The fourth Bearish Setup - Outside Strong Red is the subject of this post. This is a 1 candlestick continuation pattern that feeds on a reversal during the candle formation which has the effect of trapping the bulls. It is a PROPRIETARY set up that works very successfully for most of the commodities.
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.
Prior candle should be a medium or long red candle (C3 if the pattern completes on C4, for example).
The candle that completes the pattern should be comparatively longer and close near the low. Also, the high of this candle should preferably be above or very near to the prior red candle’s open, forming a long upper wick to create an engulfing effect. So for example, if the pattern completes on C4, it should be longer than C3 which should also be a red candle. The close of C4 should be near the low. The high of C4 should preferably be above C3’s open or at least very close to it. It derives its power from a strong bullish reversal to a strong bearish continuation during the 2H candle formation thus trapping the bulls.
Pattern is stronger if forms at or near resistance though not compulsory.
There should be sufficient room to decline before encountering support. A pattern forming very close to strong underlyng 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.
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.
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.
As is clear from the numbers above, the setup is tradable on Copper, N Gas and Zinc. Avoid for Aluminium and Crude.
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 fifth Bearish Setup - Snake Sell.
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