Rally-base-rally (RBR) and drop-base-drop (DBD) zones are often praised as high-probability setups in supply and demand trading.
However, my personal experience tells a different story.
After carefully analyzing my trades over a seven-month period, I discovered that most of my losses stemmed from these very zones.
While some may argue that I simply wasn't trading them correctly, extensive backtesting revealed that RBR/DBD zones simply don't perform as well as many claim. Price often blows right through them, rendering them ineffective.
So, why the underperformance?
The answer lies in a fundamental principle of supply and demand trading: the strength of a zone is determined by the market sentiment preceding its formation, not the move away from it.
Here's the breakdown:
Strong Zones: A demand zone formed after a steep decline (drop-base-rally) is often powerful because the bearish sentiment leads to a large number of sell orders, requiring substantial
buying from the banks to reverse the trend.
Weak Zones: Conversely, a demand zone formed after a rise (rally-base-rally) is weaker because the bullish sentiment leaves fewer sellers for banks to buy from.
The same principle applies to RBR/DBD zones.
These zones always form AFTER price has moved in zones expected reversal direction, leaving fewer opposing orders for the banks to utilize. The lack of orders makes them significantly weaker than RBD/DBR zones, which always form during a reversal when there's an abundance of opposing buy or sell orders.
Because of this inherent weakness, banks are limited in their ability to:
1) Enter large trades
2) Take significant profits
3) Close open positions
Let's analyze a rally-base-rally (RBR) zone on EUR/USD...
At first glance, it seems like a promising setup, right?
Many supply and demand experts would agree, pointing to its substantial move away, decent base, and alignment with the current short-term trend.
But here's the critical flaw:
The RBR zone formed AFTER a steep rise - the prevailing sentiment was already very bullish, with masses of traders piling into long positions, expecting further upward movement.
After such a strong surge, would many be eager to sell?
Absolutely not!
The banks now have a limited number of sell orders to work with, hindering their ability to enter significant buy trades or take substantial profits from open shorts.
The result?
A weak Rally-Base-Rally demand zone.
Remember: Banks only care about supply and demand zones created from large-scale trading actions. If a zone forms in an environment where they couldn't make a significant impact, i.e., entering large trading positions, its potential for a strong reversal is limited.
Let's see how this plays out in the market as the price returns to this zone...
Price consolidates for a while, and then easily breaks through the zone.
Where does it reverse?
Surprise, surprise...
Price doesn't reverse at the rally-base-rally (RBR) zone. Instead, it reverses at a much stronger drop-base-rally (DBR) zone formed earlier in the move.
This illustrates a critical point:
RBR and DBD zones generally underperform compared to RBD and DBR zones.
Here's why:
RBR (Rally-Base-Rally) and DBD (Drop-Base-Drop) zones form after the price has already moved significantly in one direction. This limits the pool of potential opposing orders available for banks to utilize, hindering their ability to execute large trades or take substantial profits.
Sentiment Matters
Furthermore, RBR and DBD zones form in line with the prevailing market sentiment. This means they're essentially riding the wave, not fighting against it.
The RBD and DBR Advantage
In contrast, RBD (Rally-Base-Drop) and DBR (Drop-Base-Rally) zones emerge against the current market trend:
RBD zones: Form after a price drop, creating a pool of potential buyers eager to enter at a discount. This provides the banks with ample liquidity to execute large sell orders, increasing the likelihood of a significant downward reversal.
DBR zones: Form after a price rise, creating a pool of potential sellers looking to take profits. This presents the banks with a golden opportunity to buy at a favorable price, potentially triggering a powerful upward reversal.
The Bottom Line:
Opposing market sentiment is key. RBD and DBR zones offer the banks the liquidity they crave for large-scale trading, making them prime candidates for significant reversals.
While RBR and DBD zones can still be traded, their effectiveness is often limited by timing and prevailing sentiment.