Drop Base Rally (DBR) – 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 Drop Base Rally (DBR). This pattern suggest shift in trend from bearish to bullish.

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

Understanding Drop Base Rally (DBR) 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.

In Drop Base Rally, Drop represents a downtrend. Here, sellers dominate the market and push the price lower. The downward movement of price must be strong. The strength of the move can be seen in the form of strong bearish 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 reversal pattern, the final phase is Rally. This reverses the trend into an uptrend. In this phase of the market, buyers regain control of the market. A strong uptrend move with strong candlesticks is often supported by increased volume. This authenticates the bull move as rally.

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

Key Characteristics of Drop Base Rally (DBR)

The following are the characteristics of Drop:

• In Drop phase of market, there is a dominance of bearish candlesticks.
• It would be better if there is a high volume associated with bearish candlesticks. This indicates aggressive liquidation by market participants.
• Price moves downward by breaking prior support area.

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 accumulation phase by institutional traders.

The following are the characteristics of Rally within DBR:

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

Psychology Behind DBR

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

Normally, in immediate down move of a market, there is fear and pessimism involved. When sellers become pessimistic and fearful, they offload their position which result in immediate downtrend represented by strong bearish candles. This is the drop phase of market. It is also possible that negative news or economic data involved in the Drop of market.

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. This is an equilibrium phase of market where supply matches demand. In case of Drop Base Rally, market prepare to reverse its prior trend. This base becomes demand zone.

In Rally, Optimism emerges among buyers. They perceive the price to be undervalued. Supply is converted into demand. Buyers overwhelms sellers which results in trend reversal.

Base as a Demand Zone

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

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

• Traders expect uptrend in future where market revisit this zone before continuing to the upside. Market structure should be bullish or there must of signs of bullishness (by breaking key structure level like Change of Character). Base coincides with a support level.
• From institutional perspective, the base serves as accumulation zone. Institutions accumulate large positions in this phase. This represents that market is preparing for uptrend 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 long positions.

Identification of Drop Base Rally

Its identification is a bit complex task. Recognizing DBR 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 DBR, 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 breakout. Employ different strategies to get a sign of breakout to the upside. A valid Rally begins with strong uptrend move. This can be with strong bullish candlesticks. Increased volume during this breakout 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 Rally (DBR), 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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