We would cover another PROPRIETARY setup in this post which is the last Bearish Setup in our aresenal, called the Big Red and 2 NRs below 20 SMA. This is a 3 candlestick continuation pattern that is close in appearance to the Snake Sell, the fifth Bearish Setup. The pattern psychology is that of a consolidation after a big downward move before the move resumes in the same direction.
(Fig 1.1 - Big Red and 2 NR's below 20 SMA)
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. 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.
The first candle of the setup should be a big red candle, comparatively bigger than the size of the nearby candles and ideally close near the low. The second and third candles should be narrow range candles, green or red, closing below 20 SMA. Ideally their real bodies should be inside the range of the big red candle, however, not compulsory. Neither of them should be a long hammer.
The setup holds more promise if it forms at or just prior to a Pivot Support or other Horizontal Support. It suggests that price is just biding time before it overcomes support. However, the support should not be very strong or in a confluence. Pivot or minor horizontal support works best. Some judgment is required.
There should be sufficient room to decline before encountering the next level of 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.
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 for Zinc and Aluminium, discretionary for Copper. Avoid for Crude and N Gas.
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.
This concludes our discussion on Bearish Setups. Please click on "Next Post" to move to the next section dedicated to STRATEGY - including Money Management, Risk Management and Profit Management.
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