Rally Base Rally (RBR) is a trading strategy that successful traders widely use. It involves identifying potential turning points in the market based on the principles of supply and demand. This guide will provide a comprehensive step-by-step approach to mastering the art of RBR trading.
What is Rally Base Rally?
Rally Base Rally (RBR) is a simple price action pattern that shows a strong demand zone on the chart. This means a specific area on the chart where the number of buyers are increasing.
It is based on the concept of supply and demand in Trading, which states that prices move according to the imbalance between buyers and sellers.
How to identify Rally Base Rally?
Identifying the Rally Base Rally pattern is quite simple. First, it usually consists of three candles, but sometimes, there could be more than one candle in the base zone.
The first candle is a big, powerful, green bullish (rally). This indicates that buyers are strong. Then, there is a small doji candle (base), representing a period of indecision or increasing demand. Finally, another powerful green bullish candle (rally) indicates continuation.
A simple form of the RBR pattern consists of three candlesticks.
- Two big bullish candlesticks
- One or sometimes more than one base candlestick
A Body to wick ratio is also important here:
- Two big bullish candles’ body-to-wick ratio must be greater than 70% of the total candlestick size.
- The base candlesticks’ body-to-wick ratio should be less than 25% of the total candlestick size.
How to draw?
We can draw a zone or box between those big candles, the ‘Demand Zone.’
To draw a demand zone in a rally base rally pattern, you must first identify the base zone’s high and low. Once you’ve done that, draw a rectangle that joins the high and low points of the base zone. This rectangle should be extended to the right of the RBR pattern.
If there is more than one candle in the base zone, mark the high of the highest candle and the low of the lowest candle. In short, you can mark the high and low points based on the available candlesticks.
What does this pattern indicate to traders?
It indicates nothing but the footprint of big institutional players on the chart. It shows high demand in specific zones, and institutional traders buy there.
The Rally Base pattern helps us retail traders to identify those areas and to trade there. Once the demand goes up, the base breaks with a high-volume candle, and prices rise quickly.
How to Trade Rally Base Rally Pattern?
As we know, It is a bullish pattern that occurs when a market or stock has a strong rally, consolidates in a base, and then rallies again from that base.
There are two methods to trade this pattern. One is riskier but can result in higher profits if you manage risk appropriately.
- Entry in Breakout
- Entry on Retest
Entry in Breakout:
This method involves entering the trade as soon as the price breaks out of the demand zone / the base zone with a high-volume candle. It’s a riskier method because sometimes the breakout could be a fakeout, which means the price breaks out of the zone but quickly returns inside. You can place a stop-loss order below the demand or base zones to manage the risk.
Entry on Retest:
This method involves waiting for the price to break out of the demand zone / the base zone and then retesting the zone. The retest is when the price comes back to the zone and touches it again. This method is less risky because it confirms that the demand zone / base zone is strong enough to hold the price. You can enter the trade on the retest with a stop-loss order below the demand or base zones.
This is for entry, right, but what about the exit? You can set your targets as per the best levels available on the chart. Most of the time, you will get a 1:2 risk-to-reward ratio.
One common approach is to set a profit target is based on the chart’s levels. This means identifying key resistance areas where the price might struggle to move higher and setting your target below them.
For example, if you enter the trade at $100 and there is a resistance level at $110, you might set your profit target around $110. This ensures that you take profits before the price hits the resistance level and gives you a 1:2 risk-to-reward ratio, which means your potential profit is twice the amount of your possible loss.
Another approach is to use trailing stop-loss orders. These orders automatically adjust the stop-loss level as the price moves in your favor, allowing you to lock in some profits while still being in the trade.
For example, you might set a trailing stop-loss order at $95. If the price moves to $105, the stop-loss order will adjust to $100, locking a $5 profit. If the price keeps increasing, the stop-loss will traverse it, securing your profits.
Ultimately, the best approach will depend on your trading style and risk tolerance.
Pros and Cons of Trading Rally Base Rally Pattern
Here are some Pros and Cons of Trading Rally Base Rally pattern:
- Easy to identify: The Rally Base Rally pattern is easy to spot on a chart, making it a popular choice for traders who use pure price action.
- A strong indication of demand: The pattern shows a strong demand zone on the chart, indicating that institutional traders are buying there.
- High potential for profits: If traded correctly, the pattern can result in high profits, as prices rise quickly after the base breaks with a high-volume candle.
- False breakouts: Breakouts can sometimes be fake, meaning the price breaks out of the zone but quickly returns inside. This can lead to losses if the trader enters the trade on the fakeout.
- Risk of losses: As with any trading strategy, there is always a risk of losses. Traders should manage their risk appropriately by using stop-loss orders.
- Not always reliable: The Rally Base Rally pattern is not always reliable. Traders should use it with other technical analysis tools and indicators to confirm their trades.
In conclusion, the Rally Base Rally (RBR) pattern is a simple yet powerful price action pattern that can help traders identify strong demand zones on the chart. By looking for the specific three-candlestick pattern and drawing a demand zone between the big bullish candles, traders can understand the big players’ game and should play accordingly to gain profit.
However, traders should also be aware of the potential risks, such as false breakouts and losses, and manage risk appropriately using stop-loss orders and other technical analysis tools and indicators. When used correctly and with different analysis methods, the RBR pattern can be valuable to a trader’s toolkit.