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 uncommitted……directionless 
 Types of Patterns

Most patterns have simple names based on what they

look like.

 A Double Reverse Whirligig,

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... Most patterns have clear targets.

 Assess the Target and target

Initial Stop values.

3 Reward

 Trade those patterns entry

1 Risk
with a Reward : stop
Risk 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

At “A” we can use H.  “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

 borena tkhoeu ut pi

s indoer. mIna laly

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 run or

Bear run
normally a
rectangle is
formed
which
Support line s h o w s
con s o li d a
th e
t i o n or profit
booking
happening
 because the
next direction is
not
 yDetu driencgi
dthede.
“Rectangle” days,
Sell near the
Resistance line and Buy near the
“Support” line 
 FLAG

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

 Wedge is the opposite of

the Triangle. But
normally the Wedge is
for aggressive
Traders. Normally
at
the support line
For
GO LONG and at
 Aggressive
INFY Traders the
Resistance line GO
SHORT.
 Price Gap Structure
Breakaway, Measured & Exhaustion

Short “  reakaway
Entry
Gaps mark
Exhaustion Gap the
beginnings
Long Entry of moves,

Measured
Gaps mark
the centers
Measured Gap of moves,

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

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 GAPS

The break
away GAP
Measuring
Gap confirms the
trend and the
breakout.
Breakaway
Gap
TGhaep m
neoarsmuariln
lyg separates
the trend into
two halves. So
after a
NIFTY measuring
exgpapec, ty
aonuo ctahner
50% run and
plan to
close
 your
positio
ns
accordi
ngly
 Other patterns

RCOM

Head and Diamond

Shoulders
 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