Chapter 2 - Technical Tools
2.1 Candlestick Patterns that you need to know to Trade our System
Candlesticks are graphical representations of price movements over a specific period of time, such as a minute, an hour, a day, or a week. Candlestick patterns, formed by the arrangement of multiple candlesticks, are often used in technical analysis to identify trends, reversals, and trading opportunities.
All charting software available are equipped to present trading data in the form of candlestick charts for technical analysis. We would suggest opening an account with Tradingview (you can start with the free version) as their software is very lucid and user friendly. However, if you already use a different software and are comfortable, please continue with it.
Anatomy - The anatomy of a candlestick consists of several components that provide valuable information about price action during a specific time period. Here's a breakdown of the key parts of a candlestick:
Fig 1.0 - Anatomy of a Candle
Real Body - The body of the candlestick represents the range between the open and close prices during the given time period. If the closing price is higher than the opening price, the body is coloured green or white to represent bullishness. Conversely, if the closing price is lower than the opening price, the body is coloured red or black to represent bearishness.
Wicks (or Shadows) - The wicks, also known as shadows, extend above and below the body of the candlestick and represent the highest and lowest prices reached during the time period. The length of the wicks relative to the body can provide insights into the volatility and price movement during the period. Longer wicks indicate greater price volatility, while shorter wicks suggest more stability.
Open Price - The open price is the first price at which the asset traded during the time period represented by the candlestick. It is represented by the lower point of the body if the candle is bullish or by the top of the body if the candle is bearish.
Close Price - The close price is the last price at which the asset traded during the time period represented by the candlestick. It is represented by the ending point of the body if the candle is bullish or by the bottom of the body if the candle is bearish.
The candlestick patterns that you need to know is limited to only a few basic patterns relevant to our Trading System, out of an universe of tens of patterns with exotic names! Other patterns that you could find in any book on candlestick patterns are essentially a variation/combination of these basic patterns. Throughout this course, we have consciously attempted to cut through the clutter to only include what works, and this is an example of that.
Important Candlestick Patterns
The above patterns are explained in the following content with visual examples.
a) Big Green or Big Red Candle
A Big Green or Big Red Candle is characterized by a single candlestick with a relatively large body indicating a strong bullish or bearish momentum in the market respectively.
Fig 1.1 - Big Green and Big Red
Key characteristics include:
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Large Body: The body of the candlestick is notably large, indicating a significant price movement during the given time period. The size of the body suggests strong buying (for Green) or selling (for Red) pressure throughout the period.
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Minimal or Absent Upper and Lower Wick: In a Big Green Candle, the upper wick (or shadow) is either very small or completely absent, indicating that the price closed at or near the high. Similarly, the lower wick (or shadow) is also very small or non-existent, suggesting that the low for the period was at or near the open. Vice versa for Big Red.
A Big Green is a bullish signal, suggesting strong buying interest and potential continuation of the bullish momentum. It often occurs as a breakout from a pattern or range or a pullback in price, along with a surge in volume. Vice versa for Big Red.
b) Hammer or Reverse Hammer
A Hammer is a single candlestick pattern that forms at the bottom of a downtrend and signifies a potential reversal in the price action. It has a small body at the top with a long lower shadow, resembling a hammer, hence the name. Vice Versa for Reverse Hammer (aka Shooting Star).
Fig 1.2 - Hammer and Reverse Hammer
The Hammer indicates that despite the sellers' dominance during the trading session, they lost control at some point and the buyers were able to push the price back up. This would mean that a reversal to the upside may be imminent resulting from a shift in momentum from bearish to bullish.
Longer the lower shadow, stronger the Hammer.
A Hammer forming at support offers additional confirmation and makes the pattern stronger.Vice versa for Reverse Hammer pattern as mentioned above.
c) Bullish or Bearish Engulfing
A Bullish Engulfing after a significant downtrend consists of two candlesticks having the following characteristics:
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The first candlestick is bearish, representing the continuation of the downtrend.
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The second candlestick is bullish and completely engulfs the body of the first candlestick, preferably. The larger the engulfing candle, the more significant the pattern.
