Here is a simple intraday trading setup based on a very high probability Candlestick pattern. The chart timeframe for this intraday candlestick pattern strategy is 3 mins.
Interestingly, you can use this setup to trade stocks, equity indices, commodities and or even currencies. Further, you can use any instrument to trade it i.e. cash (equity shares), futures or options. Also, with this strategy you can trade in a bullish as well as a bearish market.
The candlestick pattern that we are going to trade is a Bullish Engulfing candlestick pattern. Bullish Engulfing pattern is a bullish reversal pattern. The key is to spot a bullish engulfing in specific zones or areas to take best advantage of the movement that can follow post bullish engulfing - just like the hammer intraday setup.
Let’s understand the step by step process as to how we analyze and trade this strategy. This is an Intraday buy Strategy. You will buy first and then sell later to square off your position.
Steps of the setup:
We’re analysing the Nifty spot chart in the example below.
Step 1 : Identify a Bullish Engulfing pattern after a downtrend.
Bullish engulfing is a two candle pattern unlike hammer which is a single candle pattern. In bullish engulfing, it is the body of the candle which holds greater importance than the wicks of the candle.
Since bullish engulfing is a two candle pattern, the first candle should have a red body and second candle should have a green body. The second candle with a green body should completely engulf(cover) the first candle with a red body.
Let me show you a classic bullish engulfing pattern after a downtrend with a help of an image below
We can clearly see the bullish engulfing pattern circled in the image above. The second candle with a green body should completely engulf(cover) the first candle with a red body. The wick of the candle need not be covered. We just have to compare body to body. In a hammer pattern, the long lower wick matterns. No hard and fast rule relating to wicks in a bullish engulfing pattern.
Step 2 : Spot a bullish engulfing pattern near it’s previous support zone.
Like I mentioned above. It is very important to look for a bullish engulfing pattern at specific zones. In our strategy our specific zone is a support zone. A support zone is a zone where the price makes a low and bounces back upwards from that low. You may also call it a swing low wherein the price is in a downtrend, it pauses at a certain zone or it halts at a certain zone and moves upwards. The zone from which it made a low and bounced back is called the support zone or the swing low zone.
We will look at a price chart on Upstox pro web platform to understand step 2 in detail.
We can see the PURPLE line drawn at 17376.27 is our support zone or the swing low zone because the price bounced back from this zone previously. After a price rise from the support zone, the price tumbled down and formed a bullish engulfing pattern exactly near our previous support zone of 17376.27 which was suggesting we may see a trend reversal from bearish to bullish. Engulfing is the most powerful pattern in candlestick patterns. It works like a charm majority of the time.
Now that we know how to spot a bullish engulfing pattern and where to spot a bullish engulfing, let’s see how we can trade the same.
Step 3 : Let's understand with the help of a chart as to what price do we enter, where do we keep our stop loss and when do we exit (target)
You can see the GREEN line (17383.57) that's where we got confirmation of a bullish engulfing pattern at the support zone. The moment the engulfing high is broken (second green candle high), our entry is triggered. We will enter at around those levels at 17383. Since Nifty spot can’t be traded, you can look to trade Nifty futures or options. If you choose to trade options, one way to go about it is that you can buy an ATM (at the money) strike price call option to trade. The market price is 17383 in our example and the nearest strike price seems to be 17350 call options. Since it’s an intraday day, you can go for weekly expiry rather than a monthly expiry contract.
Coming to stop loss now. You can see the RED line (17374) which is the low of the second green candle. That's 10 points below the entry point of 17383. If the Nifty goes down and hits 17374 (our stop loss) we will take a loss and exit from our position.
Since it’s an intraday trade and a Nifty trade, the timeframe being 3 minutes, we will aim for a risk to reward of 1:1. In our example the risk being 10 points, we will aim for a target of 10 points too from our entry price which comes to 17394 (17384+10 )
You can see the PURPLE line (17394). Once our price hits 17394, we will exit our 17350 call option position and come out with our profit.
We hope this simple bullish engulfing pattern strategy was simple and easy to understand. You can try spotting it on charts and see if you are able to identify such setups.
What is important here is the zone where you spot the candlestick patterns! We don’t have to randomly see a hammer anywhere in the chart.
We will be covering a lot of candlestick pattern strategies in our blogs so that you become super confident to trade Intraday very soon.
Until then, happy trading!