Constructing cup and cap entries with a three-bar net line

Classify the trend with a three-bar net line

Trend direction is classified with a three-bar net line before any cup or cap is treated as a trading setup. The three-bar net line is a horizontal reference taken from the third qualifying swing extreme. A close through the far side of the line ends the classified trend, and a new extreme requires a fresh line.

In a rising market the net line is drawn from the third successively equal-or-lower low counted left from the high-day low. The uptrend holds until a close occurs below that line, and a new high forces a recalculation.

In a falling market the net line is drawn from the third successively equal-or-higher high counted left from the low-day high. The downtrend holds until a close occurs above that line, and a new low forces a recalculation.

Define a cup and a cap

A cup is a three-session sequence in which the middle session prints the lowest low or the lowest close. A cap is a three-session sequence in which the middle session prints the highest high or the highest close. In both shapes the first and third sessions may match or differ.

Accept the shape only at the current extreme

A cup is eligible as a short setup only when the net line still classifies an uptrend, the cup sits at the high of the current advance, and the entry arrives within three sessions of completion.

A cap is eligible as a long setup only when the net line still classifies a downtrend, the cap low is the low of the current decline, and the entry arrives within three sessions of completion. A high-based cap that marks the low of the current decline can still produce a buy on the third session after the three-session shape completes.

The trend filter is the gate on those choices. It licenses a cup short only while the net line still classifies an uptrend, and a cap long only while the net line still classifies a downtrend.

Write the entry, the protective stop, and the two-close exit

The rule-based entry is a timed choice, valid only inside a three-session window, between a stop offset by three ticks from the pattern extreme and a close through the extreme close of the pattern.

For a cup short, entry may be a sell-stop three ticks under the cup low or a short on a close under the lowest close of the cup. The protective stop sits three ticks above the cup high and is set with the entry. The two-close exit waits for the second close under the cup low rather than exiting on the first breach.

For a cap long, entry may be a buy-stop three ticks above the cap high or a long on a close above the highest close of the cap. The protective stop sits three ticks below the cap low and is set with the entry. The two-close exit waits for the second close above the cap high rather than exiting on the first breach.