Trading using Chart Patterns

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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.

Market at rest...continuations

2.

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
Most patterns have clear targets.

On any opportunity...
Assess the Target

and Initial Stop

values.
Trade those patterns

with a Reward : Risk

Ratio of at least 3:1.

targe
t
3

Reward
Risk

entry
stop

Reward:Risk = 3:1

Prior Move Test

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

H
A

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

SBIN

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

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

Shake out
the Week
minds

MCDOWELL-N

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

WEDGE

INFY

For
Aggressive
Traders

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.

Price Gap Structure

Breakaway, Measured & Exhaustion

Short
Entry
Exhaustion
Gap
Long
Entry

Measured
Gap
Long
Entry
Breakaway
Gap

Breakaw
ay Gaps
mark the
beginnings
of moves,
Measured
Gaps
mark the
centers of
moves,
and
Exhaustion
Gaps
occur at
the ends
of moves.

GAPS

SBIN Daily

GAPS

Measuring
Gap

Breakaway
Gap

NIFTY

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

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