How to draw supply and demand zones for piercing and dark cloud cover patterns?
How to draw supply and demand zones for piercing and dark cloud cover patterns?
What is Piercing Pattern?
Piercing patterns are candlestick patterns in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body but the 2nd candle is between 50-100% of first candle range. Piercing patterns can be bullish or bearish and can be a sign of a potential reversal of the current trend. Bullish piercing pattern is called as piercing pattern whereas bearish piercing pattern is also called as dark cloud cover.
HOW TO USE PIERCING PATTERNS
They are the building blocks of a trend
They usually happen at the end of an uptrend/downtrend
They can happen at flip zones and previous SR/SD zones that are being revisited.
Don’t use if pattern is in the middle of nowhere, these patterns are good reversal candlestick patterns but they need to be at bigger timeframe zones for higher probability trading
The Piercing Pattern and Dark Cloud Cover pattern
• Piercing pattern = demand reversal pattern
• Dark Cloud Cover = supply reversal pattern
How to draw zone for Piercing & Dark Cloud Cover Patterns:
For Demand Zone
For distal line – use low of the zone
For proximal line – use high of the tightly packed body
For Supply Zone
For distal line – use high of the zone
For proximal line – use low of the tightly packed body
Tweaking and extending the proximal/distal lines of a level:
There are times when the proximal and distal lines of a base can be tweaked, for instance when there is a single basing candle (not a wide one) or we have several low volatility candles at the base without long wicks.
Remember you can be flexible as long as you always keep the same risk, the wider the level the smaller the trade size, the narrower the bigger the trade size. Experience will tell you when you should be extending the proximal lines and cover the upper of lower shadows. As long as you use the same risk per trade it will be fine.
WHAT IS A DISTAL 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.
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.