4 Key Candle Structures Used To Identify Imbalances on a Price Chart(important)

4 Key Candle Structures Used To Identify Imbalances on a Price Chart

 

There are 4 key structures used to identify imbalances on a price chart

  1. Drop Base Drop (DBD) – this is a bearish continuation pattern, sell on the relief bounce to this supply
  2. Rally Base Rally (RBR) – this is a bullish continuation pattern, buy on the retracement to this demand
  3. Drop Base Rally (DBR) – this is a bullish reversal pattern, you want to get long after a sell off into a strong DBR demand
  4. Rally Base Drop (RBD) – this is a bearish reversal pattern, you want to sell after a relief bounce into a strong RBD supply

Drop Base Drop (DBD)

This is a bearish continuation pattern, sell on the relief bounce to this supply

This is a drop base drop (DBR) supply. They form in downtrends. The idea here is to SELL on relief bounce to this fresh supply. The origin of this sell off is not at 149, but at the little consolidate period PRIOR to the sell off. That is a drop base drop 3H imbalance. Price begins to sell from 149 to 144, but is followed by a small green basing candle. This is where the supply resides. Price bases, then all of a sudden TANKS. This is indicative of a large amount of supply sitting in that white space at that price point. Price only moves for one reason. Supply exceeds demand or demand exceeds supply. $ROKU falls from 144 to 127. Notice the low volume run up. Price relief rallies to the origin of the sell off. When the fresh imbalance is tested, note the HUGE volume surge. Market participants are buying after a rally in price into a level of supply. The big boys are able to sell while the other side is buying, until supply exceeds demand and the market rejects prices. This is a powerful imbalance in this case. I will explain in a different post – how to gauge the strength of an imbalance, is it weak/strong?

Rally Base Drop (RBD)

This is a bearish reversal pattern, you want to sell after a rally into a strong RBD supply.

Starting from the 29 low by the (A), notice how price rallies without stopping all the way up to the 78 area. From here, price BASES, then all of a sudden collapses. That tells me that there is a surplus of sell orders waiting to be filled and this makes it an either A) high probable area to scalp a short from or B) take profits if long and watch for re-entry on the pull back. Look what happens when price retest the fresh rally base drop supply zone, you get immediate rejection for almost 20 points. The sell orders that did not originally fill on the sell off because price fell too fast hit the market when the fresh level is tested, and you see an immediate reaction. Now look what happens after the rejection from 72 down to 53, we get a second attempt to breach the supply that was tested already and it busts through. This is because majority of the sales filled when price rejected, making it a very low probable trade if you tried to short a non-fresh supply zone.

Drop Base Rally (DBR)

This is a bullish reversal pattern, buy when price sells off into this supply.

This is a Drop Base Rally (DBR) demand zone, the idea here is to get long after a sell off in to this imbalance. First thing here, this is a clear downtrend. Lower highs. Supply is in control in this particular $BA chart. Now the weekly demand zone resides in the basing candle at 334. Notice price FADES from pivot high 375 all the way down to 320. From 320, price bases in that area then reverses UP. This suggests that there is a mass amount of demand at the origin of this move (334) because price was previously selling off, based and rallied. The idea here is to get long when price sells off in to a fresh imbalance like shown above. $BA rallies from 319 to 391, forming DEMAND at the 333 DROP BASE RALLY(DBR) zone. At 391, notice we form a DROP BASE DROP weekly supply zone. We get a large sell off from 374, and look where price moves to. Price sells off into the DROP BASE RALLY weekly imbalance and reverses hard. From 334, we see a strong move up to the NEXT LEVEL of supply. This is the drop base drop weekly imbalance (remember supply is in control, we have a series of lower highs). Going long here, I would enter at 333 and target the drop base drop weekly supply at 370 to take profit. We see a strong move into supply then an instant sell off. This sells off into the drop base rally demand zone, but remember that this is no longer a fresh level of demand. It was tested previously, causing the rally form 334 up to 391. Price chops a bit, filling the remainder of sales, but then breaks BELOW. This is why the highest probability trades come from those zones that have not traded yet.

Rally Base Rally (RBR)

This is a bullish continuation pattern that forms in up trends. Buy on a return to this imbalance

This is a bullish continuation pattern that forms in up trends. The idea here is to get long on a retracement into this fresh imbalance. Above is a weekly chart of $BA (Boeing). Looking to the left, you have a strong rally from 240, price pauses (bases) at 300, then all of a sudden takes off again. The series of basing candles in the rally, base, rally (yellow circle on left side of chart) is where the weekly imbalance is. It is an imbalance because price rallies, pauses, then rallies again. This suggests that there is a surplus of demand at that price point to cause price to be able to rally out of the BALANCED(based) area. From here, price begins to trade sideways and finally sells off just before the 400 area. Look where price sells off to. It sells to a FRESH level of demand. The sell off in to demand (market participants are SELLING after a LARGE DROP IN PRICE into a LEVEL OF DEMAND…..think about this for a second. Big money is on the other side BUYING at the weekly imbalance while the other side is selling. Price takes off and moves from 300 to 448. Every buyer there is a seller and vice versa. The market is a game of liquidity. It moves from the large institutional buy to sell orders. This is why we want to ideally take fresh ,untested levels of demand. These are the levels that will have the highest probability of the strongest reaction since it will have more orders to fill due to it being a fresh imbalance.