Trading Rally-Base-Rally/Drop-Base-Drop Zones (Complete Guide)

Supply and demand zones are all the rage these days, but two types of zone I rarely hear many traders discuss:

• Rally-Base-Rally Zones.
• Drop-Base-Drop Zones.

Ring a bell?

RBR/DBD zones form when price continues in the same direction rather than reversing, like we see with standard supply and demand zones. It’s a continuation zone, NOT a reversal zone. So we can use them as enter low risk/high reward entry signals into strong trends.

That’s what I’m going to teach in this article.

Ready to dive in? Let’s get started…

Supply and demand zones come in many variations. However, ALL zones fall into one of two categories depending on how they form.

The two categories are as follows:

• #1: Rally-Base-Rally & Drop Base Drop
• #2: Rally-Base-Drop & Drop Base Rally

Rally Base Drop and Drop Base Rally are the normal zones people think of when trading supply and demand. These zones form when price, after trending, reverses after creating a small base.

Here’s how they look…

Each zone follows the same structure – an impulsive move, followed by a base, ending with a reversal against the previous movement.

Now let’s look at RBR and DBD zones…

See the difference?

Looks wise, the zones appear similar.

But check their location – see how the zones develop mid swing from a continuation?

Unlike RBD & DBR zones, Rally Base Rally and Drop Base Drop zones always form DURING a price swing. The zones don’t form from a directional change (like RBD/DBR zones), they only form after a swing gets underway.

The swing begins, price bases, then continues in the same direction.

This has major implications for how and why RBR/DBD zones form.

Here’s the issue:

For an RBR/DBD zone to form, the banks must enter trading positions.

DUH, that’s obvious!

But wait, here’s where it gets deeper: the size of the bank’s positions, and thus the likelihood of price reversing, depends on how many orders were entering the market from opposing traders at that time.

• For the banks to sell, thousands of traders must be buying.
• For the banks to buy, masses of traders must be selling.

And herein lies the problem with RBR/DBD zones…

The banks only have few traders to match with their positions. Why?

Because most traders are already trading in the direction of the swing. When price bases, few traders decide to enter against the swing, so the banks only have a tiny amount of order to match with their positions.

Sound confusing?

Here’s a quick example…

Before the DBD zone above developed, most traders were…

Selling, right?

With price trending lower, most traders were selling before the base formed. But the banks don’t need sellers; they need buyers. That’s the only way they can enter their sell positions.

Therefore: With few traders buying, the banks can’t enter any large sell positions.

They can only sell a small amount, causing the RBR zone to be weak.

This is the key difference between Rally-Base-Rally/Drop-Base-Drop zones and Rally-Base-Drop/Drop Base Rally zones: RBR/DBD zones are significantly weaker. The zones form due to the banks entering smaller positions, which weakens the zone dramatically.

So, RBR & DBD zones are weak, which we now know.

But that doesn’t mean we shouldn’t use them… not at all!

While weaker than RBD and DBR zones, RBR and DBD zones can still get you into some quality supply and demand trades.

Additionally, they tend to provide great support and resistance points.

(More on this later).

Now, let me be clear:

For beginner traders, identifying and drawing RBR/DBD zones can take time and practice. But there are a few ways to speed up the process and make everything far easier.

Want to learn how?

Let’s start with identifying the zones…

To identify RBR and DBD zones, look for supply and demand zones that form during a swing or trending movement. The zones will mark a pause or small consolidation in the swing before price continues in the same direction.

Zones like these, for example…

Notice how the zone formed almost in the middle of the rise?

This is the case for most RBR zones; they’ll form during a small pause during an impulsive up move, usually at 30%, 50%, or 70% completion.

Remember: RBR zones form when price rallies, bases i.e., consolidates, or pauses for a few candles, then rallies again. Aways leads to a zone forming. The zones always form 1. after price has moved higher and 2. when a swing is around 50% complete.

To find and identify RBR zones, then…

1. Look for small pauses in a up move.
2. Check if a rally precedes & succeeds the base.
3. Make sure the zone DOES NOT form due to a trend reversal.

Let’s look at Drop-base-Drop zones now…

DBD zones always form during a downswing, usually towards the middle, but sometimes at the beginning or near the end. Watch for a drop, followed by a base – minor consolidation or pause – completed by another decline

The quickest way to spot DBD zones… look for small pauses or consolidations during a down move; that usually indicates a DBD zone exists.

To find and identify DBD zones, then…

1. Look for small pauses in a down move.
2. Check if a drop precedes & succeeds the base.
3. Make sure the zone DOES NOT form due to a trend reversal.

Onto drawing the zones now…

Drawing Rally-Base-Rally & Drop Base Drop zones is like drawing normal supply and demand zones.

The process is as follows…

1. Identify the zone.
2. Place a rectangle on the base.
3. Cover the base with the rectangle and extend out.

Let’s go through some examples…

Drop-Base-Drop Example:

Here’s a DBD zone I’ve located on Eur/Usd.

First things first: Find the last small candle before price moved away. In our case, that’s the small bear candle marked above. That’s where the zone sits when it extends out.

In the example, I’ve marked this with a black line.

Next, place the zone along the line.

Placing the line isn’t critical; but can make the lower edge clearer.

With the rectangle tool selected, we place the tool along the lower edge, then drag it up to the highest swing high that formed during the base.

If drawn correctly, the zone should look like this…

Easy, right?

Now, we extend the rectangle to the right and wait for entry signals.

Important:

Let’s look at a RBR example now…

Drawing RBR zones follows the same process as DBD zones, but with one key difference: we draw the zone from UPPER base edge rather than the lower.

