Rally Base Drop – Supply ZoneUnlike conventional Price Action Analysis, which relies on countless chart patterns, Supply Demand Strategy focuses only on four high-probability price formations. Rally Base Drop (RBD) is one of the four price formations which lay the foundation of the Supply Demand Trading Strategy.
Rally Base Drop Pattern
RBD is a reversal price pattern, which one can generally locate at market turning points. At areas where uptrends get exhausted and begin a new downward move.
RBD occurs when prices have been rising, and peaking, followed by a sharp drop. This indicates that the sellers are now more aggressive and have overwhelmed the buyers to form a Supply Zone.
Components of a Rally Base Drop Pattern
This formation comprises three parts:
1. Leg-In Candle - Bullish Candle to the left-hand side of the base structure. It need not be an explosive candle.
2. Base Candles - Narrow range small-bodied candles which indicate that orders are potentially being accumulated by the institutions.
3. Leg-Out Candle – Huge Explosive Red candle with a sharp drop in price, which indicates the footprint of Institutional Selling activity.
Steps to Identify a Rally Base Drop Pattern
1. Start with the Current Price on the Chart and go from Right to left
2. Look up and left until you find a strong Drop in the Price
3. Identify whether the formation is an RBD
4. Mark the Zone
When marking the Zone, we need to watch for freshness and the strength of the Leg-Out Candle.
Fresh Supply Zones are those where the price has never retraced after formation, they have the highest probability of having unfilled sell orders.
Strong Explosive Red Leg-Out Candle indicates that supply and demand are totally out of balance and institutions have been aggressive sellers at that price zone.
Trade Action at a Rally Base Drop Supply Zone
RBD pattern is the footprint of Institutional selling activity, formed due to the sheer size of their sell orders. This implies that, when prices retrace back to the area, there is a strong likelihood that there will be a large number of pending sell orders.
After identifying the supply zone, we as retail traders must wait for the price to retrace to the zone. The first retracement to the RBD supply zone is a high-probability sell opportunity. We can initiate a short trade on the pullback to the zone and in doing so participate along with the Institutions to the short side.
Some past examples:
Although RBD is a very powerful supply zone formation, it is highly recommended that one mustn’t trade it in isolation. Combining it with factors like a trend, trend exhaustion and location will improve the odds of the zones working in our favour.