Fig 1.3 - Bullish and Bearish Engulfing
The Bullish Engulfing indicates a potential reversal from a downtrend to an uptrend. It suggests that buyers have overwhelmed sellers, leading to a shift in momentum, as evidenced by the second candlestick completely engulfing the first one.
Like other reversal patterns, a Bullish Engulfing pattern is more significant when it forms near key support levels.Vice versa for Bearish Engulfing.
d) Piercing Pattern or Dark Cloud Cover
A Piercing Pattern is a two candlestick pattern that occur after a significant downtrend, and signals a potential reversal to an uptrend.
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The first candlestick is a bearish candlestick, indicating continued selling pressure.
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The second candlestick is a bullish candlestick that opens with a gap down below the previous day's low but closes more than halfway into the body of the previous day's bearish candlestick, preferably.
Fig 1.4 - Piercing Pattern and Dark Cloud Cover
Piercing Pattern suggests that the buyers have found value at the price level that opens with a gap down after a sustained downtrend, indicating a potential reversal from a downtrend to an uptrend.
The pattern becomes more significant when it forms near support levels or after a prolonged downtrend. Vice versa for Dark Cloud Cover.
e) Doji
A Doji is a candlestick pattern that indicates indecision or a standoff between buyers and sellers. It forms when the opening and closing prices are very close to each other, resulting in a candlestick with a very small body and often long upper and lower shadows. The shape of a Doji resembles a cross or plus sign.
Fig 1.5 - Doji
The interpretation of a Doji depends on its context within the price action:
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In an uptrend or downtrend, a Doji may signal potential exhaustion of the trend and a possible reversal, especially if it occurs after a series of bullish or bearish candles respectively. If the subsequent candle is a strong candle in the other direction, then there is a high chance that the trend might have reversed.
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In a sideways or range-bound market, a Doji or a series of Dojis suggest continued indecision and lack of a clear direction.
The pattern becomes more significant when it forms at or near support or resistance levels after a prolonged trending move and at reasonable higher volume than the preceding candles.
Types of Dojis : There are several types of Dojis that are commonly known as Long Legged Doji, Dragonfly Doji and Gravestone Doji. They differ in the position of the real body relative to the upper and lower wick. Typically, they have a bigger range than a standard, neutral Doji and are more likely to cause a trend reversal if they occur after a significant trend.
Fig 1.6 - Different Types of Dojis
A Long Legged Doji has long upper and lower wicks with the real body almost in the middle of the range. It signifies a fierce battle between bulls and bears and is more likely to cause a trend reversal particularly if it happens at a higher volume after a significant uptrend or downtrend.
A Dragonfly and a Gravestone Doji resemble a strong hammer and a reverse hammer respectively with a very small real body. If they occur after a prolonged trend, they are very likely to result in a trend reversal because they signify exhaustion of the existing trend and shift of momentum.
f) Narrow Range including Bullish or Bearish Harami
Narrow Range (NR) is a candlestick pattern characterized by a relatively small price range between the high and low prices compared to previous candlesticks. It suggests a contraction in price volatility and indecision in the market. It indicates that neither buyers nor sellers have gained significant control over the price direction during the trading period.
Fig 1.7 - Narrow Range, Inside Bar and Harami
It becomes an Inside candle if it is completely engulfed by the trading range of the previous candle. It can form anywhere within a series of candles, whether there is a trend or the price action is sideways. If it forms within a sideways market, it does not have much meaning. However, if it forms within a trend preceded by a large candlestick in the opposite colour, it is known as a Harami and suggests a potential reversal.
For example, a Bullish Harami occurs when the candlestick is a NR green candlestick and is contained within the lower half of the previous long red candlestick in a downtrend. It suggests a slight shift in momentum on the downside leading to a potential reversal from a downtrend to an uptrend. Vice versa for Bearish Harami.
Though a NR candle in itself does not have much meaning, but a series of such bars signifies reducing volatility and the market reaching a stage of equilibrium. Normally, the market does not stay in equilibrium for long and makes a big move once the equilibrium phase is over. So you should expect a big move after a series of NR candles, particularly if they occur near a breakout or breakdown level.
For example, if you find NR candles very close to the neckline of a large H&S pattern a breakout may be imminent. Another example is when a series of NR candles form in combination with Dojis after a good trending move, you should expect a meaningful reversal.
