How to recognize a base for various types of zones?

Welcome to Episode 9 of Price Action Trading Series from MarketSecrets.

In this episode we are go to learn about “how to recognize a base for various types of zones“.

In previous episodes you have learnt about extremes (valleys and peaks) as well as continuation patterns (CP’s). All these formations have a base or price action in common. Furthermore it is important not to confuse candlestick patterns with a continuation pattern. The former is a Japanese price action formation, the latter is an expression mostly used in this supply and demand strategy. A CP is made of Japanese candle pattern, if you are using candlestick charts, all formations will actually be made of them.

Once you are able to recognize the price action properly. Next important aspect is to pay attention to drawing the base. We have rules in place for drawing the zones.

Zone Drawing – Recognizing a base

First of all, let’s first define what a base is but also keep in mind that bases almost never present themselves as textbook structures, below are features we should be looking for when trying to locate bases (pauses). A base consist of:

1. A single 50% candle
2. Up to 6 – 50% candle’s (not more)
3. A Marubozu candle (very rare formation, a tight base with no wicks or almost not wicks at

all). There are a few different Marubozu candles, the white and black Marubozu are giant. We only will take into consideration the small Marubozu type.

4. Engulfing Pattern

But the first thing you want to do is become an expert at locating price action levels such as Valleys, peaks and CPs on any price chart.

It doesn’t matter which timeframe you choose, since price is fractal. Whatever structures and patterns there are on daily, you will find the same on other timeframes.

Some say that drawing levels correctly can be considered an art. I don’t agree with that, if you have rules that can be consistently and methodically applied the same way every single time, there should be no art in it.

It just takes practice and a lot of screen time, so be patient, your mind and eye need training, and lots of screen time till it becomes second nature to you.

Question: How far back in time do I need to go in order to find supply and demand levels?

As far as you need to hours, days, weeks, months, even years! It depends on the timeframe you are trading as well.

Coming back to the old question, “What are the different types of bases?”

A single 50% basing candle

Each candlestick is defined by the Open, Close, Low and High. If the number of ticks between the Open and the Close is 50% or smaller than the whole candle range (distance from the high to the low), it will be considered a basing candle, a pause.

When the zone is composed by a single candle and not too wicky, it’s advisable that we extend the drawing of the zone to cover the highs/lows, price will often retest just the wicks and bounce off it without pulling back to the base.

50% candles are automatically detected by the amibroker basing candle indicator and similar one is available in trading view as well.

A coloured red dot will be drawn in the middle of a 50% basing candle to distinguish it clearly from others.

Single candle at base are commonly seen in MOST CPs (Continuation Pattern) CANDLESTICK FORMATIONS.

Several 50% candlesticks at the base

This is the most common scenario, we usually see a few basing candles forming a base because price creates the second leg out.

Rules allow for a maximum of 6 candles at any base

Marubozu candlestick

Marubozu candlestick pattern is a tight base candlestick with no wicks at all or almost no wicks.

Important note about Marubozus: we only use the Marubozu candles that have very small bodies, not the white or black Marubozus with very long bodies.

A long body will never be a pause in the market, use the logic please, it will be an ERC candle. They are very strong bullish/bearish signals after the break of a HTF zone.

Engulfing patterns

Bullish and bearish engulf patterns are very common in CPs, they are high odds formations if they are momentum engulfing patterns and opposing imbalance is far away.

Assignment:

Open your chart and draw a rough zone using rectangle box for the 4 different types of bases I have explained today and share the link in the comments section of this video.

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