Thread by @vivekthebaria

1. Trading a Rejection candle : One of the most enjoyable pattern to trade is a Rejection candle. I say enjoyable because it has a higher probability of success playing contrarian to the market. And who doesn't like to play contrarian and win.
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2. The typical setup is something like the one shown in the below chart:
A rejection candle appearing almost at day high, followed by a red candle is a high probability short.

3. Stoploss in such trade would be the high made on the rejection candle.
If Market comes back and takes away that stop, it would mean the market is not really in a mood to go down. Remember, I called it a High-probability short, and not a sureshot short.
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4. In case of a range bound market, we see a lot of rejections on both sides. This signifies that the traders have been unable to make up their mind and both the bears and bulls are fighting to take control of the market.
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5. Below is the banknifty futures chart for 26th march 2021, when the index kept oscillating between a range as perfectly as it ever can be.
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6. However, the day was accompanied with sharp fall in Ivs, which led to fall in both calls and puts - a perfect day for Option Sellers (Short straddles, strangles, Iron fly, Iron condor etc.)

7. Look at the price decay that happened on the same day for 34000CE option. Someone writing this particular contract could have shorted after the first rejection candle with the top of the rejection candle as his stoploss.
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8. However, given the sharp fall after the first rejection candle, stoploss would have been quite broad and thus, to take this particular short, one would be advised to reduce his position size to comply with his daily max loss potential limit.
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9. Remember, "High Probability" means a higher chance of something happening as expected. But it also means, a lower chance of something unexpected happening. We put stoploss and reduce positions to save ourselves in case the low probability event occurs. #TheWittyOptionsClass

10. Finally, Such ranges, when broken, lead to sharp movements and attract major trend followers.
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