of C and A. The second target is set atextensions of 1.27 to 1.62 of AD range.Stop: Once a trade is triggered, a "stop" is placed below D or below PRZ for "long" and aboveD for "short" trades.
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Trading Gartlev Bullish Pattern
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The example above shows a bullish "Gartley" formation from the daily GE stock chart. Frommid September 2006 to November 2006, GE formed a "Gartley" formation. The B levelretracement was 60.1 % near the minimum of Gartley's requirement. The PRZ level wasformed at 88.6% area at D. After D level, the price action is closely watched for a "long"trade entry. GE made higher-highs from D level suggesting a completion of the "Gartley"formation. A "long" entry is triggered at $35.35 area with a "stop" below D level at $34.30.Targets were placed first at the A level (at $36.48) and from 138% to 162% of XA range at$37.50.
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Trading Gartley Bullish PatternI
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Trading Gartlev BullishThe example above shows a bullish "Gartley" pattern from the Russell Emini (ER2) dailychart. After XA "swing," the B level was formed near 62% of XA. C swing was formed at0.886 of AB range. The "Gartley" pattern is completed when AB=CD is formed at D.1. After completion of D, a "long" trade is entered one-tick above previous bars' high.2. A "stop" order was placed one tick below D level (PRZ).3. Place a target at 127% of XA level around 770 level.
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Trading Gartley Bearish PatternI
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Trading Gartlev Bearish PatternThe example above shows a bearish "Gartley" pattern from the Dow Emini futures (YM) 5mchart. The B retracement was formed at 62% of XA swing. C swing point was formed with0.786 of AB swing. The D level was formed at 0.886 of XA range with AB=CD confluence.
1. Enter a "short" trade one-tick below the previous bar's low at 'D'.2. Place a "stop" order one tick above the "D" level.3. Place "targets" at "A" level and at 1.62 of AD range.
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Bat and Gartley Comparison
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5.3. Bat Pattern
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Bat PatternThe Bat pattern was discovered by Scott Carney of Harmonic Trading in 2001. The Bat patternis in the same family of Gartley's 5-point corrective patterns, but has distinct harmonic ratios.Bat pattern incorporates a precise harmonic ratio (0.886 of XA swing). It also demands that theB (center) retracement should be less than 0.618 of XA swing. The B retracementdifferentiates between the Gartley and Bat patterns. The Gartley pattern must have a 61.8%retracement of XA swing, and in Bat patterns have the same XA swing retracement below61.8% at "B".The Bat pattern's Potential Reversal Zone (PRZ) is defined by 1.27AB=CD pattern, 1.62BC,0.886 XA retracement levels. In bullish or bearish Bat patterns, a reversal from PRZ isanticipated for a potential long and short entry trades.Trade: Once the Bat pattern is completed, wait for a higher-high bar or wide range bar to givea signal to enter a long trade. Enter a "long" trade one tick above the high of the confirmation(higher-high or wide range) bar. For bearish patterns, enter a "short" trade one tick below thelow of the lower-low or wide-range bar.Target: The target for the Bat patterns is similar to the Gartley patterns. First targets may beset at A level or 1.27 of XA swing. The secondary targets could be 1.62 to 2.0 of XA swinglevel.Stop: The Bat pattern fails if price trades below the X level. Place a stop order one tick belowX level.
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Trading Bullish Bat
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Trading Bullish Bat
The example above shows a bullish Bat formation from Boeing's daily chart. Boeing formed abullish Bat formation from mid January 2007 to March 2007. After XA swing, a 51.6%retracement is marked for "B" level. A Potential Reversal Zone (PRZ) is computed at 0.886 ofXA, 1.62 of BC and 1.27 of BC range. After a series of "higher high" bars, Boeing stockreversed its prices from PRZ (at D). A "long" trade is triggered above the B level.1. Enter a "long" trade above B level at $88.2. Place a "stop" order below the low of D at $84.60.3. Place a "Target" 1.27 of XA level at $94.
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Trading Bearish Bat
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Trading Bearish BatThe example above shows a bearish Bat formation from the NASDAQ futures (NQ) chart.NASDAQ futures formed a bearish Bat from January to April in 2006 from the range of 1872to 1845. The B retracement level was at 51.3% confirming the Bat pattern. The D level wasformed at 0.886 of XA range. A PRZ was computed from 1845 to 1853 levels for a reversal atD. Once prices traded inside the PRZ, a reversal bar is anticipated to signal a "short" trade.1. Enter a "short" trade below the low of the reversal bar at D level (1 820).2. Place a "stop" order above the D level 1847.3. Place "targets at "A" level and at 1.62 of XA swing at 1660.
