Technical Analysis · Intermediate · 5 min
Finding zones: base, rally, drop
You can name the four base patterns used to find supply and demand zones and draw a zone from the base candles.
Move, pause, move
Supply and demand traders scan charts for one shape again and again: a move, a short pause, and then a sharp move away. The pause is where they draw their zones.
The shape comes in four versions, depending on what happens before and after the pause. Once you know them, they are easy to spot, which is exactly why it helps to be strict about them.
Four shapes, two zones
The short pause before a strong departure is called the base. It usually consists of one to a few small candles. What happens before and after it gives four shapes:
Demand zones, left upward:
- Drop-base-rally: a decline, a base, then a sharp rally. The price reverses up. The drop-base-rally is the reversal shape for demand.
- Rally-base-rally: a rally, a base, then another rally. The trend continues.
Supply zones, left downward:
- Rally-base-drop: a rally, a base, then a sharp drop. The rally-base-drop is the reversal shape for supply.
- Drop-base-drop: a decline, a base, then another drop.
In the fictional chart, a rally reaches candles 6 to 8, which hold in a tight range between 52.38 and 52.85. Candle 9 then drops from 52.59 to 50.60: a rally-base-drop, and the base becomes a supply zone. The decline continues to 49.17 and pauses on candles 12 and 13 before rallying: a drop-base-rally, and that base becomes a demand zone.
How to draw the zone:
- Include the base candles only, not the move before or after.
- Choose a method and keep it. Some traders draw from the extreme wick to the furthest body, others use the full range of the base.
- Keep the base short. If the pause lasts dozens of candles, it is a range, and the range lessons apply instead.
As the last lesson noted, these rules are trader conventions. They have been tested far less than classic support and resistance.
Back into supply
After the demand base at 49.12 to 49.74, the fictional price rallies back up.
- On candles 18 to 20, it rises to 52.68, 52.83 and 52.77, inside the supply zone from 52.38 to 52.85.
- None of the three candles closes above the zone. Candle 20 closes at 52.01, below it.
- Over the next five candles, the price falls to 49.28, back toward the demand zone.
Seen through supply and demand, sellers who did not finish selling at the first visit sold again at the second. Seen through classic analysis, the old high acted as resistance. Both readings describe the same candles, which is one reason the two approaches overlap so much.
Common mistakes
- Including the departure candle in the zone. The zone is the base, not the move.
- Calling long ranges a base. A base is a short pause.
- Weak departures. If the move away is ordinary, there is no reason to expect leftover orders.
- Switching drawing methods. Use the same rule for wicks and bodies on every chart.
The takeaway
Zones come in four shapes, two for demand and two for supply. The base defines the zone.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the zone created by a rally-base-drop.
Tap the chart.
The price rallied into candles 6 to 8, paused, and dropped from 52.59 to 50.60 on candle 9. The base marks a supply zone.
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2Which two shapes create demand zones?
Demand zones are bases left upward. Coming from a drop, it is a reversal shape; coming from a rally, a continuation.
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3What usually counts as the base?
The base is the short pause before the move. Many traders limit it to a handful of candles.
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4How is the zone usually drawn from the base?
Methods differ: some use the wicks, some the bodies. The zone should cover the base, not the move.
of 4 correct.