Trading using Chart Patterns

AJEET SINGH

Introduction
Thomas N. Bulkowski in his book Encylopedia of Chart Patterns talks about around 63 chart patterns. The most researched and comprehensive content on chart patterns till today. A lot of people have tried to simplify the chart patterns because it would not be possible to remember all those patterns

Types of Patterns
1. 2.

Market at rest...continuations Market finished reversals

3.

Market uncommitteddirectionless

Types of Patterns
Most patterns have simple names based on what they look like. A Double Reverse Whirligig, if it existed, would be far too complex to be useful. K.I.S.S!

Continuation Patterns

Triangles Rectangles (aka trading ranges)

Flags
Gaps But look at the next slide.

Reversal Patterns

Triangles Rectangles (aka trading ranges)

Flags (Not so much)

Gaps

Not So easy right?

Key Points
The shape of a pattern yields clues to what is going on in terms of market psychology The position of the pattern in the context of what came before it is also critical

Most of the times Patterns lean one way or the other but the market decides which way it breaks
Decide a timeframe and look for patterns within the timeframe. Do not change the timeframe. At max you can have two timeframes for the defining the pattern. For example for Intraday trading See the pattern in daily timeframe, which would give overall trend / pattern. Plus see the pattern in 10 min / 30 min timeframe whichever timeframe you are comfortable

Directionless Patterns

If your naked eye cannot detect the pattern in half a second, Then there is no pattern or
You have a Directionless Pattern Move on

All the patterns

Reward:Risk Criterion
On any opportunity...
Assess the Target and
Most patterns have clear targets.

target
3

Initial Stop values.

Trade those patterns

Reward Risk entry

with a Reward : Risk Ratio of at least 3:1.

stop

Reward:Risk = 3:1

Prior Move Test

Only Trade Patterns with a clear move (reference) ahead of the signal.

H
A B

At A we can use H.

B is more ambiguous.

Reliance Infra EOD chart Another example

Ascending Triangle
MCDOWEL-N

Resistance line is a straight line

In an Ascending triangle pattern the breakout is normally on the upside. In a descending triangle it is the opposite
Support line is increasing which indicates it would break on the upside

Symmetric Triangle
The Resistance line is going down and support line is going up and they are evenly poised. Better to avoid trading and play the breakout

SBIN

Rectangle
Resistance line

NIFTY

After a Bull run or Bear run normally a rectangle is formed which shows the Support line consolidation or profit booking happening because the next direction is not yet decided. During the Rectangle days, Sell near the Resistance line and Buy near the Support line

FLAG
Flag normally occurs in the middle of a Strong Bull or Bear trend

Shake out the Week minds

MCDOWELL-N

WEDGE
Wedge is the opposite of the Triangle. But normally the Wedge is for aggressive Traders. Normally at the support line GO LONG and at the Resistance line GO SHORT.

INFY

For Aggressive Traders

Price Gap Structure

Breakaway, Measured & Exhaustion

Short Entry Exhaustion Gap Long Entry

Breakaway Gaps mark the beginnings of moves, Measured Gaps mark the centers of moves, and

Measured Gap

Long Entry

Breakaway Gap

Exhaustion Gaps occur at the ends of moves.

GAPS

SBIN Daily

GAPS
The break away GAP confirms the trend and the breakout. The measuring Gap normally separates the trend into two halves. So after a measuring gap, you can expect another 50% run and plan to close your positions accordingly

Measuring Gap

Breakaway Gap

NIFTY

Other patterns
RCOM

Head and Shoulders

Diamond

Summary
Chart patterns exist when the trend is in transition. Basically, the market is resting. Our job is to determine if it is resting in preparation for the next leg or in preparation to turn around (Reversal). The shape of the pause gives us clues but we must wait for the market to make the final decision by moving out decisively from the pattern.

Summary
Other than gaps, most patterns are variations of the others Triangle Ascending Mostly bullish Triangle Descending Mostly bearish Triangle Symmetric Depends ?

Rectangle Good for Range trading Same as Resistance and Support Sell near Resistance. Buy near Support
FLAG Normally after a strong BULL or BEAR Run to let go the Weak traders. Breakaway Gap Start of the Trend Measuring Gap More Bull or Bear move left in the Trend Exhaustion Gap End of the Trend

FINALLY

Reason for analyzing Chart patterns ?

TO make the buy, sell or hold decision. NOT TO predict the future

References
Basic Patterns Everyone should know Michael

Khan The 7 Chart Patterns Confirming Entries and Exits Nirvana Systems