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5.4. Butterfly Pattern
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Butterfly PatternThe "Butterfly" pattern was discovered by Bryce Gilmore and Larry Pesavento. It is one of thepowerful patterns like the Gartley pattern. The "Butterfly" pattern has a distinct retracementlevel (0.786) of XA swing. In bullish and bearish 5-point swings, the pattern must have 0.786to 0.886 of XA swing to be valid. In perfect "Butterfly" patterns, the AB swing will be equalto CD (AB=CD)."Butterfly" patterns usually occurs at market tops and market bottoms. The pattern's successrate is much higher when the retracement and time ratios are harmonically aligned.Two primary differences between the "Butterfly" and "Crab" patterns are: I). The ABretracement must be 0.786 in the "Butterfly" pattern; where as in the "Crab" pattern, it liesbetween 0.382 and 0.618.2 levels 2). In both patterns the D point extends beyond the X and theC level can be inside or outside of the XA range. The retracement of AB defines level D. InButterfly patterns, if B is formed at 0.786, the usual retracement of D could be near 1.27 of XArange.Trade: Once the Butterfly pattern is completed in PRZ level, wait for a confirmation bar, widerange bar or "higher high" close bar to suggest a potential reversal from "D" level. Enter onetick above the high of the confirmation bar.Stop: Place a "stop" order below (bullish) the low of the "Butterfly" pattern. For bearishButterfly patterns, place a "stop" order above the high of the "Butterfly" pattern.Target: Targets are set at 100% of AD and 162% of XA from D levels. In bullish butterflypatterns, beyond the A level, targets need to be protected with trailing stops.Bullish Butterfly
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Trading Butterfly Bullish
Trading Bullish Butterfly PatternThe example above illustrates a bullish "Butterfly" pattern from Amazon's daily chart. Fromthe "swing low" of X to the "swing h i g h of A, the center of Butterfly level B is formed whenprices retrace to 0.786 of XA was made. A retracement of 0.618 of AB retracement is made atC. D is formed with in the Potential Reversal Zone at 1.27 of AB. A "long" trade is triggeredfrom D level as a wide-range bar traded above the previous bar's high.1. Enter a "long" trade one tick above the previous bar's high.2. Place a "stop" order below the low of D level.3. The first target is set at "A" level and second target is set at 162% of XA swing.
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The example above illustrates a bearish "Butterfly" pattern from the Dow Emini futures (YM)30 minute chart. YM formed a bearish "Butterfly" pattern from January 16,2007 to January17,2007 between the 12500 to 12660 levels. After completion of D level at 12260, a reversalbar (wide range bar or lower-low bar) is anticipated to signal a "short" trade.1. Enter a "short" trade below the low of the reversal bar at 12630.2. Place a "stop" order above the high of the D level at 12665.3. Place "targets" at "A" level (12590) and another at 1.62 of XA swing (at 12550).
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5.5. Crab Pattern
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Crab PatternThe "Crab" pattern was invented by Scott Carney of Harmonic Trading in 2000. The Crabpattern is another form of the 5-point Gartley extension pattern. The Crab pattern has a distinctextension: 1.62 of XA swing. Crab patterns also have a 0.618 XA retracement to form thecenter retracement "B" level. The Potential Reversal Zone (PRZ) is formed at 1.27 of ABswings, 1.62 of XA and a distinct 2.62 to 3.62 of BC. These extension patterns form whenprices trade outside of XA swing. When the price closes below X, the pattern may be signalinga further correction to 1.62 of XA level to form "Crab" pattern.Trade: Once the Crab pattern is completed at the PRZ level, look for price-action to confirmthe reversal. For bullish Crab patterns, look for a "wide range bar" or "higher highs" from thePRZ level to confirm the Crab pattern. Enter a "long" trade above the confirmation bar. Forbearish Crab patterns, enter a "short" trade below the low of the confirmation (lower low) bar.Stop: The bullish Crab pattern fails if prices close below the PRZ levels. Place a "stop" orderbelow the low of the PRZ level. For bearish Crab patterns, place a "stop" order above the highof the PRZ levels.Target: The bullish Crab patterns result in excellent profits. Set targets at "B", "C" and "A"levels. Similarly, for the bearish Crab patterns set targets at "B", "C" and "A" levels.
