Rally Base Drop (RBD) – Reversal Supply & Demand Pattern

Trading with supply and demand zones requires in-depth understanding of reversal and continuation supply and demand patterns. One of the patterns is Rally Base Drop (RBD). This pattern suggest shift in trend from bullish to bearish. Rally is a bullish trend that transformed into a consolidation (base), and lastly into a bearish trend (drop).

This article explores understanding of Rally-Base-Drop, its key characteristics, logic behind the pattern, examples related to DBR.

Understanding Rally Base Drop (RBD) Pattern

Normally, market moves in three different ways. Market moves by creating higher highs and higher lows (uptrend), market moves by creating lower lows and lower highs (downtrend), and market moves sideways. These are the three universal market movements. The same concept applies to supply and demand patterns.

Rally Base Drop represents a uptrend. Here, buyers dominate the market and push the price higher. The upward movement of price must be strong. The strength of the move can be seen in the form of strong bullish candlesticks. If there is strong volume attached with it, it will add additional validity to the pattern.

Base is the area of price that stabilize the market and market moves sideways. This is a period of consolidation. Market is uncertain during this phase. This phase has low volatility. This volatility can be seen in the form of smaller candlestick bodies. This is the balanced state of market where buyers and sellers are in equilibrium.

As this the bearish reversal pattern, the final phase is Drop. This reverses the trend into a downtrend. In this phase of the market, sellers regain control of the market. A strong downtrend move with strong bearish candlesticks is often supported by increased volume. This authenticates the bearish move as drop.

This is the overall concept of Rally Base Drop (RBD) in reversal pattern. Base area in the pattern can act as demand zone. In this zone, selling interest accumulates and prevent price from further bull move. Traders, especially institutional traders, deem this area for potential entry point for short positions during upcoming retests.

Key Characteristics of Rally Base Drop

The following are the characteristics of Drop:

• In Rally phase of market, there is a dominance of buyers represented in the form of bullish candlesticks.
• It would be better if there is a high volume associated with bullish candlesticks. This indicates aggressive liquidation by market participants.
• Price moves upward by breaking prior resistance areas.

The following are the characteristics of Base within DBR:

• In Base, price gets stabilizes and trades within a confined support and resistance.
• There is a low volatility during this phase. This can be measured various indicators. One of them is Bollinger bands.
• Smaller candlesticks like dojis and spinning tops are formed during this phase.
• This phase can be seen as distribution phase by institutional traders.

The following are the characteristics of Drop within DBR:

• Market gathers bearish momentum. It can be seen in strong bearish candlesticks.
• There is high volume associated with these strong candlesticks. This high volume represents selling pressure and interest of market participants.
• Price breaks prior support level.

Psychology Behind RBD

Trading financial market is art. As a trader, we collect multiple probabilities before drawing any conclusion. Rally Base Drop is a reversal pattern that help us determine supply zone.

Normally, in immediate up move of a market, there is fear and pessimism involved. When buyers become optimistic and fearful, they accumulate more positions which result in immediate uptrend represented by strong bullish candlestick. This is the Rally phase of market. It is also possible that positive news or economic data involved in the Rally of market.

After every up move, there comes a time when market consolidates and test demand. There market confirms whether to continue its uptrend or reverse its trend. This is an equilibrium phase of market where supply matches demand. In case of Rally Base Drop, market prepare to reverse its prior trend. This base becomes supply zone.

In Drop, pessimism emerges among sellers. They perceive the price to be over-valued. Demand is converted into supply. sellers overwhelms buyers which results in trend reversal.

Base as a Supply Zone

Price action trading is highly dependent upon previous price action and price zones that are attractive for refilling or pending orders. In Rally Base Drop (RBD), Base acts as a critical supply zone. Base represents a price level where selling interest overwhelms buying pressure. Traders identify these zones for optimal entry points.

The following are the key points of base as supply zone:

• Traders expect downtrend in future where market revisit this zone before continuing to the downside. Market structure should be bearish or there must of signs of bearishness (by breaking key structure level like Change of Character). Base coincides with a resistance level.
• From institutional perspective, the base serves as distribution zone. Institutions distribution large positions in this phase. This represents that market is preparing for downtrend move.
• Lastly, traders wait for the price to retest the zone. Retest of this zone provide low-risk and high reward trading opportunities to enter short positions.

Identification of Rally Base Drop

Its identification is a bit complex task. Recognizing RBD requires analyzing trends and market structure.

First, trader should know the current trend of market. SMC Market structure can help us in understanding and confirmation about trends. In case of RBD, look for a clear uptrend. Market creates higher highs and higher lows. If market is in an downtrend, market must be in retracement phase.

Second, identify a phase where price action is choppy, and there is a stability in price action after drop. Remember, consolidation phase has a low volatility and smaller candlestick bodies.

Lastly, wait for breakout. Employ different strategies to get a sign of breakout to the downside. A valid Drop begins with strong downtrend move. This can be with strong bearish candlesticks. Increased volume during this breakout is a key confirmation signal.

These are the few simple steps that can be followed in order to identify Rally Base Drop. However, things are not that much simple in trading. It is crucial to take into account other concepts and strategies that can be combined logically for better results.

Final Note

Trading in financial markets involves significant risk. Understanding supply and demand patterns, especially Rally Base Drop, cannot minimize the risk. It is a powerful tool for market analysis but does not guarantee success in trading. There are various factors that can influence the market. Some market does not respect well-identified patterns

Traders should use proper risk management by using stop-loss orders and position sizing. This helps protect against uncertain market conditions. Try not to use overleveraging. Leverage amplifies profits but increases the risk of loss. Remember, past performance of price action does not guarantee future results. Traders are responsible their profit and loss. It would be better to risk the capital that you can afford to lose.

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