This post will delve deep into the third Bullish Setup - Big Green above Resistance (refer our post on Chart Patterns). This setup is characterized by a single candlestick with a relatively large green body that is able to overcome nearby resistance and close above it near the high of the candle. The resistance could comprise of a Horizontal, Pivot, Congestion or Gap or a confluence of one or more types. It indicates strong bullish momentum and the likelihood of the price expanding further.
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 red candle or a long green 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 red candle or a long green 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 close should be above the real bodies of the candles offering resistance though it is acceptable if the close is not above the upper wick/s of such candles. Such candles may be in the immediate vicinity or be part of a larger pattern that has formed over multiple days. However, the close should be near the high of the candle i.e. the candle should not have a long upper wick.
A close above the opening gap (also known as closing the gap), if any, is also a valid signal to go long as the opening gap is considered as a form of strong resistance (refer to the relevant post on Gap S&R for more details). Again, if C4 or C5 is the big green candle closing above horizontal support formed by prior candles on the same day (C1,C2,C3), it is an acceptable trade.
The body length of the big green candle should ideally be more than the average body length of the candles in the vicinity. However, even medium size candles are acceptable as long as the close is near the high.
Avoid trade if the big green candle is a first close conspicuously above several resistance points formed over multiple days or a first breakout above a prominent pattern such as a Reverse Head & Shoulder or a wide and long rectangular range. Such a conspicuous close attracts a lot of attention from buyers who are waiting to go long on a breakout from a closely watched resistance zone or a bullish pattern. Such a breakout is highly prone to retrace below the resistance trapping the bulls. It would be safer to wait for a retracement to resistance and a second breakout which has much better odds of success. However, if the candle closes above nearby resistance of the last coupe of days (which is not prominent), go with the trade.
There should be sufficient room to expand before encountering resistance. A pattern forming very close to strong overhead resistance 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 negative, avoid long trades. Take the trade if at least one of these is positive or sideways with a bullish 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 highly tradable on Crude, N Gas and Copper with a high Win Ratio. Discretionary for Zinc and Aluminium.
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 fourth Bullish Setup - Outside Strong Green.
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