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Trading Crab Bullish Patte,m
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Trading Crab Bullish PatternThe above example illustrates a bullish Crab pattern from the S & P 500 index (SPX) dailychart. From September 2005 to October 2005, SPX formed a bullish Crab pattern. Pricestraded from a high of 1243 to 1172. In October 2005, SPX completed the Crab pattern asprices reversed to confirm the pattern. A wide-range bar at 1195 level confirmed the pricereversals.1. Enter a "long" trade above the confirmation bars' high at 1196.2. Place a "stop" order below the low of the Crab pattern at 1171.3. Targets are set at "C" level at 1233 and at "A" level at 1243.
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Trading Crab Bearish Pattern
Trading Bearish Crab PatternThe example above illustrates a bearish Crab pattern from Merck's (MRK) daily chart. MRK 'formed a bearish Crab pattern as it rallied from $43 to $53 from February 2007 to May 2007.After completion of the PRZ at "Dmlevel, a reversal bar from the PRZ confirmed thecompletion of the Crab pattern. A "short" trade is triggered at the $5 1 level.1. Enter a "short" trade below the low of the confirmation bar at $5 1.
2. Place a "stop" order above the high of the "D" level at $52.75.3. Targets are set at "X" level at $47. The second target is set at "B" level at $45.
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Chapter 6: Geometric Patterns6.1. Triangles
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Symmetric Triangle
.
"Symmetric Triangles" form when the markets are in indecision mode. The "Symmetrictriangles" can be easily detected when prices make alternate "lower highs" and "higher lows"in upside and downside slopes defining a symmetry. "Symmetric" triangles form when supplyand demand are near equal resulting in market indecision. Most triangles result in a clearbreakout and breakdown in the direction of the prior trend.
Trade:Trades are only initiated at the trend line breakouts of the "Triangle." Enter trades only when"Symmetric triangle" breakoutsibreakdowns are confirmed by price trading one or two ticksaboveibelow the breakoutibreakdown bar's highllow.Target:Most "Symmetric triangles" result in 100% of the depth riselfall of the entire triangle range inthe direction of the breakout. Partial trade exit targets are set at 50% of the depth from thetrade entry. Protect targets by using trail stops.Stop:"Symmetric triangle" failures occur when price results in false breakouts. Stop below the firstmajor "swing low" below the trend line for a long setup. Place a "stop" order above the firstmajor swing high from the trend line for a short-setup.
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Trade Chart Patterns Like The Pros
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Trading Symmetric TriangleThe example above shows a "Symmetric triangle" formation from the Russell Emini (ER2)6 10 tick chart. On May 3 1,2007, ER2 made lower highs and higher lows to form a"Symmetric triangle." Late afternoon, ER2 prices rallied and closed above the top trendline toconfirm a "Symmetric triangle". On the following day, ER2 traded higher from the breakoutto reach the target levels.1. Enter a "long" trade above the high of the breakout bar at 848.52. Place a "stop" order below the low of the previous swing low at 845.3. Target the depth of the triangle from the breakout level to 853.
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Ascending Triangle"Ascending Triangles" form when prices attempt to make "higher highs" and "lower lows"suggesting a bullish price trend. The "Ascending triangle" is bound by two trendlines: ahorizontal line at the top and an upward slope trend line connecting the lower lows."Ascending triangles" form in any market and are quite reliable. The "Triangle" prices mustintersect the trend lines at least twice (each) before the pattern is complete. Usually at the thirdor fourth attempt to trade outside the top trend line results in a breakout. Breakouts occur nearthe apex of the triangle. This pattern has a high success rate as it meets its target about 75% ofthe time.Trade:Trade a clear breakout of the top trend line. Enter a "long" trade one tick above the high of thebreakout bar. Confirm the breakout by volume or other indicators.Target:"Ascending triangles" have excellent success in reaching target areas. The usual target wouldbe the depth of the "Triangle". Measure the distance (depth) between the top trend line andlowest of the upward slope trend line. Add this depth to the breakout point from the top of thetrend line. Targets are also set at 50% of depth level for partial exits.Stop: Place a "stop" order when the price closes below the low of the lower trend line or amajor swing low.
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Trading Ascending Triangle
Trading Ascending TriangleThe above example shows an "Ascending triangle" from the Russell Emini (ER2) 5 minutechart. On February 01,2007, at around 2.30 pm, after few failed breakout attempts, the priceclosed outside the upper trend line. A trade is triggered above the high of the breakout bar at809.6. A "stop" order is placed below the low of the last "swing low" at 808. The depth ofthe triangle is 4 points. Targets are set for 50% of depth (2 points) at 8 12 and 100% of thedepth at 813.
