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Pattern Recogntion: Triangles

pattern recognition trianglePattern recognition is a popular topic especially with new and evolving traders. I've used pattern recognition to make trading decisions for 30 years. It's not the only way to trade but it's been a very successful method for me and I'm happy to share some insights wiht you.

Pattern: Triangles

The Setup: The bullish setup is simple to recognize. Firstly, the trend must be up; that is, our 30 day EMA (exponential moving average) must be higher today than what it was yesterday. The triangle you are looking for must have 4 distinct internal swings, which help define and differentiate the pattern from lower probability trades.

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Pattern Recognition: Flag

pattern recognition flagIn our last article we described the triangle pattern. Another trend following set up that is less common but still a useful strategy for your trading toolbox is the continuation Flag.

Pattern: Flag

The Setup: The flag is a bullish setup like the Triangle pattern. Firstly, the trend must be up; that is, our 30 day EMA (exponential moving average) must be higher today than it was yesterday. The Flag also has 4 internal swings, which help define and differentiate the pattern from lower probability trades.

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Patterns Recognition: Gaps

pattern recognition gapToday we look at several Gap patterns. I prefer to use them as a continuation pattern especially during a strongly trending market. The problem with Gaps is they can only be defined several days after they occur. Therefore, we must apply some rules to help define the validity of the gap pattern before or as they occur.

Patterns: Gaps

The Runaway or Breakaway Gap is where prices jump without actually trading and the Gap area is never filled. This may occur for various reasons, mainly due to unexpected news or an announcement. This type of pattern can indicate a strong continuation of the trend. There is no way to define this type of move beforehand.

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Pattern Recognition: Smash Bars

pattern recognition smash barsToday's trading pattern is for scalpers or those who want to get into the market, take a quick profit and move on. We are looking for quick moves of three to four days for profitable trades and losses of one day in duration.

Pattern: Smash Bars are based on the dynamics of a single bar. The pattern is easily programmed into most charting software packages (eg Amibroker) and can then be backtested (with quality data such as Norgate Premium Data) to test its performance.

I've done extensive work on this methodology and found it has a high strike or success rate, but the average dollar win was not high. The average dollar win was also very close to the average dollar loss. Be wary of this especially if you're paying high brokerage rates.

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Pattern Recognition: Swing Target Trading

pattern recognition swing tradingToday I'll introduce you to my version of Swing Trading which defines the risk/reward prior to the trade being implemented and is based more on momentum than trend following.

Pattern: Swing Target Trading

A swing is simply a move from a high point (HP) to a low point (LP) or from a low point (LP) to a high point (HP) and will take anywhere from 2 to 15 days to develop.

Equity traders must ensure that a strong trend or thrust is underway. This system will fail if traded in a market with no momentum.

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Pattern Recognition: Springs

pattern recognition springsPattern: Springs

A Spring is one of the most profitable trades is in the opposite direction to a failed breakout off a sideways consolidation or accumulation area. The term Spring comes from a Wyckoff method and generally uses volume as a filter. We will define the Spring pattern without volume for our purposes here.

The move out of the consolidation area tends to be very sharp and short. This is a powerful tool with low risk. Ensure you combine this method with exposure stop rules (you can learn more about stops in Building a Profitable Trading Plan Using Technical Analysis)

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Pattern Recognition: Moving Average Breakout

pattern recognition moving average breakoutPattern: Moving Average Breakout 
One of the first technical analysis indicators beginners are taught is the basic moving average crossover system. In nicely trending markets this method works extremely well. However, markets only trend about 25% of the time. It’s the other 75% that a normal moving average crossover will cause your account to bleed to death.

Whipsaw is where a system repeatedly buys and sells for small losses. Long periods of whipsaw are common and it’s during these non-trending times that many small losses are accumulated and for the novice trader, frustration will build.

To decrease whipsaw we use filters. A filter is simply an added criterion that has to be met before the trade or setup can be taken.

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Pattern Recognition: Channel Breakout

pattern recognition channel breakoutPattern: Channel Breakout

The Channel Breakout technique is a simple, robust trading method made famous by the Turtles Traders. It's a profitable pattern favoured by many great traders and money managers.

Like the Moving Average Breakout method, the Channel Breakout attempts to catch the early trend. As a result, whipsaw is a high probability as is a high loss rate but the percentage win/loss ratio is not important as a system that loses the majority of the time can still be profitable when the correct money management is applied. (Money management is covered in Building a Profitable Trading Plan Using Technical Analysis).

We're not talking about trend channels created with two trend lines or Bollinger Bands. The channels we're referring to here are simply recent high and low points and the breaking of such points. No trend lines or indicators are needed. 

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Pattern Recognition: Divergence

pattern recognition divergenceThe final pattern in our series is a trend reversal entry. As the trade is against the trend, there's no need for a trend filter.

Pattern: Divergence

There are 3 types of Divergence:

  1. Type A Bullish: Prices reach new secondary low while indicator puts in higher secondary low. Type A Bearish: Prices reach new secondary peak while indicator puts in lower secondary peak
  2. Type B Bullish: Prices make double bottom formation while indicator puts in higher secondary low. Type B Bearish: Prices make a double top formation while the indicator puts in a lower secondary high
  3. Type C Bullish: Prices make a secondary higher low, as does the indicator. Type C Bearish: Prices make a secondary lower high, as does the indicator

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A Simple Monthly System for ASX Investors

Relaxed lifestyle 300 002After a break we're back to our regular newsletter discussions on all things trading. To start it off again I thought I'd discuss a simple 'once-a-month' strategy for ASX investors. 

Let's face it; we all aspire to have the track record of Warren Buffett, Ray Dalio or Bill Dunn.

And yet our behaviour suggests otherwise. 

In today's 'social media' world we get pressured and focus more on short term outcomes. In turn we tend toward sub-optimal strategies (if any) rather than taking the long term view like those investors we aspire to.

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