Saturday, September 30, 2006

Cataloging the high probability chart patterns

Okay. After thinking about the swing trading setups vs. the daytrading setups, I am beginning to see that they are indeed similar to each other. It took a bit of studying various charts in the 5/10/15/30min and daily/weekly timeframes to convince myself of this. That amount of time spent studying charts has also led me characterize, categorize and summarize the high probability setups that I am looking for when entering a swing trade. Coming from a software Engineering background, I have been working with design patterns in my software design tasks. Design problems repeat themselves, so the solutions should also repeat themselves. It's pretty neat to see that I can re-use a tried, tested and proven design strategy that solves a specific problem, each time this problem occurs. It's like having all these tools in the toolbox at your disposal. Similarly, that is what I will try to do in cataloging the different types of high-probability setups.

The U-Turn Reversal - this is a general reversal pattern coined by TraderX. . This is where the price is currently declining, posts one or more inside candlesticks (doesn't have to be narrow range, just smaller than the most recent red stick), and then reverses back up. On a chart it would look like a U or V shape (not necessarily symmetrical). Entry would be on a break above a clear resistance level. Examples here, here, and here.

The dummy Spot - the term "dummy Trading" was coined by MaoXian. The classic dummy spot is the narrow range, low-volume inside bar whose break allows you to enter in the direction of the prevailing trend. A good example is found here.

The Hammer Reversal - this is a specific reversal pattern, which TraderX described as his "bread and butter" setup. In this pattern, there is a pullback to a retracement zone of sorts (with an optional move back above the retracement zone), and it ultimately leads to a hammer (it usually has a tail/lower wick twice as long as the real body (open-close), and it better for it to be green (close greater than open) with little to no upper wick). Any close above the hammer will be a low risk long. Examples here, here, here, here, and here.

Breakout - This is a simple pattern - there is a clear break above a clear resistance level. The higher the volume on the breakout, the more reliable the pattern. Initial stop would be placed at just below resistance, but moved up as soon as practical. Example here:


Trader-X said...

On the "U" turn - you need to have a few bars with higher lows and higher highs as it reverses back up...

Preferably at some obvious support.


Phileo said...

Got it. Thanks!

TradeR:R said...

Nice outline of these high probability set ups.

Re: the high volume break out. I would be inclinded to enter after the hollow red candle after the high volume break out. The reason is I've been reviewing my trades (wins and losses) from last week... and without exception the failed trades were entered on high volume bars.

I suppose one could try and enter on the bar immediately after the high volume long candle, but I've found this to provide more false signals... and it would be hard to hang in there when price gaps down on opening two days later.

Just some thoughts from a fellow trader trying to get better too!