In this post, we delve into the second short-term variable that feeds into our Trade Selection Tool—Chart Patterns on the 1-hour (1H) chart. It's crucial to differentiate between a Chart Setup and a Chart Pattern for clarity.
Chart Setup: As previously discussed, a Chart Setup in our Trading System is either the C1 or C2 1H candle that forms in the morning, or a combination of four 1H candles that concludes at C4 or C5. Our setups are unique to our system, even though some of them are built on common candlestick patterns like the Bullish Engulfing or Hammer. Many of our setups are proprietary, derived through meticulous observation and backtesting.
Chart Pattern: A Chart Pattern refers to well-known technical patterns such as Head & Shoulders, Reverse Head & Shoulders, 1-2-3 Top or Bottom, Double Top or Bottom, Ascending or Descending Triangles, Flags, Pennants, and Rectangles. A Chart Setup may or may not be part of these patterns, as explained below.
Relevance of Chart Patterns in Trade Selection
Chart Patterns are crucial in trade selection because they provide a confluence, building conviction and increasing the probability of success. When a Chart Setup coincides with a supporting Chart Pattern, it strengthens the case for the trade. Effective setups should occur:
Just before the breakout from the pattern during the last leg of formation
As part of the breakout
Soon after the breakout, on the same day or the following day
As a breakout from a smaller pattern within a larger pattern
Note: "Breakout" here also includes "breakdown."
Refer to the chart examples below for detailed annotations and self-explanatory insights.
(Fig 1.1 - Chart Setups on Nifty Futures that form as part of a breakout from a chart pattern)
(Fig 1.2 - Strong Green on C1 setup on 26th March that forms a Double Bottom before the breakout above the neckline. A Big Green on C1 setup forms on 28th March as a breakout from a smaller Double Bottom pattern that is part of a larger Reverse H&S pattern. )
(Fig 1.3 - Bearish Engulfing setup on Nifty Futures on 21st Feb that forms before a breakout from a Double Top chart pattern. A Big red on C1 setup forms after the breakout on the following day. It subsequently turns into a Bullish Engulfing setup that represents a sell failure)
Please click on "Next Post" to know about the next short term variable that feeds into the Trade Selection tool - Support & Resistance.
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