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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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  • Parent Category: Articles

Defining The Short Term Trend

A great question came across my desk recently:

                                           "...as a swing trader (1 - 10 days) I'm looking to buy shares when the market is going up in
                                            short bursts and then reverse and go short during the down moves. I would be interested in
                                            how to determine when
to get in or out of the market..."

The Chartist ASX and US Power Setups® both contain a Discretionary Portfolio that does exactly that; specifically attempts to ride short term price movements both up and down. The key with the short term movements is to position oneself in the direction of the prevailing market trend, so if you're trading Australian stocks you may wish to align yourself with the trend of the All Ordinaries Index, or, if you're trading US stocks you should align yourself with the trend of the S&P 500. Don't get too caught up in the intricacies of which index to use, it's more important to align yourself quickly.

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