Last Updated on 4 months by ICT Team
In the world of forex trading, there are numerous price patterns that traders use to identify potential trading opportunities. One such pattern is the Rally Base Drop (RBD) pattern. This pattern signifies the formation of a supply zone, where big institutions and traders place their pending sell orders to go short in the market. By understanding and effectively using the RBD pattern, traders can gain insights into the hidden sell orders of market makers and make informed trading decisions.
What is the Rally Base Drop Pattern?
The Rally Base Drop pattern is characterized by a specific sequence of candlesticks on a price chart. It consists of a big bullish candlestick, followed by a base candlestick, and finally a big bearish candlestick. This pattern indicates a bullish impulsive wave, followed by a retracement wave, and then a bearish impulsive wave.
The candlestick with a large body and a small wick represents significant price momentum, and on a lower timeframe, it signifies a complete wave.
To identify the Rally Base Drop pattern, traders can follow a simple formula:
RBD = big bullish candlestick + Base candlestick + Big bearish candlestick
How to Identify the Rally Base Drop Pattern?
To effectively identify the Rally Base Drop pattern, traders need to analyze the body to wick ratio of the candlesticks involved. Through proper backtesting, it has been observed that the body to wick ratio of the big bullish candlestick should be greater than 70%. On the other hand, the body to wick ratio of the base candlestick should be less than 25%. If a candlestick fails to meet these criteria, it is advisable to avoid considering it as an RBD pattern.
Drawing the Supply Zone in the RBD Pattern
The supply zone in the RBD pattern is drawn based on the high and low points of the base candlestick. If there are multiple candlesticks in the base, traders should choose the highest high and lowest low to draw the base zone. By drawing a rectangle on these points and extending it to the right, traders can define the base zone, also known as the supply zone.
The Psychology behind the RBD Pattern
The RBD pattern often appears as a fake-out at key levels in the market. These fake-outs create areas that become attractive for sellers, and traders can identify these areas through the RBD pattern. Market makers engage in stop loss hunting through fake-outs, which then manifest as the RBD pattern in technical analysis. It is important to note that most chart patterns in technical analysis are derived from natural phenomena, and the RBD pattern is no exception.
Conclusion
The Rally Base Drop pattern is a valuable tool in the arsenal of technical traders. By understanding the formation and characteristics of this pattern, traders can identify potential supply zones and make informed trading decisions. It is crucial to conduct thorough analysis, including evaluating the body to wick ratios of candlesticks, drawing the supply zone accurately, and considering the psychological aspects behind the RBD pattern. By adopting effective trading strategies and combining the RBD pattern with other chart patterns, traders can enhance their technical analysis skills and increase their chances of success in the forex market.
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