Before we move to discussing Chart Setups, it would be befitting to set the stage on the basic nuts and bolts so that you have complete clarity on why we do what we do.
Note : Any mention of candles anywhere in this post refers to two hour (2H) candles.
As commodities on MCX trade for more than 14 hours, there would be 8 candles for the day - 7 candles for two hours each starting 9AM and ending 11PM and the last candle for less than an hour. Excluding the last candle, we have 7 candles at our disposal to trade during the day. The System is designed such that if a setup forms on the first 4 (or 5) candles, the trade is executed on the 5th (or 6th) candle and then managed for the remainder of the session till all trades are exited @ 11PM at the close of the C7 i.e. the 7th candle.
Why 2H candles? Based on our experience and backtesting, the best results in intraday trading are achieved with a balance between the timeframe of the candles and clarity of price action. If we use a lower timeframe like 1H or 30 minutes, too many candles result in noise and confusion.
The timeframe of 2H in the context of a trading day of more than 14 hours presents us with the optimum number of candles to base our trading decision on without getting lost in noise. The results of backtesting setups based on both 2H and 1H clearly tilt the scales in favour of the former.
Why execute positions @ 5PM or @ 7PM? During the day, the market just drifts without a clear direction on most days. We want to avoid taking positions during that time. We want to use this time to observe the price action and check for any identifiable setups. Executing positions @ 5 or 7PM also allows us to position ourselves ahead of the US open @ 7PM (8PM during DST) to take advantage of trending moves that develop usually after the open.
Why no carrying of overnight positions? Exiting all positions @ 11 PM is part of the System as carrying the baggage overnight adds substantially to risk where we have no control. More so because the chart setup that looks good to carry overnight may completely reverse by the next morning due to adverse developments in the foreign markets that are open almost through the night. Hence the system is intra day.
Note : Carrying part positions overnight is allowed only in special circumstances when substantial profits have already been booked on majority of the positions. Would be discissed later in the Strategy section.
Why no Technical Indicators? The strategy has been designed based on pure price action, without the use of technical indicators (except for using Simple Moving Average in a very limited way). We feel the most popular technical indicators have been hijacked by smart money to fade the technical trader. MAJORITY OF OTHER TRADERS USE THEM - AND STATISTICS SHOW THAT MAJORITY CONSISTENTY LOSE! If you become aware of that, would you still walk into their trap?
We have used Technical Indicators for a long period of time and realized that they often lie. They would tell you that the market is overbought or the momentum is weakening when price action tells you to buy. Oscillators such as RSI and Stochastics will begin to drift, even change trend, when the market goes merrily on its way making profits for others. They will show divergences long before the market makes its extreme, therefore clouding your judgment regarding entering a trade or staying with a winning trade.
The closest you can get to the truth of what is happening is what you see on the chart as the price action ticks up and down on the screen. That is why our Setups are based on pure price action with no indicators allowed to cloud the truth.
Now that you understand the "Whys", we are ready to move on to the Setups. We have 7 Bullish and 8 Bearish Setups. The bearish setups are the exact opposite of the bullish setups. So essentially there are just seven basic setups, having both bullish and bearish versions, apart from an additional bearish one.
In the subsequent posts, we have dealt with each setup in detail along with plenty of chart examples for you to understand how to discover these setups while putting up with the noise offered by the markets most of the times. We discuss the trade conditions and the Win Ratio across commodities for all setups so that you have a ready reckoner of which commodities are most likely to turn up a profitable trade for a particular setup. This information is invaluable in trade selection as we would see later.
We mentioned at the beginning of the course of our conscious effort to make commodity trading simple and profitable by cutting the clutter and only talking about what works. Well, these setups are the prime example of our extensive research and backtesting to include only what works. You should put your focus and commitment on mastering these setups rather than master the market itself, and you will reap rich rewards.
Please click on "Next Post" to move to The first Bullish Setup - Bullish Engulfing.
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