With this, we have covered the candlestick patterns that are relevant to our Trading System. As mentioned earlier, we would limit the content to what is relevant for us to keep it sharper and focused.
2.2 Chart Patterns that you need to know to Trade our System
The next technical tool that you need to know is Chart Patterns. As with candlestick patterns, what you need to know are basic patterns that would be relevant to our Trading System, not the umpteen that fill up pages and pages of books and content on technical trading.
These basic chart patterns are integral to understanding the charting landscape and hence the prevailing market mood. Eventually, the application of this knowledge plays a significant role in trade selection, so important to your overall trading success.
Important chart patterns
In the following content, we provide a brief explanation of the above patterns along with a snapshot of the chart formation of the 2H or 4H chart. These patterns are valid for any timeframe whether intraday, daily or weekly.
When we talk about setups, we would present number of examples from charts with practical application of the psychology behind these patterns. Please do not bother about understanding technical targets and stop losses for now as that would be very specific to the setups.
a) Head & Shoulders or Reverse Head and Shoulders
A Head & Shoulders (H&S) is a popular and widely recognized chart pattern used in technical analysis to identify potential trend reversals. It typically signals the end of an uptrend and the beginning of a new downtrend. The pattern consists of three peaks, with the middle peak (the "Head") being higher than the other two peaks (the "Shoulders").
Fig 1.8 - Head & Shoulder
Key Characteristics
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Left Shoulder: The pattern begins with an uptrend, represented by a peak (shoulder) followed by a pullback and a subsequent rally to a higher peak (the head).
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Head: After the first peak, the price retraces before rallying to form a higher peak, known as the head of the pattern. The head is usually the highest point in the pattern.
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Right Shoulder: Following the head, there's another pullback in price, followed by a final rally attempt that fails to surpass the high of the head. This creates a third peak, which is lower than the head and often similar in height to the left shoulder.
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Neckline: The neckline is a trendline drawn through the lows of the pullbacks between the peaks. It serves as a support level for the price. Once the price breaks below the neckline, it confirms the completion of the pattern and signals a potential trend reversal.
The H&S is considered complete when the price breaks below the neckline after forming the right shoulder. Traders often use this breakout as a signal to initiate short positions or to exit long positions, anticipating further downward movement in price.
It's important to note that while the pattern is widely recognized, it's not always perfectly symmetrical, and variations in its structure are common.
Additionally, like any technical analysis tool, false signals can occur, called as pattern failure. A pattern failure on the H&S can occur in many ways like the price after breaking below the neckline reverses and closes above the neckline. Or a small bullish pattern forms right after the breach of the neckline and a subsequent bullish breakout happens with a close above the neckline.
A pattern failure can be very strong as it traps the bears who may be forced to exit their bearish bets as the price starts moving in the opposite direction. We will share examples when we discuss our setups to show how this happens and how to capitalize on it. In fact, our Trading System is geared to take advantage of pattern failures.
Reverse Head & Shoulder is a bullish pattern, the exact reverse of H&S above. Please refer to the image below.
Fig 1.9 - Reverse Head & Shoulder
b) Double Top or Double Bottom
A Double Top (2T) is a common chart pattern that indicates a potential trend reversal from bullish to bearish. It occurs after an uptrend and consists of two consecutive peaks that reach a similar (more or less) price level, separated by a trough (a pullback).
Fig 1.10 - Double Top
Key Characteristics
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Initial Top: The price of the asset reaches a high point, forming the first peak.
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Trough: After the first peak, the price retraces or pulls back from the high but finds support at a certain level, forming a trough or valley.
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Second Top: The price rallies again to near the level of the initial peak, forming the second peak. This peak is often similar in height to the first peak, however, it may slightly exceed or fall short of the first peak.
The formation of two peaks at approximately the same price level suggests that the upward momentum is weakening, and the market may be running out of buyers willing to push the price higher. It is a bearish pattern, indicating a potential reversal of the uptrend and a possible downtrend ahead. The confirmation of the pattern usually occurs when the price breaks below the trough or the neckline that separates the two peaks.
