In this post, we'll delve into the Bearish Engulfing setup, a two-candlestick reversal pattern that forms after a significant advance.
(Fig 1.1 - Chart example of Bearish Engulfing)
To be considered tradable within our strategy, the setup must meet specific criteria:
Setup Conditions:
Formation Timing: The setup should complete on C3 at 12 PM, C4 at 1 PM, or C5 at 2 PM. A setup forming on C2 is not eligible.
Trading Conditions:
Trades at 1 PM (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. Look for a narrow-range candle (red or green) or a small doji indicating consolidation.
Trades at 2 PM (Completion of C5): The setup should form at C5.
The setup should meet the trade selection criteria (refer to the "Trade Selection" section for details) for a trade.
Key Elements of a Strong Bearish Engulfing Setup
Size of the Engulfing Candle:
The bigger the size, the stronger the setup.
It's even more favourable if the high of the candle rises above strong resistance and then price action reverses to form the engulfing candle, indicating a buy failure.
Formation at Strong Resistance:
Seek setups forming at prior resistance levels for added confirmation of the setup's strength.
A confluence of resistances is ideal. For example, a setup at the intersection of strong horizontal and gap resistance has a higher success likelihood than one at a simple double top (2T).
Avoid trades if the setup forms after a steep advance at no or weak resistance.
By 1 PM or 2 PM as the case may be, you should have decided whether to take the trade or step aside. If you’re unsure, it’s better to step aside. Remember, trading is about strategy, not gambling. A good trade will be clear and meet all conditions—if it’s not obvious, it’s not your trade. Avoid chasing momentum at unfavourable prices when the market becomes fast.
Chart Examples:
Carefully study the provided chart examples, paying attention to annotations that explain the price action behind the setup. Observe the results after the trade execution.
(Fig 1.2 - Chart example of Bearish Engulfing on Nifty Futures)
(Fig 1.3 - Chart example of Bearish Engulfing on Nifty Futures)
(Fig 1.4 - Chart example of Bearish Engulfing on Nifty Futures)
Win Ratio: The Win Ratio, a critical input for Trade Selection, is simply the number of successful trades divided by the total trades. The Win Ratio of this setup is around 69% based on backtesting past data for the last 2 years. This setup is modestly successful.
Please click on "Next Post" to move to the second Bullish Setup - Hammer at Support.
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