In the world of supply and demand trading, proximal and distal lines are two terms you’re likley to come across when drawing and trading the zones.
Heard these before?
These two terms originated from a popular thread in forexfactory back in 2013, but have become popular supply and demand lingo for traders worldwide. The problem is, many newbie traders either don’t know what these terms mean or find their explanation confusing.
So, let’s change that…
In this post, I’ll give you a detailed breakdown proximal and distal lines and show you how to draw supply and demand zones according the lines.
Sound interesting?
Let’s jump in…
What Are Proximal And Distal Lines?
Wondering what these intriguing terms mean and where they originated?
Let’s first dissect their meaning:
In supply and demand trading, ‘proximal’ and ‘distal’ lines outline the upper and lower limits of the base that earmarks the zone’s location. Zones are typically drawn between these two lines, with ‘proximal’ denoting the upper boundary and ‘distal’ representing the lower boundary.
Sound a bit nebulous?
Let’s illustrate with an example…
See how the proximal and distal lines mark the upper and lower boundries of the small consolidation at the source of each zone?
That’s your base – the zone always encompasses this area.
The base signifies where the banks entered significant buy trades to form the zone. The proximal and distal lines highlight the high and low points of where the banks entered, marking the region we need to capture with the zone.
Got the hang of it?
There’s more:
Proximal and distal lines also double up as the entry and stop positions for our supply and demand zone trades.
For supply zones…
- Distal line marks entry point.
- Proximal line marks stop position.
For demand zones…
- Distal line marks entry point.
- Proximal line marks stop position.
Key Point: The proximal line isn’t just about marking the entry point for pending orders. When it comes to price action entry (my go-to method), the proximal line is used to pinpoint where a candle pattern must land to signal a valid entry into the trade.
Now, let’s press on…
How To Draw Zones Using Proximal And Distal Lines
Drawing supply and demand zones according to proximal and distal lines simply means making sure the zone lines on the correct points in the base.
Here’s a quick walkthrough:
Step 1: Identify The Supply Or Demand Zone
The first order of business is to pinpoint the supply or demand zone you’re aiming to draw.
The quickest, no-frills way to spot a zone? Look for a dramatic price shift stemming from a small consolidation (or base) or a few candlesticks.
- For demand zones, watch for a steep price rise.
- For supply zones, watch for a steep price decline.
Let’s look at an example…
We’ll use this neat-as-a-pin demand zone on the Eur/Usd chart.
Step 2: Locate The Zone Base
Our next mission is to find the base of the zone.
The base marks the spot where the banks will orchestrate a reversal if price returns to the zone in the future.
So, what exactly is the zone base?
In a nutshell: The source of the steep move that formed the zone.
Typically, the base will be a compact consolidation of a few small candlesticks (see below), but don’t be surprised if you find zones forming from a two-three candle base. The proximal and distal lines for these zones are drawn in the same way:
From the base candle to the most recent low/high.
Key Point: The base candle is the last small bullish or bearish candlestick that formed before the steep rise or decline took place.
See the little consolidation before the price shot up?
That’s our zone base – where the banks entered buy positions.
The banks entered buy positions all over this area, sparking a price reversal and forming our demand zone. To validate this zone, our proximal and distal lines need to stretch across the entire area. For two-three candle zones, the lines should encapsulate that lone candle before the price launch.
Let’s take a look at an example:
See that dip culminating in a two-candlestick swing high?
That’s our blueprint for the supply zone.
Rather than twiddling their thumbs, waiting for orders to pile up (as we see in zones with a standard base), the banks decided to sell into the torrent of buying. This triggered a dip, resulting in a two-candle swing high that marks our supply zone.
Step 3: Draw The Zone Using Proximal And Distal Lines
Now, it’s time to bring our zone to life.
Sketching the zone involves framing the base with a rectangle, ensuring that the proximal and distal lines nestle into their rightful places.
And what might those places be?
Here’s the breakdown:
Standard base zones…
Supply zones
- Distal line sits on the most recent nearby swing high.
- Proximal line sits on the last small candle before the steep decline.
- For bullish candles, place the line on the open.
- For bearish candle, place the line on the close.
Demand Zones
- Distal line rests on the most recent nearby swing low.
- Proximal line sits on the last small candle before the steep rise.
- For bullish candles, place the line on the open.
- For bearish candle, place the line on the close.
Confused yet?
Relax, it’s easy!
Here’s how the zone looks in our example…
Notice how the distal line comfortably nestles onto the most recent swing high, while the proximal line parks itself on the open of the last little candle (bearish in this case) that formed before the price took a nosedive?
Simple as pie, right?
The process mirrors itself for demand zones: Position the proximal line on the most recent swing low and the distal line on the open or close of the last petite candle before the price rocketed up (depending on whether the candle was bullish or bearish).
And what about those zones with a lone candle base?
Just stick to the same playbook above.
Here’s a quick illustration:
Notice the pattern?
The zone adheres to the same rules.
The proximal line sits on the most recent swing low, and the distal line settles on the last small candle before the price plummeted and those hefty bear candles began to take shape.
Simple, with practice.
The Bottom Line
Alright folks, let’s wrap this up!
In supply and demand trading, proximal and distal lines mark the beginning and end points of zones. The proximal line marks the beginning of the zone, while the distal line defines the zone’s end – the point where the banks bought/sold to create the zone.
And remember: Always marks your lines from the correct points.
Misdrawn zones are one of the key reasons people struggle to make money from supply and demand. Keep your lines on point, and use my guide if nesscary.
Till we meet again, fellow traders…