Similar to H&S, a pattern failure on the 2T can occur in many ways like the price after breaking below the neckline reverses and closes above the neckline. Or a small bullish pattern forms right after the breach of the neckline and a subsequent breakout happens with the close above the neckline.
Double Bottom (2B) is a bullish pattern, the exact reverse of 2T above. Please refer to the image below.
Fig 1.11 - Double Bottom
c) 1-2-3 Top or 1-2-3 Bottom
A 1-2-3 Top occurs frequently on the charts, sometimes as part of a larger pattern, usually after a significant uptrend. It indicates the end of the uptrend and a potential reversal to a downtrend. It is similar to a Double Top in appearance except for the fact that the second top (point 3) is lower than the first top (point 1).
Fig 1.12 - 1-2-3 Top
The formation of the second peak at a lower level than the first resembles the Head and the Right Shoulder pattern in the H&S, and is weaker than the Double Top. The pattern occurring after a sustained uptrend is a strong signal for the trend to reverse. The confirmation of the pattern usually occurs when the price breaks below the trough or the neckline that separates the two peaks.
Similar to H&S, a pattern failure on the 1-2-3 Top can occur in many ways like the price after breaking below the neckline reverses and closes above the neckline. Or a small bullish pattern forms right after the breach of the neckline and a subsequent breakout happens that closes above the neckline.
1-2-3 Bottom is a bullish pattern, the exact reverse of 1-2-3 Top above. Please refer to the image below.
Fig 1.13 - 1-2-3 Bottom
d) W Pattern
A W pattern resembles the letter "W" and is considered a bullish reversal pattern. It typically occurs after a prolonged downtrend and signals a potential change in trend direction from bearish to bullish. It is basically a Double Bottom pattern, however, the difference is that it is larger, more pronounced and forms over many days if we are looking at 2H charts. Hence, any breakout from this pattern is stronger and more reliable.
Fig 1.14 - W Pattern
The reverse of this pattern, a M Pattern forms very infrequently and hence, not covered. This is because price action, by nature, spends a longer time at market lows than at the top, where the price action is more likely to form other reversal patterns like a H&S, 2T or a 1-2-3 Top.
e) Flag or Pennant
A Flag or a Pennant forms during sideways consolidation, a continuation pattern that typically occurs after a strong price movement, either upwards (bullish) or downwards (bearish).
Fig 1.15 - Flag and Pennant
The Flag resembles a rectangular shape that slopes against the preceding trend. It consists of price action contained between two parallel trend lines representing the upper and lower boundaries, usually close to each other.
The pattern forms as a brief consolidation phase following a sharp price movement. The breakout from the pattern usually occurs in the direction of the preceding trend. However, it may also break in the opposite direction signaling a reversal. Usually, a breakout following a short consolidation is more reliable. The longer the sideways consolidation, higher the chances of false breakouts and/or a reversal.
A Pennant is similar to a Flag but has converging trend lines instead of parallel lines. It typically forms a small symmetrical triangle shape.
f) Sideways Rectangle or Trading Range
A Sideways Rectangle, also known as a Trading Range or consolidation, represents a period when the price moves within a range, forming horizontal support and resistance levels. As the market moves sideways for most of the time, this pattern occurs very frequently. It represents equilibrium in the market, where buying and selling pressures are roughly equal.
Fig 1.16 - Rectangle
The sideways Rectangle pattern is characterized by parallel horizontal lines that represent the upper and lower boundaries of the trading range. These lines connect multiple highs and lows within a period of consolidation wherein you can expect to find multiple candlestick and chart patterns that have little or no significance unless they form at or very close to the upper or lower boundary signaling a potential reversal. In the above example, you can see many examples of Bullish and Bearish Engulfing, Hammer and Reverse Hammer forming at or very close to the lower and upper boundaries respectively, resulting in a strong reversal.
The duration of a sideways Rectangle Pattern can vary widely, ranging from several hours to several days to several weeks, depending on the timeframe being analyzed and the underlying market conditions. Eventually, the price typically breaks out of the trading range, either to the upside or the downside.
The breakouts are characterized by multiple false ones, wherein the price appears to break out of any one boundary only to retrace back into the range quickly. As mentioned before in the case of pattern failures, these false breakouts operate as traps and can move in the other direction very quickly.
