Here is a simple intraday trading setup based on a Fake Breakout technique. The chart timeframe for this intraday strategy is 3 minutes.
Interestingly, you can use this setup to trade stocks, equity indices, commodities 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.
We will use Fake Breakout to look for a trade setup and a Candlestick pattern to further confirm the trade. Hence this strategy is going to be a combination of both Fake breakout and a candlestick pattern.
Let’s understand the step by step process as to how we analyze and trade this strategy. At the moment, let's look at a bearish or short only setup.
Steps of the setup:
We’re analysing the Nifty spot chart in the example below.
Step 1 : Look for a swing high in the chart. As we already know, swing high is a point where the price makes a high, pauses a bit and reverses. The point from where it took a halt and started its journey downwards is called the swing high. We’ll explain to you with the help of an example. We will look at a price chart on the Upstox Pro Web Platform.
As we can see, with a gap up opening and the candle made a minor swing high(as marked in the image)
Step 2 : Once we have figured out the high, now we will wait for the candle to close above the swing high (green candle)
As we can see that the the green candle closed above the swing high (marked as C)
Step 3 : After spotting the price closing above the swing high, the next candle should immediately close below the swing high.
In the above image we can see that the second candle( red) immediately closes below the swing high.
This is the trade setup we have to look for and it is called a fake breakout.
Step 4 : The fake breakout should be supported by a bearish( red color) - candlestick pattern.
In the above chart, you could see a dark cloud candlestick pattern marked in a red box. The red candle has engulfed more than 50% or more of the green candle.
This confirms our trade setup. Only after getting a fake breakout and a bearish candlestick pattern, we will initiate the trade. Now that the analysis and confirmation is done, let us see how we can trade the setup with a defined entry, exit and a stop- loss.
Step 5 : Let's understand with the help of a chart as to what price we enter, where keep our stop- loss and when to can do we exit (target) the trade.
You can see the GREEN line (17913.69) that's where we got the confirmation after the dark cloud pattern was formed. That is our entry point. We will enter around those levels at 17913. Since Nifty spot can’t be traded, you can look to trade Nifty futures or options. If you choose to trade options, you can buy an ATM (at the money) strike price put option. In our example, the market price is 17913 in our example and the nearest strike price seems to be the 17900 put option. Since it’s an intraday trade, you can go for a weekly expiry rather than a monthly expiry contract.
Now, let’s come to our stop-loss. You can see the marked RED line (17943.54) on the chart, which is the high of the green candle. That's 30 points above the entry level of 17913. If the Nifty goes up and hits 17943 (our stop loss) we will take a small loss and exit our position.
Since it’s an intraday and a quick trade, the chart timeframe being 3 minutes, we will aim for a risk to reward of 1:1. In our example the risk being 30 points, we will aim for a target of 30 points from our entry price which comes to 17883 (17913- 30)
You can see the PURPLE line (17883). Once our price hits 17883, we will exit our 17900 put option and will close the trade.
We hope this intraday fake breakout strategy was simple and easy to understand. You can try spotting it on charts and see if you are able to identify such setups.
We’ll come up with an article on how to use the same strategy to identify a fake breakdown or a bullish setup.
Until then, happy trading!