In this post, we'll delve into the Big Red below Support setup. This setup is characterized by a single candlestick with a relatively large red body that overcomes nearby support and closes near the low of the candle. The support could be a Horizontal, Pivot, Congestion, Gap, or a combination. This pattern indicates strong bearish momentum and the potential for further price expansion.
(Fig 1.1 - Chart example of Big Red below Support)
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. Setups forming on C2 are 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)
Key Elements of a Big Red below Support Setup
Close Below Support:
The close should be below the real bodies of the candles offering support, though it's acceptable if the close is not below the lower wicks. The close should be near the low of the candle, without a long lower wick.
A close below the opening gap up, such that the gap gets closed, is a valid signal to go short as the opening gap up is considered strong support.
If C4 or C5 is the big red candle closing below horizontal support formed by prior candles on the same day (C1, C2, C3), it is an acceptable trade.
Body Length:
The body length of the big red candle should ideally be more than the average body length of nearby candles. Medium-sized candles are acceptable if the close is near the low.
Avoiding Conspicuous Breakouts:
Avoid trades if the big red candle is the first close conspicuously below multiple support points formed over several days or a breakdown below a prominent pattern like a Head & Shoulders or a wide rectangular range. Such breakdowns often retrace, trapping sellers.
It's safer to wait for a retracement to support and a second breakdown. However, if the candle closes below support from the last couple of days that is not very prominent, proceed with the trade.
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. 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 Big Red below Support on Nifty Futures)
(Fig 1.3 - Chart example of Big Red below Support 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 62% based on backtesting past data for the last 2 years. This is an avoidable setup.
Please click on "Next Post" to move to the fourth Bearish Setup - Triple Rising Top.
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