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Descending Triangle
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"Descending Triangles" are similar to "Ascending Triangles" formation rules except they arebearish. "Descending triangles" form in bear markets and favor breakdowns. A "descending"triangle is bound by two trend lines connecting a downward slope trend line and a flat trendline connecting the lows of the pattern. Trades usually occur near the apex as the price closesoutside the bottom trend line suggesting a breakdown. The price must intersect trend lines atleast twice before the pattern emerges. Like the Ascending triangles, "Descending Triangles"also have a high success rate.
Trade:Trade one tick below the low of the breakdown bar (outside of the triangle). Confirm thebreakdown with increased volume.Target:"Descending" triangles have similar targets like "Ascending" triangles. Measure "Triangle"depth at the lowest and highest points and set targets at 50% and 100% range from thebreakdown point.Stop:Place a "stop" order outside the downward slope trend line. If price closes above the top trendline, exit the trade.
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Trading Descending TriangleThe above example illustrates a "Descending triangle" from the daily Gold futures chart. InJuly 2006, Gold reached 700 and retraced to 620 by the mid of July. Gold made a series oflower highs and a flat bottom near the 620 level to form a "Descending Triangle". During thefirst week of September, Gold closed below 620 to trigger a sell-off. The depth of the"Triangle" was 80 (700 to 620) points.1. A "short" trade was entered at 6 18 with target of 570.2. A "stop" order was placed above the trend line at the 640 level.3. A 50% depth target area can be seen from the trade entry.1.
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Triangle Types
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Rectangle Pattern"Rectangle" patterns are continuation patterns showing indecision in trader's sentiment aboutbullish and bearish conditions. "Rectangle" patterns are reliable patterns and the direction ofthe breakouthreakdown is known prior to the rectangle formation. These patterns arecontinuous and follow in the same prior direction (Up or Down) after the pattern formation."Rectangle" formations are bound by two horizontal trend lines, where prices oscillatebetween the "highs" and "lows." The prices must intersect these trend lines at least twicebefore a breakout or breakdown can result. The volume within the pattern is usually quiet andincreases during the breakouthreakdown stages.Trade:A trade setup occurs when a price closes outside the trend line after at least two penetrationson each side of the boundaries. Trades are entered on a follow-up bar at "high above thebreakout bar or "low" below the breakdown bar.Target:Targets in "Rectangle" formations are based on the depth of the rectangle pattern. The patternis reliable, and targets are usually set at 70 to 100% of the depth of rectangle from the tradeentry.Stop:Rectangle patterns fail when prices retrace in to the middle of the rectangle channel. Place a"stop" order just belowlabove the middle of the channel.
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Trading Rectangle Patterns
T r a d i n ~Rectangle PatternThe example above illustrates a "Rectangle" pattern from the S&P futures (ES) 15 minutechart. On January 30, ES traded in a tight rectangle channel with highs and lows bound bytwo parallel trend lines. On the following day, prices traded outside the trend channelsuggesting a breakout at 1437. The prior direction before the "Rectangle" formation wasupside. A "long" trade is entered above the breakout bar. Targets are placed at the depth ofthe rectangle from the trade entry at 1440.5. A "stop" order was placed in the middle of thechannel at 1433.
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The example above shows a "Rectangle" formation from the Exxon Mobile (XOM) dailychart. From late June 2005 to September 2005, XOM traded in a narrow range from $57.5 to$61 forming a "Rectangle" pattern formation. Late September 2005, XOM broke out of theupper trading channel and closed above $61. The trades are only entered in prior trenddirection.1. Enter a "long" trade above the breakout bar at $6 1.2. The height of the "Rectangle" pattern is $3.5.3. Place a "stop" order below the midline of the "Rectangle" channel at $59.4. Target the height of the "Rectangle" pattern above the breakout at $64.
