Bearish Engulfing is the first Bearish Setup in our aresenal. Please refer to the post on Chart Patterns to refresh your memory. Just to recapitulate, it is a 2 candlestick reversal pattern that forms after a reasonable advance.
To be tradable as per our strategy, the following conditions need to be met, part of trade selection.
The setup should complete on C3 @ 3PM, C4 @ 5PM, or C5 @ 7PM. Setup forming on C2 is not eligible. Trading conditions are mentioned below separately for trades on C4 @ 5pm and trades on C5 @ 7pm. Note : If you recall from the introductory post on chart setups, trade execution @ 5PM or 7PM depends on the US open. The former applies when the US markets open @ 7PM and the latter when the US markets open @ 8PM during winters.
Trades @ 5PM i.e. completion of C4 - The setup should form at C3 or C4. If the setup forms at C3, C4 should not be an adverse green candle or a long red candle.
Trades @ 7PM i.e. completion of C5 - The setup should form at C3, C4 or C5. If the setup forms at C3 or C4, the subsequent 2H candle/s before taking the trade should not be an adverse green candle or a long red candle. In both the situations above, if the setup forms on a 2H candle earlier than the trade execution time @ 5PM or 7PM, the interim candle/s should not violate the setup or run away. A narrow range candle (red or green) or a small doji that indicates consolidation is what we are looking for. Some amount of judgment is required. IF THERE IS ANY DOUBT, DO NOT ENTER.
Setups forming at a strong Horizontal, Pivot, Congestion or Gap Resistance have a high probability of success (refer our posts on these four types of S&R in the section on Technical Tools). Do not enter a trade if the setup forms after a steep rise without resistance in the vicinity as the price action may just be taking a pause before resuming the uptrend.
There should be sufficient room to decline before encountering support. A pattern forming very close to strong underlying support may not work hence avoid.
Always keep the bigger trend in mind. You should be ready with the weekly and daily view of the chart beforehand. If both are positive, avoid short trades. Take the trade if at least one of these is negative or sideways with a bearish undertone.
As you can notice, points 2 and 3 above are based on identifying the important S&R zones on the charting landscape. Point 4 is about awareness of the long term trend on the daily and weekly charts. All this is part of preparation before the trade (refer the post on Trade Preparation in the section on Trade Mechanics). Points 2, 3 and 4 are part of the Trade Selection process and tool discussed in detail in the subsequent section on Trade Selection.
Note : Click on Navigation Guide at the bottom of the page to navigate to the relevant posts mentioned above.
By the time the candle completes @ 5 PM or 7 PM, you should have already made up your mind whether to take the trade or step aside, very very important. If you cannot make up your mind, it is best to step aside.
Remember, we are in the business of trading, not gambling. Any good trade would scream from the charts meeting all above conditions - so if it is not screaming, it is not your trade. Never, never jump into a trade at an unfavourable price chasing momentum when the market becomes fast or runs away.
Chart Examples : Please study the following chart examples carefully, across commodities, paying attention to the annotations which explain the price action behind the setup. Observe carefully what happens after the trade is executed.
Trade dynamics in terms of number of lots, Stop Loss, Price Targets by lot and the profit/ loss of the trade is also provided in a table below the chart. Please revisit once we have covered these in the section on Strategy as it would make better sense then.
Win Ratio: The table below provides the Win Ratio for this setup for different commodities, a key component for trade selection. We will explain how this works when we come to Trade Selection in the subsequent sections.
As is clear from the numbers above, the setup has a High Win Ratio across commodities except for Aluminium where the trade is discretionary.
Now that you know the setup, please look for similar setups on the 2H charts for our chosen basket of commodities. Please share your observation in the Comments along with an image of the chart that you are referring to. We will revert with our comments. Please click on "Next Post" to move to The second Bearish Setup - Reverse Hammer at Resistance.
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