How to Draw Zones Using Proximal And Distal Line?
Welcome to Episode 10 of Price Action Trading Series from MarketSecrets.
In previous episode, we learnt how to recognize a base for various types of zones:
1. A single 50% candle
2. Up to 6 – 50% candle’s (not more)
3. A Marubozu candle
4. Engulfing Pattern
In this episode we are go to learn about “How to Draw Zones Using Proximal And Distal Line?“.
If you prefer video based learning, you can watch this episode in Youtube.
https://youtu.be/vvKobFLXvzE
How do I draw a level in a consistent and methodical way?
The base of an imbalance can be identified by drawing two features
- The proximal line. The price closest to current price
- The distal line. The price furthest away from current price
WHAT IS A DIS TAL LINE AND A PROXIMAL LINE?
An area of supply or demand is not just a single price/line (like classic support/resistance), but a zone/area composed of a number of ticks.
For a supply zone, The highest part of that (rectangle) is the distal line, that is, the highest price in the zone. The lowest part of that rectangle is the proximal line, which is the lowest and the closest to current price.
The closer we are to the a supply area, the better for selling and/or exiting your long positions. The closer we are to the a demand area, the better for buying and/or exiting your short positions.
We use patterns to draw base: engulfing patterns, piercing patterns, haramis, and marubozu patterns.
High wave candles, wicky candles, failed ERC candles are not used to draw demand areas because we need a clear base and pause in the market.
As per the guideline, the cleaner a base looks the stronger (I mean, it should not have many wicks). We want to see tight price action, with explosive moves at the zones.
IMPORTANT: There are times when zones will have no basing candle at all or even an ERC candle. They are not as common but they can still be valid zones nevertheless. We must read price action and score the zone, together with a top down analysis in order to evaluate its tradability. (Concept of zone scoring will be explained later)
There are unfortunately many different looks and shapes for basing zones. These looks will vary depending on which stock you are trading. There are no differences between stock candlesticks patterns and Commodities, indexes.
NOTE: In order for us to draw a base we don’t include the highs (wicks) of basing candles to draw a demand zone or the lows (tails) for a supply zone.
Later on when you have gained enough experience with a lot of screen time you may decide to draw the level wider if the level is not too wide to have a bigger area to ensure that you get filled in a trade but for now we have to keep it by the rules laid out.
I am sure that this is not the first point you come into contact with trading and you should have read some books and watched some videos and attended some trainings before. You will have noticed that reality never really keeps lining up with things mentioned in books.
Formations and candles that look so nice and easy to read in books seem completely different on a chart that you look at every time you open your trading platform.
Unfortunately the reality of markets is that they hardly provide us with the perfect looking candle, formation or for this matter a base every single time, in fact, they almost never do.
There are many nuances we need to take into account so you better get familiar with this harsh reality.
There are times when you can be flexible drawing the imbalances, but before you start being flexible you must understand and sink in the rules for quite some time, spend a lot of time in front of the screen and see thousands of scenarios.
It’s very important to understand that before you tweak any rules, you must first master them
There are some cases when you can adjust the proximal line:
- When there is a single candle at the base
- The candlesticks forming the base are tight and small, we can draw the proximal line covering the lower shadows (supply) or upper shadows (demand)
Note: There is no flexibility when it comes to drawing Distal line – it should always follow rigid rules as it is related to SL.
In order to draw a correct base we first need to learn how to read price action candle by candle.
Luckily there are a few well known candlestick patterns that can consistently provide high odds trading opportunities but as mentioned before they come in varying different shapes and sizes. Let’s discuss about it in detail in the forthcoming sessions.
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