give you an idea of whether the zone will hold or break.

- Adjust for Different Timeframes: The indicator works well across different timeframes. Use a higher look-back period for larger timeframes (e.g., 4-hour, daily) and a lower look-back period for shorter timeframes (e.g., 5-minute, 15-minute charts).

Final Notes:

This script is intended to help traders identify key supply and demand zones and make better trading decisions. Since it dynamically adjusts to market volatility, it is well-suited for both day traders and swing traders who want to capture price reversals at significant levels.