Drop Base Drop (DBD) – Supply & Demand Continuation Pattern

Supply and Demand traders typically take care of supply and demand zones. These are the traders that have an in-depth understanding reversal and continuation supply and demand patterns. In continuation patterns, Drop Base Drop (DBD) is a bearish continuation pattern. This pattern represents continuation of primary bearish trend.

This article explores understanding of Drop Base Drop (DBD), its key characteristics, and psychology behind the pattern.

Understanding Drop Base Drop (DBD) Pattern

Normally, market either trends or consolidates. There are two types of major trends that market creates. Market moves by creating higher highs and higher lows. This type of trend is known as uptrend. Secondly, market moves by creating lower lows and lower highs. This a downtrend of the market. In consolidation, market moves in tight range. The same concept applies to supply and demand patterns.

In Drop Base Drop, Drop is an initial downtrend move. In this price movement, sellers dominate the market and push the price lower. The downtrend movement of price must be strong. The strength of the price can be seen in candlestick patterns. During the move, price creates strong bearish candlesticks. Consider volume with the candlesticks as well. Volume in such trading market should be high to moderate. If there are spikes (excessively high) in volume bar, then you should avoid trading with the trend.

Base in this supply and demand pattern is the area of price that stabilizes the market. Market moves sideways. This is a period of sideway price movement. In live markets, it is difficult to predict the next move. This phase is generally characterized by low volatility. The low volatility can be observed through indicators like Bollinger bands or through candlesticks with small bodies. This is a balanced state of market where buyers and sellers are in equilibrium.

As this is the continuation supply and demand pattern, the final phase is again Drop. This confirms trend and supply zone for future price action. This phase continues its prior trend. In this phase, sellers take control of the market. A strong downtrend move with strong candlesticks is often supported by increased volume. This authenticates the sell move as Drop.

This is the overall concept of Drop Base Drop (DBD) in bearish continuation pattern. Base in the pattern can act as supply zone. In this zone, selling interest accumulates and prevent price from upside rally. Traders, especially institutional traders, deem this area for potential entry point for short positions during upcoming retests.

Key Characteristics of DBD

The following are characteristics of Drop:

• In Drop phase of market, there is a dominance of bearish candlesticks.
• It would add strength to our analysis if there is a high volume associated with bearish candlesticks. This indicates aggressive liquidations by market participants.
• Price moves downward by breaking prior support area.

The following are the characteristics of Base with DBD:

• In Base, price gets balanced and moves within a confined support and resistance.
• There is a low volatility during this phase. Volatility factor in trading can be measured with the help of candlestick pattern and indicators.
• Smaller candlesticks like dojis, hammer pattern, hanging man etc. form during this phase.

The following are the characteristics of Drop within DBD.

• Market gathers bearish momentum. It can be seen in strong bearish candlesticks.
• There should be a high to moderate volume associated with these candlesticks. This high volume represents selling pressure.
• Price must break the support level.

Psychology Behind DBR

Trading in financial markets is an art. As a trader, we take risk and collect multiple probabilities before drawing any conclusion. Drop Base Drop (DBD) is a bearish continuation pattern that help us determine supply zone for future price action.

In any downtrend of a market, there is a fear and pessimism involved. When sellers become pessimistic and fearful, they offload their position which results in intermediate downtrend move. There is a possibility that drop phase of price action is a result of negative news or economic data.

There is another possible scenario is that institutions traders drive the market lower. This is because they want to accumulate more and more positions at discount price. After finishing accumulation, they reverse trend in their desired direction.

After every down move, there comes a time when market consolidates and test supply. There market confirms whether to continue its downtrend or reverse its trend. In case of Drop Base Drop, market prepare to continue its prior trend. In Drop, pessimism emerges among sellers. Their selling intent results in further downtrend. This base becomes supply zone.

Base as a Supply Zone

Remember, price action trading is highly dependent on previous candlestick or bar chart data. With the help of this data, we look for strong supply and demand zones. These zones are attractive for refilling or pending orders. In Drop Base Drop (DBD), base act as a critical supply zone.

Base in DBD 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 a supply zone:

• Traders expect downtrend in future where market revisit this zone before continuing to the downside. Market structure should be bearish and there must be a sign of bearishness.
• From institutional perspective, the base serves as distribution zone. Institutional distributes positions in this phase.
• Lastly, traders wait for the price to retest the zone. Retest of this zone provides low-risk and high reward trading opportunity to enter short positions.

Identification of Drop Base Drop

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

First, trader should know the current trend of market. SMC and ICT Market structure can help us in understanding and confirmation about trends. In case of DBD, look for a clear downtrend. Market creates lower lows and lower highs. If market is in an uptrend, 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 breakdown. 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 breakdown is a key confirmation signal.

These are the few simple steps that can be followed. 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 Drop Base Drop (DBD), 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.

Frequently Asked Questions (FAQs)