How to Draw Demand and Supply Zones

Not all basing candles are CPs

When to extend the proximal and distal lines of a zone to cover the wicks

How to draw levels in a consistent and mechanical way

How to draw bases with Engulifing, Piercing, and Harami patterns to use with supply and demand

Fresh vs. original levels of supply and demand, when to use them in a trend

How to draw CPs (continuation patterns) in a mechanical way

  1. A CP has 3 features, ERC + BASE + ERC.
  2. Make sure the CPs you locate have ERC candles on both legs
  3. When in doubt, ignore the CP, it has to be clear
  4. CPs have to be clear pauses in the market, they can be basing candles or Marubozu candles
  1. Single basing candle
  2. Several baing candles which are not wicky
  3. Candle prior to the basing is close, it's advisable to add more wiggle room

1. Look for 50% candles and tight bases
2. Locate mother candles and watch if next child candles (inside candles, haramis, dojis, spinning tops) close above/below the mother candle’s open/close and makes a lower low (higher high) above below the mother candle's price range
3. If price closes above/below mother candle, it will negate a CP and will make it a Valley/Peak
4. Bullish/bearish engulfing patterns are common as CPs, there is a video that explains how to draw them here
5. Marubozu candles are not 50% candles but they can be part of a CP if they are at a good location or attained an important event (took out an important HTF zone or flip zone)

Remember this Importance

  1. Always look at what a CP has accomplished, not only a CP, but any potential SD zone
  2. If the CP has not taken out an opposing zone, it's too wide and too wicky, you can't see it's a clear pause in the market, don't draw it, don't trade it, forget about it
  3. The sames CP rules apply to PCPs, which are potential CPs without the second leg's imbalance

DEPARTURE IS KEY:

  • We need at least 2 ERC candles closing at its high or near its high (80% of the candle range) when price leaves the level

FEATURES A GOOD BASE MUST HAVE:

  1. Maximum 4-6 candles in the base. No matter which timeframe
  2. Tight candle bases with bodies <= 50% of the candle range
  3. Strong departure, 2nd leg (IMPULSE) with at least 2 ERC candles closing at its high or near its high (about 80% of the whole candle range)
  4. Exceptions:
    A) the 50% body rule does not apply to CP (continuation patterns). Many good CP patterns are made of marubozu candles
    B) Engulf patterns

DO NOT CONSIDER A BASE THAT:

  • Has only doji candles as a base. Doji + Gap is considered valid
  • Has more than 6 candles
  • Has wicky candles (long tails and/or wicks), they are normally reactions to previous levels

FRESH LEVEL:

  • A fresh level is a level which price has not retested yet (pulled back to it)

ORIGINAL LEVEL:

  • An original level is a level which is not a reaction to any previous level, a level that has been created on a blank area on the charts out of the blue
  • Thus an original level can be fresh, but a fresh level does not necessarily need to be original

WHEN AND HOW TO USE FRESH AND ORIGINAL LEVELS

IN TRENDING MARKETS

  • Use always fresh levels with trending markets
  • If the fresh level is also original, it’s even better

COUNTER TREND
Use always original levels
Don’t lean on non-fresh or used up levels when trading counter trend

Engulfing Patterns

When to extend the proximal/distal lines of a zone to cover the wicks

  1. Single basing candle
  2. Several basing candles which are not wicky
  3. Candle prior to the basing is close, it's advisable to add more wiggle room