BASIC THEORIES

COMMENT ON YOUTUBE TO BUY THE CUSTOMIZED FINANJA INDICATOR

Price Action Theories ::WIP

Candle Sticks to represent Pirce

Dow Theory

Elliot Wave Theory

Time

Patterns

CANDLE STICK

MARKET STRUCTURE (Dow Theory)

CANDLE STICK PATTERNS : WIP

TIME FRAMES

ELLIOT WAVE THEORY

Elliott Wave Theory posits markets move in repetitive 5-3 wave cycles: 5 impulse waves (with trend, faster execution) followed by 3 corrective waves (against trend, slower development). Wave 3 is typically the fastest/strongest impulse due to maximum participation, while corrective ABC waves (especially flats/triangles) progress slowest with choppy consolidation. Beginners focus on basic 5-3 structure, 3 cardinal rules, and Fib relationships for practical counting.

Core Concepts

Impulse waves (1-2-3-4-5) subdivide into 5 waves each, advancing the trend; correctives (A-B-C) into 3 waves, counter-trend. Fractal nature applies across timeframes; degrees label larger cycles (e.g., Wave I vs. i). Key Fib ties: Wave 2 retraces 50-61.8% of 1, Wave 3 = 161.8-261.8% of 1, Wave 4 = 38.2% of 3.

3 Cardinal Rules

Rule 1: Wave 2 never retraces >100% of Wave 1.
Rule 2: Wave 3 cannot be shortest impulse (often longest).
Rule 3: Wave 4 never enters Wave 1 price territory.

Beginner Structure

Start with impulse: Wave 1 (initial move), 2 (retracement), 3 (extension), 4 (sideways pullback), 5 (final push). Follows ABC correction: A (sharp drop), B (rally <A), C (=A length). Trade Wave 3 entries (fastest) on pullbacks to 38.2-50% Fib.

Impulse Waves Detail

Wave 1: Small, motive start.
Wave 2: Sharp retrace (never to Wave 1 origin).
Wave 3: Fastest, longest, no overlap with 1.
Wave 4: Shallow, complex (alternation from 2).
Wave 5: Equal to 1 or truncated.

Corrective Patterns

Zigzag (5-3-5): Sharp ABC.
Flat (3-3-5): Sideways, Wave B near A start.
Triangle: Converging ABCDE, slow consolidation.

Impulse waves (1-2-3-4-5) subdivide into 5 waves each,

Advancing the trend; correctives (A-B-C) into 3 waves, counter-trend.

Fractal nature applies across timeframes;

degrees label larger cycles (e.g., Wave I vs. i).

Key Fib ties:

Wave 2 retraces 50-61.8% of 1,

Wave 3 = 161.8-261.8% of 1,

Wave 4 = 38.2% of 3.

3 Cardinal Rules

Rule 1: Wave 2 never retraces >100% of Wave 1.
Rule 2: Wave 3 cannot be shortest impulse (often longest).
Rule 3: Wave 4 never enters Wave 1 price territory

Beginner Structure

Impulse Waves Detail

Wave 1: Small, motive start.
Wave 2: Sharp retrace (never to Wave 1 origin).
Wave 3: Fastest, longest, no overlap with 1.
Wave 4: Shallow, complex (alternation from 2).
Wave 5: Equal to 1 or truncated.

Corrective Patterns

Zigzag (5-3-5): Sharp ABC.
Flat (3-3-5): Sideways, Wave B near A start.
Triangle: Converging ABCDE, slow consolidation.

POSITION SIZING

Position sizing ensures fixed risk per trade (typically 1-2% of account) regardless of RR ratio, using the formula: Position Size = (Account Balance × Risk %) ÷ Risk per Share (Entry - Stop Loss). RR influences target but not size—higher RR (e.g., 1:3) justifies the risk without altering shares/lots. For channel entries, measure risk from entry to stop below/above retest.

Core Formula

Calculate risk amount first: Account × 0.01 (for 1% risk). Divide by per-shareare risk: |Entry Price - Stop Price|. Example: $10,000 account, 1% risk ($100), entry $50, stop $48 (risk $2/share) → 50 shares ($100 ÷ $2).

Channel Entry Example

In descending channel retest long: Entry at retest support ($48), stop below low ($46, risk $2), 1% on ₹5L account (₹5,000 risk) → 2,500 shares. Target at 1:3 RR ($54) yields ₹15,000 profit if hit.

Steps to Size

•Define risk % (0.5-2%, conservative for India markets).

•Mark entry/stop from structure (retest low/high).

•Compute: Shares = Risk ₹ ÷ |Entry - Stop|.

•Adjust for lot size in F&O (e.g., Nifty).

RR Integration

Size based on risk only; select setups where Reward (Target - Entry) ≥ 2× Risk for sustainability. Track via spreadsheet: larger RR allows win rate <50% profitability.

ENTRY/EXIT POINTS

In an ascending parallel channel during an uptrend, reversal occurs when price breaks below the lower trendline with a strong bearish candle and volume, ending higher highs/lows. Enter short on the retest of that broken lower line (now resistance), confirmed by a reversal like shooting star, for optimal risk-reward. Targets project downward by channel height or to prior lows, aiming for 1:3 ratio.

Channel Structure

Ascending channels feature parallel upward trendlines: lower as support, upper as resistance, in bullish trends. Price respects bounces until bearish divergence on RSI or MACD signals exhaustion.

Reversal Confirmation

A close below lower trendline on high volume marks structure shift to bear control. Avoid wicks; seek momentum candle.

