pt.30 Base Isolation Technique | Becoming a Trader

Summary

This video script introduces the base isolation technique for identifying and drawing supply and demand zones in trading charts. The method involves three steps: marking the leg out, locating the leg in, and drawing proximal and distal lines around the base. The script explains how to recognize bullish and bearish formations, such as drop-based rallies and rally-based drops, using the technique. Examples of demand and supply zones are provided, with instructions on how to delete temporary lines once the zones are identified. The lesson aims to help traders mechanically isolate bases and assess zone formations.

Takeaways

• 📈 Understanding the Four Price Action Formations: The script introduces four formations in price action trading, two bullish (drop-based rally and rally-based rally) and two bearish (rally-based drop and drop-based drop).
• 🔍 Base Isolation Technique: A method to systematically draw zone lines around the base of a formation to identify and classify the type of zone formation.
• 📝 Three-Step Process: The base isolation technique involves marking the leg out, finding and marking the leg in, and drawing proximal and distal lines around the base.
• 📊 Demand Zone Identification: For demand zones, the leg out is a rally, which can be a gap up, a tall green candle, or consecutive higher closes.
• 📉 Supply Zone Identification: For supply zones, the leg out is a drop, which can be a gap down, a tall red candle, or consecutive lower closes.
• ✏️ Drawing Vertical Lines: Vertical lines are drawn on the leg out and leg in candles to isolate the base of the demand or supply zone.
• 🔄 Determining Formation Type: The type of formation (reversal or continuation) influences the placement of the distal line in the zone.
• 📌 Proximal and Distal Lines: These lines are drawn around the base after it has been isolated to evaluate the quality of the zone formation.
• 🌐 Practical Illustration: The script includes a practical demonstration on a chart, showing how to identify and draw zones for both demand and supply scenarios.
• 💻 Upcoming Lab Exercise: The speaker mentions a future lab exercise for viewers to practice drawing zones using the base isolation technique.

Q & A

What are the four formations mentioned in the script?

The script refers to four formations: two bullish (drop-based rally and rally-based rally) and two bearish (rally-based drop and drop-based drop).

What is the purpose of the base isolation technique?

The base isolation technique is used to systematically draw zone lines around the base of a formation to help identify the elements of the formation, classify the type of zone formation, and evaluate its overall quality.

How many steps does the base isolation technique consist of?

The base isolation technique consists of three simple steps.

What is the first step in drawing out demand zones using the base isolation technique?

The first step is to mark off the leg out, which is a rally in the case of a demand zone. This can be identified by a gap up, a tall green candle, or a series of candles with consecutive higher closes.

How is the leg in candle for a demand zone identified?

The leg in candle for a demand zone is identified by moving left on the chart until the leg in candle leading into the base or the zone is found.

What is the third step in the process of identifying a demand zone?

The third step is to draw the proximal and distal lines around the base of the demand zone after isolating it with vertical lines.

What is the difference between a drop-based rally (DBR) and a rally-based drop (RBD)?

A drop-based rally (DBR) is a bullish formation with a drop leading into the base and a rally leading out, while a rally-based drop (RBD) is a bearish formation with a rally leading into the base and a drop leading out.

What is the first step in identifying a supply zone according to the script?

The first step in identifying a supply zone is to locate the leg out, which is a drop in this case, and then find the base candle or candles at the top of the drop.

How are the proximal and distal lines placed in a supply zone?

The placement of the proximal and distal lines in a supply zone depends on whether the formation is a reversal (like a rally-based drop) or a continuation pattern (like a drop-based drop).

What color are demand zones typically represented as in the platform mentioned in the script?

In the platform mentioned in the script, demand zones are typically represented as green.

What is the final step after drawing the proximal and distal lines in both demand and supply zones?

The final step after drawing the proximal and distal lines in both demand and supply zones is to delete the vertical lines used for isolating the base.