With this, we have covered the chart patterns that are relevant to our Trading System. As mentioned earlier, we would limit the content to what is relevant for us to keep it sharper and focused.
2.3 Introduction to Support and Resistance
Support and Resistance (S&R) are foundational concepts in technical analysis used to identify key levels where the price of an asset is likely to encounter obstacles in its movement.
Support is a price level where the price action finds it difficult to break below, as there is typically a concentration of buying interest at or around that level. When the price approaches a support level, buyers are more inclined to enter the market, leading to increased demand and a potential reversal of the downtrend or a temporary halt in the downward movement.
Support levels can be identified by looking at historical price data and identifying areas where the price has bounced back from after declining. They can also be associated with psychological levels, moving averages, trendlines, or chart patterns.
Resistance levels are exactly opposite of support levels.
Fig 1.17 - Support & Resistance
Recognition of strong S&R levels is key to make informed trading decisions. You buy near support levels with the expectation of a bounce, or sell near resistance levels with the anticipation of a reversal. A breakout above resistance is potentially buliish and a breakdown below support is potentially bearish price action. A strong support level changes to resistance on breaking and vice versa.
When defined setups appear on the chart, their proximity to S&R levels is integral to filtering the trade. For example, a bullish setup appearing at or just below a strong resistance level can be filtered out as the probability of price advance is low. On the other hand, a bullish setup occurring at a strong support level or when the price has already broken above nearby resistance level (which then becomes support) has a much higher probability of advancing.
S&R can be classified into four types as below, each having its own characteristics.
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Horizontal
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Pivot
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Congestion
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Gap
Each of these different types has been detailed along with chart examples for Nifty Futures in the following content. Each of the chart example has detailed annotations that explain the charting landscape and the topic of discussion
There are many other types of S&R that are followed by the trading community such as those denoted by trendlines or moving averages, however, we do not consider it as particularly relevant. Hence, they have not been covered as part of this content. Cutting through the clutter!
a) Horizontal Support and Resistance
A Horizontal S&R line is a straight, flat line drawn on a price chart at a specific price level where the market has historically repeatedly reversed, paused, or consolidated — reflecting a significant zone of buying or selling activity.
Support Line is a horizontal level where price tends to stop falling and bounce back up. Resistance Line is a horizontal level where price tends to stop rising and reverse downward.
How to Identify One
You draw a horizontal line by connecting two or more price points (highs or lows) at the same price level, where the market has:
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Bounced multiple times
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Formed wicks/shadows repeatedly
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Consolidated or stalled
The more times price has tested and respected a level, the stronger that level is.
Role Reversal (Important Concept)
When price breaks through a support or resistance level with conviction:
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Support → becomes Resistance (old floor becomes new ceiling)
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Resistance → becomes Support (old ceiling becomes new floor)
This is called a polarity flip and is one of the most reliable concepts in technical analysis.
Fig 1.18 - Horizontal S/R
For a comprehensive view:
Intraday - Use a 4-hour/ 2-hour (4H/2H) time-frame depending on number of candles that are involved
Positional - Use a daily (D) time-frame. Use weekly(W) for the bigger picture.
This method is straightforward yet highly effective. When price action approaches a Horizontal S&R line, there is a high likelihood of a reversal. Strong reversal patterns such as Hammer, Reverse Hammer, Bullish Engulfing, Bearish Engulfing, Double Bottom, or Double Top, forming near these horizontal lines, provide significant confirmation signals.
Understanding and applying Horizontal S&R can greatly enhance your trading strategy by identifying potential reversal points and making more informed decisions.
CHART EXAMPLES
Intraday
Fig 1.19 - 4H chart of Nifty Futures - Horizontal S/R depicts numerous reversal points that form at or near the Top and Bottom Horizontal
Fig 1.20- 2H chart of Nifty Index - Horizontal R forms after joining multiple reversal points almost at the same level.
Daily
Fig 1.21 - Daily chart of Nifty Futures - Multiple examples of reversal candles that form at or near established Horizontal S/R leading to strong moves in the opposite direction. Horizontal S/R provides strong confirmation and confluence.
