Trading using Chart Patterns

RAJSTOCKSOLUTIONS@GMAIL.COM
 

Introduction

Thomas N. Bulkowski in his book “Encylopedia

“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 
rest…………...continuations 

2.
Market finished …………reversals 
…………reversals 
3. Market uncommitted……directionless 
uncommitted……directionless 
 

Types of Patterns

Most patterns have simple names based on what they

look like.

Whirligig,, if it existed, would be far

 A Double Reverse Whirligig
too complex to be useful.

K.I.S.S!
 

Continuation Patterns

 Triangles

 Rectangles (aka trading ranges)

 Flags

 Gaps

But look at the next slide…. 

slide…. 
 

Reversal Patterns

 Triangles

 Rectangles (aka trading ranges)

 Flags (Not so much)

 Gaps
Not So easy right?
right?
 

Key Points

The shape
shape of
 of a pattern yields clues to what is going on in terms of
market psychology

The position
position of
 of the pattern in the context of what
of what came before it is
also critical 
critical 

Most of the times Patterns lean one way or the other but

other but the
market decides which
decides which way it breaks
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” 

Pattern” 

Move on
 

 All the patterns

 

Reward:Risk Criterion
Most patterns have clear targets.
On any opportunity...

 Assess the Target and target

Initial Stop values.

3 Reward

 Trade those patterns entry

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

Reward:Risk = 3:1
 

Prior Move Test

Only Trade Patterns with a clear move

(reference) ahead of the signal.

B
A

H.  
At “A” we can use H.  ambiguous. 
“B” is more ambiguous. 
 

Reliance Infra –EOD chart – Another example

 

 Ascending Triangle

MCDOWEL-N Resistance In an Ascending

line is a
straight line 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

SBIN 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

Bull run or
Bear run
normally a
rectangle is
formed which
Support line shows the or
consolidation
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 
line 
 

FLAG

Flag
Shake out
the Week normally
minds occurs in
the
middle of
a Strong
Bull or
Bear
MCDOWELL-N trend
 

 WEDGE

 Wedge is the opposite of

the Triangle. But
normally the Wedge is
for aggressive
Traders. Normally at
the support line GO
For LONG and at the
 Aggressive Resistance line GO
INFY Traders SHORT.
 

Price Gap Structure

Breakaway,, Measured & Exhaustion
Breakaway

Short Entry “  reakaway

Gaps mark
Exhaustion Gap the
beginnings
Long Entry of moves,

Measured
Gaps mark
the centers
Measured Gap of moves,

and
Long Entry
Exhaustion
Gaps occur
reakaway Gap at the ends
of moves.” 
moves.” 
 

GAPS

SBIN Daily
 

GAPS

The break away

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

Other patterns

RCOM

Diamond
Head and Shoulders
 

Summary

Chart patterns exist when the trend is in transition

transition..

Basically, the market is resting.

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
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

Start of
 of the Trend
Measuring Gap – More
More Bull
 Bull or Bear move left in the Trend
Trend  
Exhaustion Gap – End
End of
 of the Trend
 

FINALLY

Reason for analyzing Chart patterns

?
TO make
TO make the buy,
the buy, sell or hold
decision..
decision

NOT TO predict 
predict the future
 

References

 Basic Patterns Everyone should know – Michael

Khan
 The 7 Chart Patterns – Confirming Entries and Exits
– Nirvana Systems