Basing Structure of a level

18th January 2018, 05:53 PM

BASING STRUCTURE OF A LEVEL

Scoring the structure at the base of a potential imbalance is crucial. The basing will tell us a lot about
what is going on before price creates the final impulse to become an imbalance. You need experience
and screen time to read price action. The basing structure will tell us if the accumulation or distribution
that happened in the area was caused or created by professional investors. It takes time, a lot of time, to
gain the experience to distinguish good basing from bad basing. You will not be able to distinguish a
good structure from a bad structure unless you spend countless hours in front of your trading platform
analysing price action. There are no shortcuts.

Most imbalances are made of basing candles, but not all. How come? Let me remind you about the type
of imbalances there are. There are drop-base-rally (valley) and rally-base-drop (peak). However there
are also drop-rally (valley) and rally-drop (peak)... Refer to the type of imbalances lessons to refresh your
understanding of these key concepts, engulfing patterns is just one of them and engulfing do not
necessarily need to be made of basing candles.

Remember basing candles are pauses. If you see candlestick price action at a specific price area and
you don't see a clear pause with tight candlestick bodies, then it won't be a pause. If it's not a pause
then it's not an imbalance.

Rules are very specific about the basing structure:

1. We want to see a maximum of 4-6 candlesticks at the base. No matter which timeframe

2. Tight candle bases with bodies <= 50% of the candle range. Remember a base is a pause, a
wide body or ERC candle is not a pause. Failed ERCs are not bases even if they are 50% candles.

3. Strong impulse, 2nd leg out after the base (impulse) with ideally 2 ERC candles closing at its high
or near its high (about 80% of the whole candle range)

4. We want to see these candlestick patterns at the base:

o Bearish/Bullish Engulfing patterns

o Dark cloud cover (supply) and Piercing patterns (demand)

o Morning Stars and Evening Stars candlestick formations

o Bullish and bearish Haramis

o Marubozu. Many good CP patterns are made of marubozu candles (tight candlestick
bodies with no wicks or hardly no wicks)

5. Exceptions:

o The 50% body rule does not apply to CP (continuation patterns) because many CPs have
tight engulfing patterns
Important note on the 6 candles rule:

• Having more than 6 candles at the base does not render an imbalance invalid, an imbalance
will only be an imbalance if it meets the rules for the creation on an imbalance. An imbalance
could be tradeable or not, but the imbalance will not stop being an imbalance if the basing
structure is not good.

• A H4 level with more than 6 candles does not meet the good basing structure rules, but if the D1
chart shows a D1 CP then it's valid if the D1 rules and trend go with it. A D1 CP is composed of at
least 5 x H4 candles, a D1 CP will probably have about 10-12 H4 candles. So a H4 supply with
more than 6 candles might be a good area if D1 CP is valid and D1 and HTF are down. It's all
about multiple timeframe analysis. If you look at the H4 level on H1 then you will see maybe 20
x H1 candles. There must be a way to put a STOP on how much you drill down a zone or it will
become a loop and no level will ever be valid

WATCH VIDEO ON TIME SPENT AT A LEVEL

THE STRENGTH OF THE IMPULSE IS KEY...

• We need (ideally) an impulse made of at least 2 ERC candles closing at its high or near its high
(80% of the candle range) when price moves away from the potential imbalance

DO NOT CONSIDER A BASE THAT...

• Has only doji candles as a base. Doji + Gap is considered valid

• Has more than 6 candles

• Has wicky candles (long tails and/or wicks), they are normally reactions to previous levels and
the picture indecision/confusion. Hammers (bullish) and shooting stars (bearish) candlestick
formations are usually a reaction to another level

WHY SINGLE DOJIS ARE NOT USUALLY GOOD FOUND AT A BASE:

• It all has to do with the context where that doji is found or any other candlestick or SD level.
This requires a lot of screen time

• A doji, single spinning top candles ("wider" doji) are great candlestick patterns, but it all
DEPENDS ON WHERE that doji is located, context is key!

• A doji shows indecision, it tells us that the market is losing steam... A single doji pattern in the
middle of nowhere forming a CP pattern is usually not a good thing, it will depend on its
accomplishments. That same isolated doji at a breakout of an important HTF supply/demand is a
great pattern. Context is key!

• A doji accompanied by other candlesticks formations is much better because a single doji does
not say much, you need to look have context in mind. A doji accompanied by 1-3 more candles
at the base, let's say a bearish engulfing pattern, several shooting stars and a nice drop away
 from a HTF zone is a perfect bearish signal... but 1 single doji is not enough to tell us that the
market "is likely to turn"

WHAT A BAD BASE LOOKS LIKE

Poor basing at #1, too many candlesticks and a lot of indecision, easily absorbed on the way down with
new supply zone created at D1 SZ #2
S&P500 BASING
S&P 500 basing structure not good. [1] has 7 candles at the base and candlestick formations are very
wicky. Besides, the move away was very poor, only one bullish ERC candle at [3]. Basing structure of
imbalance at [2] is poor, we want to see a tight base with one or more basing candles. Confirmation
would be required at [2]

EURNZD WEEKLY CHART GOOD STRUCTURE AT THE BASE

Good bases have almost always the same candlestick patterns, engulfing, haramis, spinning tops and
piercing patterns. We want to see tight candles, not too wicky and not too many candles at the basing.

A few examples can be seen on EURNZD weekly chart. I am just pointing out the structure of these
zones and not their tradeability.

AWK WEEKLY CHART. BAD BASING STRUCTURE

Basing structure is key to setting and forgetting trades and to plan new trades on confirmation. On
#AWK weekly chart I have drawn four areas to compare the basing structure.

• [1] has a lot of trading, more than 6 as per the rules. Not good to plan a trade on nested levels

• [2] has a very similar structure to [1], too much trading. It was not respected

• [3] had a lot of trading at the base as well, it was respected for a couple of weeks and then
eliminated.

These three zones have nothing to do if compared with the basing structure at [4], just four tight candles
accompanied by a very strong decline. That does not mean we can short because the weekly trend is up,
we must wait for confirmation. But if supply at [4] starts playing out, price action at [1] is most likely
going to be eliminated on the way down.