| JEFFRY TURNMIRE
Three Common Patterns To Use — And One Very Uncommon One
If you’ve been following me on YouTube, you’ll know that I love to say that I only trade the high probability setups.
That sounds great and all, but how do I find those high probability setups?
Well, part of it is decades of experience. But the other part of it is that I love patterns.
Because when you’ve got a pattern that’s proven itself time and time again, you have a nearly unstoppable edge in the markets.
As a fan of patterns, I thought it would be fun to go through some common ones that many trades use — as well as one uncommon one that I discovered.
1. Head and Shoulders Pattern - This is when a chart forms three peaks, with the middle one being the biggest, resembling a head with shoulders on either side.
People usually trade this by waiting for the pattern to complete (so you have both shoulders fully formed) and then identifying the “neckline”. The neckline is is a line you can draw from the low after the first shoulder to the low after the head.
If the price breaks below this after the second shoulder is formed, it signals a bearish entry. You can also trade this in the inverse, just flip the head and shoulders upside down.
2. Double Bottom Pattern - As the name suggests, this is a bottoming batten that suggests a reversal after a significant downtrend. Basically, the stock is testing a key support level and bounces off it twice, forming a “W” shape.
The key here is to wait for a confirmed breakout, which you can find by spotting the resistance level. You can find that by drawing a horizontal line at the middle point of the “W”. Most folks consider the entry signal to be once the price action breaks through that point, but you can also wait a bit longer for a reversal before getting in.
3. Triangle Pattern - This pattern is formed when the price is essentially trending in one direction despite having ups and downs. If you draw a line connecting all the highs and then draw a line connecting all the lows, you’ll see what I mean. (or just see the image below)
An ascending triangle is formed when the stock is having higher highs and higher lows. This forms an upward-pointing “wedge” or “triangle”. The opposite can happen, too, when a stock is having lower highs and lower lows. You can even get a sideways triangle when price is consolidating sideways.
Most people take an entry when the price action moves above the trendline on the ascending triangle, or below the trendline on the descending triangle. For sideways triangles, it could go either way. In all cases, you should look for 2 closes above/below the trendline to confirm entry.  |
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