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Bull Flag"Flags" are continuation patterns representing a small pause in the market trend. They can beeasily spotted as they appear right after a sudden and quick burst from a trading range. Indynamic and quick markets, Flags form as prices pause and move in the same direction as theprior trend after a clear breakout. Flags are known to be very reliable patterns."Bull Flag" patterns can be spotted when the market breaks out from a range and makes"lower highs" and "lower lows" in a tight formation. The trend lines connecting these highsand lows are near parallel. Also, tight and well defined "flags" perform better than short andzigzag "flags."Trade:After a series of "lower highs" and "lower lows," connect prices with two parallel trend lines.Wait for a clear breakout to the upside. Price closing outside the upper trend line is the firstsign of a breakout. Enter a "long" trade one tick above the high of the breakout bar. Anotherclear signal of a "Bull flag" breakout occurs when prices trade above the recent "swing high".Target:Measure the prior distance from the "swing low" at point A to the "flag" formation at point B.Target 70% to 100% of this range from C. Secondary targets in bull markets are 138% to162% of AB from C.Stop: Place a "stop" order below the "low" of the "flag."
Bull Flag
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Trading: A Bull FlagThe chart above illustrates a "Bull flag" trade from the Russell Emini futures (ER2) 610 tickchart. After a rally from "A" on January 15, 2007, the ER2 made a "swing high" at "B" andformed a "Bull flag" with a series of "higher highs" and "lower lows". A late day rallytriggered a breakout from the top trend line as prices "closed" above the previous "swinghigh" at 797. A long trade is entered with a "stop" order at 795 (below level C). Targets areset at 70% to1 00% of the AB range from C and 138% to 162% of the AB range from "C".
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Bear Flag"Bear Flags" usually occur as markets fall from a base and pause in a downtrend. They arealmost identical to "Bull flags," but in the opposite direction. "Bear flags" can be easilyspotted as they make "higher highs" and "higher lows" within the "flag" area. The trend linesconnecting "highs" and "lows" are almost parallel. A clear breakdown confirmation is neededto trade these patterns as the price continues in the same direction prior to the "flag" formation.Like "Bull flags," "Bear flags" are also very reliable.Trade: After a series of "higher high" tops and "higher low" bottoms, prices will breakout ofthe lower-trend line. Wait for confirmation of breakdown with a long range bar. One of thebest confirmations occur when prices "close" below a previous "swing low" (of bear flag).Enter a "short" trade one tick below the "swing low" or previous bars7 low.Target: A typical target in "Bear flags" is from 76% to 100% of the AB range prior to the"Bear flag". The secondary targets are from 138% to 162% of the range AB.Stop: Place a "stop" order above C to protect the "short" trade.
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Trading a Bear Flag
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Trading A Bear Flag PatternThe example above illustrates a "Bear flag" formation from the Nasdaq Emini futures (NQ)daily chart. In March 2005, NQ made a swing high (A) and by late March 2005, NQ pricessold-off to 1580 level. A retracement of 38% into the AB swing (at C) formed a "Bear flag".A breakdown bar (in the prior down trend direction) below the trendline (at C) gave a shorttrading opportunity.1. Enter a "short" trade below the low of the breakdown bar (at 1580).2. A "stop" order was placed above the " h i g h of the top trend line (swing high).3. Targets were set at 70% to 100% of the AB range prior the "Bear Flag" from C.
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Trading Bull and Bear FlagsI@ERz.D-~
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Trading Bull and Bear FlagsThe example above illustrates "Bull" and "Bear" flags from the Russell 2000 chart. Intradaycharts produce more opportunities to trade "Flags" as the results will be known quicker thanday or longer term charts. "Flag" patterns are continuous patterns and trades are only taken inthe direction of the current major trend. In the chart above, "trade" A is taken in the directionof a major trend after a breakdown bar from "bearish flag." A "short" trade is triggered belowthe low of the breakdown bar. A "stop" order is placed above the high of the "flag. Targetsare set at 70 to 100% range of the "Flag." Similarly, a "long" trade B is triggered in theuptrend. A "stop" order is placed below the low of the "flag" pattern and a "target" is set at 70to 100% range of the "Flag."
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Rising Wedge Pattern
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"Rising Wedge" patterns are similar to "Symmetric Triangles" but "Rising Wedge" patternsform in an angle where as "Symmetric Triangles" are mostly horizontally formed. "Risingwedge" patterns have higher highs and higher lows and are connected with two angled(slanted) trend lines. These trend lines converge at the top. The price must intersect each trendline at least twice before the pattern fblly emerges."Rising wedges" are usually bearish in both uptrend and downtrend markets. In addition, theyhave a high failure rate and are relatively difficult to spot them. They seem to work well inbullish markets.Trade:"Rising wedges" are defined by the trend lines connecting the highs and lows of the pattern.The price trading outside the lower trend line signals a potential short trade. A "short" trade isentered when the prices close below the breakdown's bars low (must be below the trendline).Target:After