Here’s what to do…

First: Locate the upper edge of the base, then mark a line.
Then: Select the rectangle tool and place it along the line.
Next: Drag the rectangle to the lowest swing low that formed during the base.

Finally, extend the rectangle to complete the zone.

RBR and DBD zones can offer excellent low-risk trading opportunities into large price swings or trending movements.

The zones may not perform on par with their RBD/DBR counterparts, but they can still offer tidy entries into reversal trades. The zones often act as key support & resistance for retracements.

That makes them great low-risk entries into existing trends.

To trade RBR/DBD zones, follow these 3 steps…

1. Identify a zone.
2. Draw the zone on the chart
3. Wait for price to enter
4. Wait for a pin bar or engulf to form.
5. Enter a trade and place a stop loss.

Sound simple?

Let’s go over a few examples…

The image above shows price falling into a RBR zone on Gbp/Jpy.

To trade this zone, we wait for price to enter and form a price action pattern.

That pattern can be either…

1. A bullish pin bar candlestick
2. A bullish engulfing pattern.

In our case, a bullish pin bar forms…

The pattern confirms the banks buying, indicating price may soon reverse, and giving us a high probability buy signal.

So, now we enter our long trade.

The next step?

Place a stop loss.

On a Rally-Base-Rally zone, place the stop a few pips BELOW the zone. That’ll protect against any large losses while also allowing price enough space to fluctuate if it dips below.

Here’s what happened…

After the pin bar forms, price fluctuates inside the RBR zone. A large bull candle forms and we see price rally out the zone and reverse. Not bad, eh?

All in all, our trade was a success!

We got in, capped our risk, and profited from the reversal.

Here’s another one…

Here’s a tasty little DBD zone on Eur/Usd… To trade this zone, follow the same steps in the previous example.

First: Wait for price to reach the zone.
Next: Wait for a bearish pin bar or engulfing pattern to form; that signals the banks selling at the DBD zone.
Finally: Once an entry signal appears, we enter short and place our stop loss ABOVE the zone.

Here’s how it played out…

Once price returns to the zone, a large bearish engulfing pattern forms.

It’s the banks – they’re selling! A reversal could soon begin. We enter short, place our stop a few pips above the zone, and see if price reverses.

Which, in this case, it then did…

Simple, eh?

As for setting targets and taking profits… that comes down to you. I like to take profits and move stops whenever a new swing low/high forms, but that’s just me.

There’s no right or wrong method, only what you feel comfortable with.

Before we end, here’s 3 key tips to keep in mind when trading Rally-Base-Rally & Drop-Base-Drop supply and demand zones.

Here’s tip #1…

RBR/DBD zones always form after a swing has started, usually around the 50 or 70 retracement levels – some form at the 30% level, though far less frequently. My point?

RBR & DBD zones can provide solid S&R to retracements.

In short: RBR/DBD zones can help us anticipate where retracements terminate. Rather than use support and resistance or retracements to enter, we can use supply and demand zones for a tighter entry and better risk/reward ratio.

Check the example below…

After a long uptrend, Gbp/Jpy begins to retrace.

Sweet, a chance to get long!

Now how do we find where the retracement will end? Well, we could use support and resistance levels or fib retracements. But these have no real backing behind them – are the banks watching them?

HELL NO!!

But look at what formed during the up move…

A Rally-Base-Rally demand zone!

Unlike Fibonacci retracements and S & R levels, the RBR zone has a real-world reason backing it; the banks entering buy positions. We don’t know what size positions they entered nor why they were buying – was it to take profits, to enter trades?

But it doesn’t matter…

The banks were buying here; that’s all we need.

means price has a far higher chance of reversing at the RBR zone than at any of the other nearby level.

And that’s exactly what we see…

Price retraces back to the zone, produces a tidy bullish engulfing – our entry signal – then jumps higher and the trend continues.

All in a day’s work, eh?

Many supply and demand traders believe RBR/DBD zones perform on par with or better than their RBD/DBR counterparts.

Reality check: They don’t.

RBR/DBD zones always have a LOWER probability of causing a reversal than DBR/RBD zones. Some zones can offer similar entries, but those are the exception NOT the rule.

Remember, RBR/DBD zones always form DURING a swing.

In our case, most traders were SELLING before the zone formed.

For the banks to create the zone, they need buyers to match with their sell orders. No buyers = the banks can’t sell. Only a few traders are buying in our example. Hence, the banks can’t enter significant sell positions, leading to a weak DBD zone.

With RBD/DBR zones, this isn’t the case…

Check it out…

Before price reversed here, a major downtrend had been underway. Most traders were selling before the zone formed.

SO: the banks could enter massive buy positions; masses of sellers were available.

That creates a powerful zone; the banks won’t want price to break the zone when it returns – the opposite of what we see when RBR/DBD zones form.

Remember: Buyers need sellers, and sellers need buyers.

• For the banks to buy, thousands of traders must be SELLING.
• For the banks to sell, thousands of traders must be BUYING.

The banks can only cause a reversal if thousands of traders are doing the opposite. The more traders opposing traders available, the larger the positions they can place. That’s why RBR/DBD zones rarely perform as well as RBD/DBR zones.

The bank CANNOT enter significant positions to create the zone – not enough opposing buyers or sellers are available!

Make sense?

RBR/DBD zones will never supplant RBD/DBR as the best supply and demand zones.

Though not as reliable as their RBD/DBR counterparts, DBD/RBR zones can still provide epic trend entries when traded under the right conditions. Just make sure to qualify the zones and only take the highest probability trading signals.

That’ll help mitigate the unreliable RBR/DBD trades that’ll come up from time to time and keep the strategy profitable for you.