Supply and demand zone bounces looked excellent when we assumed a limit fill at the zone edge, and lost money when we required price to reject the zone first. Confluence turned the realistic version positive, but only certain levels counted: the prior day's point of control and round numbers helped, while Asia and overnight extremes made results worse.
The setup
A demand zone is the base a strong rally left from; a supply zone is where a strong drop started. We traded the first return to each fresh zone on three years of one-minute NQ: stop beyond the zone, target 2R, costs included.
The fill assumption decides everything
Assuming a limit order fills at the zone's edge every time gave +560R and a positive result every year. But that assumes you buy the exact low of every dip, including the ones that touch and leave without you.
Requiring a rejection first (enter on a close back out of the zone) is closer to how a trader can actually act. That version lost 27.8R, or $3,099 at one MNQ contract. The zone alone had no edge.
Confluence flipped it, with the right levels
Taking only zones that contained a key level turned the realistic version positive: +$663 over 152 trades, profit factor 1.14. Adding every level we track made it worse again, because some levels hurt:
- Helped: the prior day's point of control (profit factor 2.0), round numbers (1.25), the value-area high (1.37).
- Hurt: Asia high and low (0.31 and 0.44), premarket high (0.45), overnight high (0.52), prior-day low (0.56).
The value-area-plus-round-number set came out best, but we chose it by looking at this same data, so treat it as a lead, not a proven rule.
Grading setups
Scoring each zone on trend agreement, level confluence, time of day and room to the next level separated losers from winners: low grades lost slightly (−0.04R per trade), the top grade made +0.29R. Only 28 top-grade trades in three years, though, so it's a guide to sizing rather than a system.
What to take from it
- Be suspicious of any zone backtest that fills at the zone edge. It counts every touch-and-go as a perfect entry.
- A zone on its own is a place to watch, not a reason to enter. Wait for price to reject it.
- Favour zones that hold the prior day's point of control, a value-area edge or a round number. Treat zones built on Asia or overnight extremes with caution.
- Use confluence and grading to decide how much to risk, not as an automatic on/off switch: the edge was real but small.
Simulated results on historical data, after commissions. They don't guarantee future results; see the risk disclosure and CFTC Rule 4.41.