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P&F Pattern and Setup
  • : Prashant Shah

P&F Pattern and Setup

We have differentiated between patterns and setup. Patterns in Point & Figure chart can be clearly defined as bullish or bearish. Basic patterns and Poles can be identified as bullish or bearish patterns.
Trend filtration technique can also be implemented on P&F charts. Simple trend filtration criteria such as moving average helps in identifying trend. For instance, price above moving average is bullish and below average is bearish.
So now we have two clear things on a P&F chart - Pattern and Trend. This can be used in any instrument and time-frame. One may wonder why should we have this differentiation between Pattern and set-up. Be our guest and read further.
If the Trend is bullish and the pattern is also bullish, then the context is most ideal to focus on bullish trades. We call this a Bullish-Setup.
On the contrary, if the trend is bearish and pattern is also bearish, then the setup becomes bearish and one should focus on bearish trades.
If the trend and pattern are not in sync, then it is a neutral setup and it is advisable to apply neutral strategies.
You might be wondering why do we even bother to do this exercise? As a trader, it is very handy to know the context and market setup to decide the trading strategy. For instance, it is so very easy to lose money by shorting at each resistance in a rising markets or get trapped buying at supports in a bearish markets. To avoid such situations, this delineation of trend and setup is useful.
If the trend and the setup is bullish, then buying on bullish breakouts and / or buying at supports is advisable. Similarly, bearish breakouts and selling at resistances are recommended if setup and the trend is bearish. And if setup is neutral, one should look for trend in the instrument concerned and then decide.
More often than not, most stocks move in alignment with the trend of the broader market. Seldom does a stock rally sharply when the broad market context is bearish. Hence, understanding the set up and context of the market index such as Nifty can help in filtering the trades.
For example, if market is in an uptrend, one can simply ignore bearish trades. It can help in reducing the number trades and more importantly gives clear idea of where and what to look at.
Below is the Matrix explaining the pattern and setup combinations discussed earlier.
The above table lists out various possibilities based on the Pattern, Trend and the resultant set-up. We have a separate blog page which is updated daily at the end of the day that describes these aspects for Nifty.
We use a 10-points and 3-box reversal daily P&F chart to decide the set up and pattern. We use a 10-column closing basis moving average to decide the trend. One can tweak the parameter as per style and preference. So, if the price is above the 10-column moving average, the trend is considered bullish and vice versa. If the pattern is bearish but the nifty is traded above the moving average, we would consider it as Neutral set up as the trend is bullish while pattern is bearish.