Fig 1.22 - Daily chart of DJIA Futures - S/R levels that form naturally as price moves up and down.
b) Pivot Support and Resistance
A single sharp turning point, known as a Pivot, that has recently formed a short-term high or low after a reasonable advance or decline, serves as strong resistance or support when price action approaches it again. Observing price action is crucial as a pivot from 1-5 days prior is revisited.
Fig 1.23 - Pivot S/R
Key Characteristics
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Pivot S/R: Pivot support or resistance is generally shorter-term compared to Horizontal S/R.
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Reversal Patterns: Any reversal candlestick pattern near the pivot strongly confirms a reversal.
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Double Bottom/Top: A pivot support or resistance, when confirmed by a reversal, forms a Double Bottom or Double Top (refer to Chart Patterns)
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Horizontal S/R: Two pivot points at the same level can be connected and extended to form a Horizontal S/R.
CHART EXAMPLES
Intraday
Fig 1.24 - 1H chart of Nifty Index - Bullish Harami at prior Pivot S forms a Double Bottom and triggers a strong uptrend.
Fig 1.24 - 1H chart of Nifty Index - A Reverse Hammer forms on the 4th day at almost the same level as the prior Pivot R and triggers a strong downtrend, forming a Double Top
Daily
Fig 1.25 - Daily chart of Nifty Futures - A Double Bottom and a Double Top forming at prior Pivot S and Pivot R respectively. Subsequently, the price forms a Triple Bottom and a Triple Top at the Horizontal S/R.
Fig 1.26 - Weekly chart of DJIA Futures - Pivot S and R on a weekly chart for longer term trading. Trading reversals right at Pivot S/R can be very rewarding compared to shorter term charts.
c) Congestion Support and Resistance
Congestion forms when prices move within a narrow horizontal range over two or more days, creating a Congestion S/R zone. The narrower and longer the congestion zone, the more significant its implications. If this new congestion aligns with an older congestion at roughly the same levels, its significance increases further.
Fig 1.27 - Congestion S/R
To identify these zones, mark the upper and lower boundaries by drawing horizontal lines. As price action approaches a congestion zone from below (or above), it typically pierces the lower (or upper) boundary, encounters resistance (or support) within the zone, and then reverses, triggering a strong move in the opposite direction.
A reversal candlestick pattern forming within the congestion zone offers strong confirmation of a reversal. Conversely, if the price after piercing one of the boundaries is powerful enough to overcome the congestion and closes beyond the other extreme, it signals a continuation in the same direction.
Congestion S/R zones are similar to horizontal channels, as both are contained within two parallel horizontal lines. However, the key difference lies in the width of these channels. Congestion zones are much narrower, making them more powerful. The width of the horizontal channel should be considered in the context of the near term volatility, be it the intraday or daily chart.
Always mark such congestion zones on the chart by a rectangle and extend to the right to be alert to any reversals as the price approaches the top boundary from above or the bottom boundary from below.
CHART EXAMPLES
Intraday
Fig 1.28 - 4H chart of Nifty Index - A tight congestion zone forms over 10 trading days the continues to offer strong support as price approaches the upper boundary.
Fig 1.29 - 2H chart of Nifty Index - A narrow range congestion zone forms over 4 days within a wider range. Another congestion develops at the same levels about 3 weeks later reinforcing the strength of the zone. Reversals within the zone and breakouts from the zone result in strong moves and can be traded profitably.
Daily
Fig 1.30 - Daily chart of Nifty Futures - Two narrow range congestions form at almost the same level emphasizing the importance of the zone as strong S/R. A bearish reversal and a strong breakdown from the zone results in the price declining rapidly.
Fig 1.31 - Two narrow range congestions form at almost the same level. A false breakout from the first and the subsequent breakdown below results in a strong move down. The breakout from the second retraces to retest the zone, finds support and reverses strongly.
d) Gap Support and Resistance
Gap S/R, as the name suggests, forms due to large price gaps on a chart, typically occurring overnight but sometimes during a trading session.
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Fig 1.32 - Gap S/R
Overnight gaps, especially large ones, serve as powerful S/R levels for approaching prices, even days later. The larger the gap, the stronger the S/R. Small gaps or those within a range can be ignored. Focus on large gaps that signify a breakout or breakdown from a pattern or a range, as they are particularly significant.
