TRADING STOCKS USING

CLASSICAL CHART PATTERNS

A Complete Tactical & Psychological Guide
for Beginners and Experienced Traders

Over 100 chart examples

Detailed entry and exit strategies
Emphasis on managing risk
The mental game

BRIAN B. KIM
Copyright © 2014 Brian B. Kim
For my family.
 CONTENTS

PART I A FRIENDLY INTRODUCTION

CHAPTER 1 Our Goal
CHAPTER 2 Trading vs. Investing vs. Gambling
CHAPTER 3 Emotional Detachment and Acknowledging Our
Limitations
CHAPTER 4 Basic Trading Tools

PART II CLASSICAL CHART PATTERNS

CHAPTER 5 Head & Shoulders Top
CHAPTER 6 Head & Shoulders Bottom
CHAPTER 7 Continuation H&S Bottom
CHAPTER 8 Rectangle
CHAPTER 9 Ascending Triangle
CHAPTER 10 Descending Triangle
CHAPTER 11 Symmetrical Triangle
CHAPTER 12 Continuation Pennant (Small Triangle)
CHAPTER 13 Ascending Wedge
CHAPTER 14 Descending Wedge
CHAPTER 15 Flags and Channels
CHAPTER 16 H&S Top Failure
CHAPTER 17 Double Bottom
CHAPTER 18 Horn Bottom
CHAPTER 19 Diamond
CHAPTER 20 Second and Third Effort
CHAPTER 21 Support and Resistance
CHAPTER 22 Pattern within a Pattern
CHAPTER 23 Pattern Failures and Mutations
CHAPTER 24 Do Not Gamble on Earnings Reports
CHAPTER 25 Being Out of Position: Not Trading No Matter How
Promising the Set-Up and Breakout
CHAPTER 26 Taking Profits
 CHAPTER 27 Why We Must Diversify Our Trades
CHAPTER 28 The Trader’s Routine: Continuous Patience and
Diligence
CHAPTER 29 Trading the Market Indexes, and A Lesson in
Stubbornness
CHAPTER 30 50-day and 200-day Simple Moving Averages

PART III CONCLUSION

CHAPTER 31 Life and Trading
CHAPTER 32 Suggested Reading

ABOUT THE AUTHOR

DISCLAIMER
 PART I

A FRIENDLY INTRODUCTION
 CHAPTER 1

Our Goal

This book teaches you how to trade stocks using classical chart patterns and
related principles.

Clarity and usefulness

I strived to write a book that covers the classical-charting approach to trading

in an accessible and comprehensive manner. This book gives beginners enough
information to decide for themselves whether trading in general and classical
charting in particular fit their interest, temperament, and style. My goal is
similar if you are an experienced trader who wants to learn more about
classical charting. I tried to give you enough information so you can decide
whether to use classical charting in your trading.
My focus was on clarity and thoroughness. My experience with most books
on stock trading has been one of frustration and confusion. While they
contained nuggets of wisdom and some practical advice, most books did not
describe the author’s trading approach in enough detail for readers to carefully
try that approach for themselves.
This shortcoming is understandable. Writing clearly is difficult. And I’m
certain that some readers will wish that I had explained some parts of this
book better or in a different way. Despite the challenges of written
communication, I think I have clearly conveyed enough information for readers
to learn classical charting.
You will find that certain themes, reminders, and cautions are repeated
quite often throughout the book. It would be too easy to justify repetitive
writing on necessity, but, this time, I will use this excuse. There are many
approaches to trading, but there are relatively few principles that are most
important for long-term success as a trader. I tried to emphasize these timeless
truths in different contexts and situations for maximum retention and
awareness.
Trading is speculating

Before moving on, let’s make sure we understand that stock trading is
speculating. Even to me, an enthusiastic student of the financial markets with
significant trading experience, speculation at times seems the opposite of thrift,
hard work, patience, and all things that build anything worthwhile. Speculation
seems nothing more than a doomed get-rich-quick scheme based on greed,
impatience, and laziness.
This characterization, unfortunately, accurately describes speculation as
done by many people. It is an especially accurate description of my early
trading and it will always reflect the truth when we deviate from good
practices and forget the fundamentals, including controlling our emotions and
being patient.
It is obvious and true that there is no easy road to wealth in the stock market
or anywhere else. I don’t say this to be condescending. When I started to trade
and experienced some beginner’s luck, I suspected trading could be the easy
road to wealth. I was wrong. But I learned that trading can be a worthy
intellectual and financial endeavor if we accept the fact that good trading
requires as much discipline and resilience as anything worth accomplishing. If
we try to wish away this truth, we will find that trading is a most effective way
to lose money. Again, informed trading that maximizes our chances of success
is built on methodical risk management, continuous patience, and never-ending
diligence. There is no other way, and we should not want it any other way.
Informed speculation should meet the following three requirements:

A systematic approach that is understandable and repeatable.

