Drop Base Rally and Rally Base Drop Made Simple [Bonus Strategy]

The forex world is forever evolving, but that doesn’t mean classic trading tools like chart patterns are irrelevant.

The trick to adapting to forex is learning how to identify these patterns and knowing what to do when you find them.

In this guide, we’re going to look at drop base rally (DBR) and rally base drop (RBD) patterns. These are useful formations that occur all the time, so it’s a good idea to familiarize yourself with them.

We also prepared a simple practice trading strategy. Once you read the explanations, you can grab the strategy and dive right into backtesting.

What is a Drop Base Rally in Forex?

The drop base rally is a chart pattern that forms when the market falls, enters a period of sideways price action, and finally shows an explosive move upwards.

Here’s what it looks like:

We took this picture on the 4-hour chart, but if you go down a timeframe or two, the individual elements of the pattern are more discernable:

The story behind the pattern above goes something like this:

After a large decline, the sell-off ultimately came to a stop, leaving bulls with the opportunity to buy at lower prices.

However, the buying power at this stage was not enough to reverse the market. Instead, the market began moving sideways as neither buyers nor sellers could overcome the other party.

Eventually the piece broke out of the range to the upside and the market rallied back to higher prices.

We’re going to show you how this pattern can serve as the foundation for various trading techniques. But first, let’s take a look at the rally base drop.

What is a Rally Base Drop in Forex?

The rally base drop is a similar chart pattern to DBR but with the opposite formation criteria. The RBD forms during a rapidly increasing market followed by a period of sideways price action, ending with a sharp drop.

Here’s what it looks like:

See an up-close view here:

The narrative is the same except that everything is reversed. Enthusiastic buyers bid up the price, but once they ran out of steam, sellers slowly took over.

Now that you know the fundamentals of DBR and RBD patterns, you might be wondering how to trade them. We’ll share a few ideas with you below.

How to Trade Drop Base Rally and Rally Base Drop Patterns

One simple method to trading rally base drop and drop base rally patterns is to do so while they are forming.

You may recall that the base part is a range on the smaller timeframes.

You must also remember that a range breakout is a classic technical signal as it indicates a potential imbalance between supply and demand.

Thus, when the price breaks out from the base part, you may open a trade in the direction of the breakout.

The easiest way to do this is to switch to a lower timeframe. This way, you can clearly see the range, wait for a candlestick to close above the upper (or below the lower) bound of the range, and open a trade.

You can put your stop loss around the middle of the range and your profit target to the level where the pattern is regarded to be complete.

This guide belongs to ForexSpringBoard.com. Do not copy without permission.

In essence, this type of trade is a bet that the pattern will fully materialize. This is because the rally and the base (or the drop and the base) are already there, but the final move is not.

RBD/DBR patterns can also be combined with technical indicators. For instance, let’s assume you use Bollinger Bands, which consist of three bands that form a dynamic price channel.

The first band is a moving average that provides a measure for central tendency. The other two bands—above and below— automatically widen or narrow depending on market volatility.

You may wait for a situation when a rally base drop occurs with the drop portion stopping at the middle trend line (also called the basis).

If the body of the following candle completely covers the body of the prior candle, you go long with your stop loss below the basis and profit target at the upper band.

This trade is feasible if you regard the temporary decline as an opportunity to enter an uptrend. In other words, you expect the market to continue making higher highs and higher lows.

Of course, the opposite set up can be applied to the drop base rally.

Finally, we left one of the most popular trading methods for last: trading pullbacks to the RBD or DBR. We’ll elaborate on this technique below.

Day Trading Strategy Rules

Here’s a quick overview of the strategy rules:

Read below for a more detailed explanation.

One strategy consists of taking a long position after a drop base rally pattern forms and the price returns to the rally’s origin.

Conversely, the other strategy takes a short position after a rally base drop pattern forms and the price returns to the drop’s origin.

You can use this strategy on any timeframe and with any currency pairs.

The concept is fairly simple:

You bet on the possibility that the rally will continue in case of the drop base rally and that the drop will continue in case of the rally base drop.

Since it’s usually not smart to buy at the high (or sell at the low), you wait for a pullback to the base. The price has recently reversed in this area so you can assume that it functions as a supply (or demand) zone.

Thus, once the price gets to the zone, you can open a trade hoping for a quick bounce from the zone.

The stop loss is placed on the other side of the base. That is, a few pips below the entry in case of the drop base rally, and a few pips above the entry in case of the rally base drop.

The take profit is placed at 2x risk. So, if you risked 10 pips, your profit target will be at 20 pips.

There’s no break-even rule. Once a trade is opened, it’s either going to be a win or a loss. Of course, you should risk only a small amount of your trading money per trade (ideally no more than 1%).

Don’t expect much from this strategy in terms of profitability at this stage. The purpose is to help you practice. If you like this trading technique, feel free to improve it or create your own strategy.

If you’re interested in developing your own strategies, this guide will set you on the right path.

Conclusion

Drop base rally and rally base drop patterns can be valuable part of your toolbox.

Using the strategy above, you can begin practicing them right away. Make sure to do this in a risk-free simulated trading environment such as the one provided by Soft4FX.

This will help you decide whether or not you want to trade DBR and RBD with real money.