Once a large gap forms, the gap zone should be demarcated by a rectangle that is bound by the closing price of the prior day and the opening price of the gap day, and should be extended far into the right. Monitor price action closely as it approaches the gap within the next 1-5 days.
Typically, the price penetrates the gap, encounters S/R, and reverses. A reversal pattern after penetration adds conviction to a trade. However, if a candle fills a large gap and closes strong without reversing, it signals that the Gap S/R has been overcome, indicating a continuation in the same direction.
CHART EXAMPLES
Intraday
Fig 1.33 - 2H chart of Nifty Index- Massive Gap Up leads to an extremely significant support zone that reverses price on 4 subsequent revisits close to the upper boundary. Once price descends into the zone, the upper and lower boundary offer strong S/R.
Fig 1.34 - 2H chart of Nifty Index - Successive massive Gaps on the charting landscape provides strong S/R when price revisits from above/ below. Reversals at the top/bottom boundaries and also within these zones provide great trading oportunities.
Fig 1.35 - 1H chart of Nifty index - Massive Gap Down that also breaks below the prior Pivot S, gets filled by EOD with price rallying all through the day. Next day, the price tests the Gap S zone briefly and again rallies for the whole day much like the previous day. Gaps that fill soon after signify overcoming of S/R and is a signal for price to move in the other direction strongly.
Fig 1.36 - 1H chart of Nifty index - Big Gap Up at the fag end of a rally offers support the same day but gets filled by a big red candle the next day, breaking below a 1-2-3 Top, a strong bearish confluence. A massive downtrend starts.
Daily
Fig 1.37 - Daily chart of DJIA Index - Wide breakaway gaps create Gap zones that offer S/R on any subsequent retest. It is important to select only gaps that break away from a pattern or range and are wide enough.
Fig 1.38 - Daily chart pf Nifty Index - The upper boundary of a massive Gap Up on 8th April, 2026 coincides closely with the lower boundary of a smaller Gap Up that occurs a week later. This common boundary acts as a strong Horizontal S/R with price reversing at or near this level numerous times.
e) Confluence of Support & Resistance
When studying the charting landscape, always look for a confluence of two or more types of S/R for added conviction. The more, the better.
The following example illustrates the principle.
Fig 1.39 - 4H chart of DJIA Futures - A 1-2-3 Bottom breaks out on 26th of May, 2025, validated by a confluence of multiple support that adds strong conviction to the long trade. The more the points of confluence, the stronger the conviction.
Video on all types of Support and Resistance
With this, we have covered the four types of S/R that are relevant to our Trading System. Please watch the following video to understand how to establish confluence in real life trading situations before taking a trade.
2.4 A Guide to identifying The Trend on the Higher Time Frame
Correctly identifying the trend on the higher time frame is one of the most important elements of effective trade selection. Trading with the prevailing longer term trend significantly improves the probability of success, while trading against it usually requires greater experience and precision.
As a general guideline:
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Intraday traders should try to trade in the direction of the daily trend, unless there are clear signs that the trend is about to reverse.
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Positional or swing traders are better served by aligning their trades with the weekly trend, which represents the broader market direction.
Trading With or Against the Trend
This does not mean that trades cannot be taken against the trend. In fact, some of the strongest market moves occur when a well-established trend reverses unexpectedly, catching a large number of traders on the wrong side of the market. Such situations often arise with a pattern or range breakout/ breakdown failure.
However, identifying a reliable trend reversal requires experience and careful observation. When a trend becomes mature, price action often turns choppy and indecisive before the actual reversal takes place.
Therefore, regardless of the type of trade being considered, it is essential to know whether the setup is with the trend or against the trend. This awareness greatly improves trade selection. For example, it would generally be unwise to take an anti-trend trade when a strong trend has just begun or is accelerating.
A. Methods for Determining the Trend
There are several practical ways to determine whether a market is trending or not. These methods can help identify both existing trends and potential new trends.
1. Visual Inspection
Often the simplest method is to look at the chart itself.
If the price is consistently moving higher or lower over time, the market clearly has direction. Even when the price appears to move within a range, it may still exhibit directional movement from one end of the range to the other, particularly if the range is wide enough.
