Thought Process: When the stock is in a bull trend, every bearish candle gives hope to the short traders that it is the top and we are in newly formed bear trend, which will provide ample profits.
We all know what happens 80% of the time.
Unfortunately, in the trading world, the word ‘desire’ and ‘hope’ will not keep you in the game long. Without any strength from sellers, the bearish price action will die down and continue its path up. The same can be said about weak bullish pullbacks in a downtrend. Therefore, the set up here is to identify those weak pullbacks and join the stronger group of traders.
What does a weak pullback look like?
The best way to explain this is by assuming a position of the counter trend trader, and become a trader who just shorted a bullish trending chart. Most of us do that by looking for a bearish pressure, or trying to pick a top after a strong move up. We support our bearish case by looking at overbought oscillators (RSI, Stochs etc.)
Below is what a pullback chart can look like, and excite the counter trend traders. They would love to buy puts or short the stock. But in doing so they ignore that the move UP was strong as shown by bullish trend candles.
What makes the pullback weak?
- Pullback is weak because it has no bearish trend bars
- Bottom Wicks are holding the current swing low
- Less than 5 consecutive bearish bars
To Trade this set up:-
A) Identify the bullish candle after the weak pull back ends. That will be your set up candle.
b) Buy couple of ticks above the set up candle
If you see a stronger attempt to reverse the bull trend. You should be able to tell because of consecutive bearish trend candles.
Like always, there is no such thing as a guaranteed profit. So you have to evaluate each situation and pattern with reference to overall market bias. If stronger bearish price action destroys the weak pullback, do not force yourself into looking for bullish opportunities. Wait for the trend to resume.
Always like to show a real life example. Here is a 15 min chart of $SPY that opened strong for the day with bullish trend candles. I do not like to chase price, and do not advise as such. Therefore, wait for the pullback and look for an entry towards the direction of the market trend. In the example below, following the set up strictly would have made you nice profit on the first play, and you would have stopped out for a small loss in the second play.
Hope you enjoyed the article and learned something new. If you like to schedule a 30 to 45 min consultation or meet-up -I am available to set up a meeting. Please reach out to me at firstname.lastname@example.org OR UC@itradeprice.com