A systematic approach that allows a trader to be profitable overall

despite having more losing than winning trades.

A systematic approach that stresses limiting losses, not making money, as

the most important priority.

I believe carefully applying classical charting principles meets these

requirements. This book applies those principles and where productive adds to
them with these requirements in mind.
Classical Charting and Technical Analysis

I use solely classical charting as a trader because it provides a simple yet

versatile and fascinating foundation on which to trade stocks. A classical
chartist trades geometric patterns such as triangles, rectangles, wedges, and
flags formed by price charts.
Classical charting is a branch of technical analysis. Technical analysis is a
fancy phrase for using the price of stocks, or any freely-traded financial
instrument such as bonds and futures, to make trading and investment decisions.
Some traders use price and many indicators, which are themselves based on
price. I don’t use any indicators except for the occasional reference to moving
averages. We will learn about moving averages in Chapter 30.
I wrote this book to be as clear, practical, and self-contained as possible to
everyone who has a passing interest in trading. Despite this nuts-and-bolts
approach, I believe that experienced traders can benefit from this book.
Learning is a never-ending process. Many of the most important truths and
insights are the most basic and yet easy to forget. Learning is as much about
retaining and reminding ourselves of old truths as learning new knowledge.
All chart patterns discussed in this book are applications of classical
charting principles that were explained by Richard Schabacker in Technical
Analysis and Stock Market Profits, published in 1932, and Robert D.
Edwards & John Magee, co-authors of Technical Analysis of Stock Trends,
published in 1948.
Some readers may disagree with my application of classical charting
principles. That is fine. There is room for disagreement when interpreting chart
patterns. Classical chartists have different trading styles utilizing different
entries, timeframes, profit-taking methods, and risk tolerances. What is most
important, and what is not debatable, is managing our risk and limiting our
losses. Whatever our interpretation of a chart pattern, our priority is managing
risk rather than making money.

The charts in this book

[T]here is nothing new under the sun.

Ecclesiastes 1:9
My impression when I read Schabacker and Edwards & Magee’s foundational
works on classical charting was one of fascination but also disbelief. Sure,
those simple and elegant price patterns may have formed in stock charts back
in the 1930s, 1940s, 1950s, 1960s, and maybe even the 1970s and 1980s, but
surely such geometric patterns are no longer found in today’s ultra-
sophisticated markets? I doubted, despite my respect for Schabacker, Edwards,
and Magee for writing an interesting analysis of stock prices, whether books
written decades ago could be relevant today.
My doubts were reasonable but I found that the principles explained in the
classic texts continue to be very useful. The fact that this book contains
almost 100 unique chart patterns that formed in the U.S. stock market just
in the past couple of years is proof of the continuing power of classical
charting. And I did not include every pattern that I found. Also, many more
tradable classical patterns developed in every freely-traded financial
instrument, including bonds, commodities, precious metals, and foreign stocks.
The financial markets have been forming classical patterns for a long time and
will continue to do so.
Just because a chart is included in this book does not mean I traded it. I
traded many of the patterns in this book but it would have been impractical and
unwise for me to have tried to trade all of them.
When we look at the charts, we must not get impatient and decide to start
trading the next day. This caution applies especially to beginners. We must first
study. The market is not going anywhere.
This book represents an important fact that all traders must remember but
tend to forget: there will always be many more great trading opportunities.
It is crucial to remind ourselves of this fact because we will experience losing
streaks and become frustrated. When we are emotionally and financially down,
we are more likely to do foolish things, such as making large bets that place all
or most of our trading capital at risk in a desperate bid to make up our losses.
It is during challenging times that it is most important to maintain composure
and exercise strict risk management. It will be easier for us to maintain our
discipline and calm if we truly believe and know that there will be many more
chart set-ups to come.
If, instead, we get frustrated because we think we have “missed all the good
trading opportunities,” then we will try to force something in unfavorable
market conditions. Knowing that there will always be more opportunities helps
us persevere through losing streaks. And we will have losing streaks even if
we trade only ideal setups.
Again, prices of financial instruments have been forming classical chart
patterns for many years, and they will continue to do so. Beginners may have a
more difficult time accepting this fact because they are eager to start trading
and do not want to miss out on any “once-in-a-lifetime” trade setups that will
make them rich overnight. We must realize that we will not get rich overnight.
We must not think about how a single trade can make us. Instead, our goal is to
patiently and methodically build our experience and capital.
The more I trade, the more I believe that surviving and preserving my
trading capital, not making money, is my first and only goal as a trader. If we
can hang around, then we will always have the opportunity to swing at very
favorable trade setups. And they will come.