Entry Rules

Short after pullback retests breakout level as resistance, with bearish pinbar or engulfing. Stop above retest high for defined risk.

Risk-Reward Diagram

Target equals channel width projected down from entry. Full setup shown below.

In a downward parallel channel, structure changes from bearish to bullish when price breaks above the upper trendline with a strong candle close and high volume, signaling the end of lower highs/lows. Optimal entry occurs on the retest of that broken upper line (now support), ideally after a bullish reversal like a hammer or engulfing candle, offering a favorable risk-reward setup. This avoids false breakouts and targets prior highs or a measured move for 1:2+ ratio.

Channel Breakdown

Descending channels form with parallel downward trendlines: upper as resistance, lower as support, during steady downtrends. Price bounces between them until momentum shifts, often confirmed by RSI divergence or MACD crossover.

Structure Change Signs

Watch for a decisive close above the upper trendline on increased volume, not just a wick. This breakout indicates sellers weakening, shifting to buyer control.

Entry Timing

Enter long after pullback to retest the breakout level as new support, confirmed by reversal candle. Place stop-loss below retest low or recent swing for tight risk.

Risk-Reward Setup

Target projects upward equal to channel height or next resistance for 1:3 ratio minimum. Diagram below illustrates the full setup.

Pullback Setup

Price retraces to dynamic support (EMA/trendline) in uptrend, enters on reversal candle. Tight stop below swing low yields wide reward to resistance.

Order Block/FVG Entry

ICT targets last opposing candle (OB) or imbalance gap post-impulse for re-entries. Confirmation via displacement; reward to liquidity.

Swing Failure Pattern

Wick beyond key level grabs stops but rejects, signaling reversal entry. Stop beyond extreme; exceptional RR in ranging markets.

1️⃣ Breakout → Retest Entry (Trend Change / Continuation)

Best for: Structure shift, channel break, range break

Logic

•Market breaks a key level (trendline / range / VWAP / daily high-low)

•Pulls back and holds that level

•Entry on rejection

Entry

•On bullish candle close after retest

•OR limit order at retest zone

Stop

•Below retest low

•⭐ Best (1:2 to 1:4)

Avoid

•Entering immediately on breakout candle

2️⃣ Pullback Entry (Trend Continuation)

Best for: Strong trending markets (higher TF trend)

Logic

•Trend intact (HH-HL or LL-LH)

•Price pulls back to:

•Trendline

•VWAP / AVWAP

•20 / 50 EMA

•Previous structure

Entry

•Rejection candle (pin bar / engulfing)

•LTF confirmation inside HTF zone

Stop

•Below pullback low (buy)

•Above pullback high (sell)

•⭐⭐ Consistent (1:2)

3️⃣ Range High / Range Low Fade

Best for: Sideways markets, low VIX

Logic

•Market respecting equal highs & lows

•No follow-through beyond range

Entry

•Sell near range high

•Buy near range low

•Confirmation candle preferred

Stop

•Just outside range

Target

•Range mid → opposite side

•⭐⭐ (1:1.5 to 1:2)

Important
❌ Stop this strategy once range breaks with volume

4️⃣ Failed Breakout (Trap Entry) 🔥

Best for: Expiry day, high OI levels, news fakeouts

Logic

•Price breaks level

•Fails to sustain

•Strong candle back inside level

Entry

•On close back inside

•Aggressive: wick rejection

Stop

•Above false breakout high

•⭐⭐⭐ Very high (1:3+)

Example

•High break → fails → sell

•Low break → fails → buy

5️⃣ Liquidity Sweep Entry (Smart Money Style)

Best for: Indices, expiry days, session highs/lows

Logic

•Market sweeps:

•Previous day high/low

•Equal highs/lows

•Immediately reverses

Entry

•After sweep + structure break on LTF

•OR strong rejection candle

Stop

•Above sweep high / below sweep low

•⭐⭐⭐ Excellent (1:3 to 1:5)

6️⃣ Trendline Break + Retest (Early Reversal)

Best for: End of strong trends

Logic

•Trendline breaks

•First pullback fails to continue trend

•Structure shifts (LL → LH or HH → HL)

Entry

•On retest rejection

•Conservative entry after structure confirmation

Stop

•Above retest high / below retest low

•⭐⭐⭐

7️⃣ Momentum Continuation Entry

Best for: News, opening range, high VIX days

Logic

•Strong impulsive candle

•Small consolidation

•Break of consolidation

Entry

•Break of flag / inside bar

•Volume expansion

Stop

•Below consolidation

•⭐ (needs discipline)

Rule
❌ Avoid late entries

8️⃣ Higher TF Zone + Lower TF Entry (Best Overall)

Best for: Swing + Intraday hybrid traders

Logic

•Daily / Weekly zone

•LTF structure confirmation

Entry

•LTF HH-HL (buy) or LL-LH (sell)

Stop

•LTF structure invalidation

•⭐⭐⭐⭐⭐ (highest quality)

🔑 How to choose the RIGHT entry?

Ask 3 questions before entering:

1.Market condition?

1.Trend / Range / Reversal

2.Where is liquidity?

1.Highs, lows, VWAP, PDH/PDL

3.Is structure supporting my trade?

1.HH-HL or LL-LH

🧠 Simple cheat rule

•Trend → Pullback entry

•Break → Retest entry

•Range → Fade extremes

•Expiry / High VIX → Trap & liquidity sweep

•Reversal → Trendline + structure break

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