Trying to find levels of supply and demand on a price chart is not an easy task. Especially given the fact that most individuals have their own unique personality for trading, such as risk management, time frame, asset class, confirmation type (if any), confluence measures and others. Below I will address two ways that will hopefully assist in how to locate these areas to generate a zone.
Validate Order Flow
Significant Imbalance of OrdersLooking for trading setups is not the same as looking for high probability trading setups. For instance, there are many levels of support and resistance on any given price chart that may have visual appeal, however the order flow at this location may not be massive (either not originally there or retested and filled). While there is no true way to predict or even determine the amount of remaining orders at a level, it makes a lot of sense to put the probability in favor to the best of our ability. The first way to achieve that is looking for an area with a vertical (strong) departure. When referring to demand the move should be to the upside and vise versa for supply. The more vertical price leaves the area in question, the greater the possibility is that many orders were left unfilled and still wish to be executed. Those orders can be used for future confluence purposes and increase the chances of another turning point from this precise location. Another factor of significance is the distance of the departure; to put it simply the further price gravitates away from the origin, the stronger the imbalance (in theory).
Confirm Controlling OrdersUnderstanding which type of order flow has most recently prevailed over the opposing can add extensive probability to an upcoming turn in price. To do this we need to first determine an opposing level (if qualifying demand look for supply, if qualifying supply look for demand). Once we have it the battle begins and whomever prevails has proven that it is indeed stronger than the opposing side of the market at that time. When combined with the above "Significant Imbalance", theory tells us that we are stronger to one side and there are likely still unfilled orders at that location which is what we can use for future confluence.
Is This All That's Needed
In our opinion there are multiple points to consider before qualifying a true supply or demand imbalance (level). The above two items are certainly at the top of the list for qualifying a level itself, however just because a level is present doesn't necessarily make it a viable setup. Some of the additional components that we factor into our analysis include multiple time frame (MTF) direction, MTF supply/demand and support/resistance zones, market structure and fibonacci ratios to help influence the type of orders we are looking for (buy or sell side) at that time. It's all about the location, location, location.