2. Trendlines and Moving Averages
Drawing a trendline connecting key swing highs or swing lows can help visualize the direction of the trend.
Similarly, moving averages can provide a useful reference. When price consistently stays above a rising moving average, the trend is typically bullish. When it remains below a falling moving average, the trend is usually bearish.
3. Breakouts from Chart Patterns or Ranges
A new trend often begins when price breaks out of a recognizable chart pattern or trading range.
Common examples include:
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H&S or Reverse H&S
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1-2-3 Top or 1-2-3 Bottom
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Double Top or Double Bottom
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Breakouts from significant consolidation ranges
For a breakout to be considered valid, the candle close should clearly confirm the move beyond the pattern boundary.
4. Reversal Patterns Within a Wide Range
When the market is trading within a large sideways range, strong reversal patterns appearing near the extremes of that range can signal the beginning of a new directional move.
For example, a large Bullish Engulfing pattern near the lower boundary of the range may indicate the start of an upward move toward the opposite side of the range.
5. Pattern Failures and False Breakouts
Sometimes a trend begins when a well-known pattern fails.
When traders position themselves expecting a breakdown or breakout and the market moves sharply in the opposite direction, a powerful move can develop due to the “trap effect.”
Examples include:
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A breakdown from a large H&S pattern that fails to follow through, moves sideways, forms a smaller bullish pattern, and then breaks upward.
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A strong intraday breakdown below an important support level that quickly reverses and forms a candle with a long lower wick, such as a hammer.
These situations often lead to strong moves because traders caught on the wrong side are forced to exit their positions.
B. Recognizing Trend Changes
Once a trend has been identified, any significant change in price behavior may require re-evaluating the trend.
For instance, after a prolonged downtrend on the daily chart, the appearance of a large Bullish Engulfing pattern at or near a strong support may indicate that the daily trend has turned bullish.
However, it is important to distinguish between different timeframes. A change in the daily trend does not automatically imply a change in the weekly trend. The weekly trend reflects a much larger structure and should not be altered based on a single day's price action. It needs to be analyzed on a weekly timeframe which offers stronger evidence,
C. Sideways or Range-Bound Markets
Markets do not trend all the time. When price moves sideways within a defined range without clear directional movement, the trend should be considered neutral.
Even after a breakout or breakdown occurs, it is important to watch how the market behaves afterward. If the market fails to move meaningfully in the direction of the breakout within the next two to three candles, the strength of the new trend becomes questionable. In such situations, it is often safer to reclassify the trend as neutral until clearer direction emerges.
Understanding the broader trend provides valuable context for every trade decision. By recognizing whether the market is trending upward, trending downward, or moving sideways, traders can significantly improve the quality of their trade selection and avoid bad trades by taking informed decisions.
Step By Step Approach For Determining Long Term Trend
Step 1 - Demarcate S/R zones on the charting landscape as covered in the previous section on S/R.
Step 2 - Inspect visually to see if a clear trend is visually discernible.
Step 3 - Annotate all the breakouts/ breakdowns, reversals and failures as mentioned in 3, 4 and 5 of A above with close attention to the S/R levels as demarcated in the first step.
Step 4 - Determine the trending and sideways phases based on Step 3 and use a vertical separator to demarcate with proper annotations.
Note : The changes in real life situations are often determined 1 or 2 days in hindsight once confirmed by subsequent price action to avoid noise (false breakouts/ breakdowns/ reversals/ brief sideways action in a trending phase).
CHART EXAMPLES
Below are two chart examples that follow the above steps for determining the daily and weekly trends for Nifty Index combining the concepts mentioned in A, B and C above. The first example demonstrates how to determine the trend on a daily chart of Nifty index for intraday traders and the second demonstrates the same on a weekly chart for positional traders.
Fig 1.40 - Daily chart of Nifty Index for ~ 7 months, mid Jan to mid Aug of 2025, showing determination of trending and sideways phases for intraday trading. Breakouts and reversals at established S/R should be closely observed for a potential change in trend.
Fig 1.41 - Weekly chart of Nifty Index for ~ 3 years, Aug-22 to Jun-25, showing changes in long term trend for positional trading. The changes are far fewer than the daily chart because of the longer timeframe.