above the close of the trend line. A longer-term stop would beabove the high of the "V-top" Pattern.
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Trading V-Top Pattern
The example above shows a "V-top" formation from the daily Gold futures chart. Goldfutures rallied during year 2005 and in part of year 2006. In May 2006, Gold made a new highand closed near 760. A Dark Cloud candlestick pattern signaled a reversal in Gold as it startedto descent. By mid May 2006, Gold closed below the trend line at 680 to signal a potential"short" trade.1. Enter a "short" trade below the trend line at 680.2. Place a "stop" order above the trend line at 705 to protect the trade.3. Place a "target" at the "swing low" prior to the "V-top" rally at 580 level.
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Trading V-Top Pattern
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Trading V-Top PatternThe example above illustrates a "V-top" pattern formation from the QLogic daily chart. Thechart shows a "spike and ledge" formation after the "V-top" formation. A "ledge" formationafter a "spike" is usually a strong confirmation of potential reversal sign. A breakdown belowthe ledge will lead to a much stronger down trend. A trend line is drawn connecting the"swing lows" below the "ledge" formation. A breakdown below the "ledge" formationconfirms a "V-top" pattern.1. Enter a "short" trade below the low of the breakdown bar.2. Place a "stop" order above the "ledge" pattern high.3. Place a "target" at a major "swing low" or "gap" area approaching the "V-top."
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V-Bottom PatternAs the name implies, "V-Bottom" patterns resemble a "V" shape. "V-Bottoms" are formedafter a steep decline followed by a rally to reach the top of the pattern. "V-bottom" patternsform quite often and are not always easy to detect until part of the formation is complete. "Vbottom" patterns usually have a single day of spike run-down or exhaustion sell-offs before therally begins."V-bottoms" usually produce high volume on the "spike" or "exhaustion" day followed byeven higher volume on the following days. Daily prices usually do not attempt to close nearthe "low" of the thrust days to signal a potential reversal pattern.A trend line is drawn connecting the previous "swing highs" in the "V-bottom" pattern. A"confirmation" is signaled when the price closes above the trend line.Trade: Wait for a confirmation above the trend line. Enter a "long" trade above the high of thebreakout bar.Stop: "V-bottom" failure can occur when prices close below the low of the "V-bottom"pattern.Target: "V-bottom" patterns usually return to the prices at the top before another descent. Settargets near the "top" of the pattern.
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Trade Chart Patterns Like The Pros
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Trading V-Bottom Pattern
Trading V-Bottom PatternThe example above illustrates a "V-bottom" pattern formation from Microsoft's daily chart.In August 2006, Microsoft made a high of $27.75 and retraced to $24 by October 2006. Inanticipation of its Vista release, Microsoft rallied from October, 2006 to November2006making a "V-bottom" pattern. A trend line is drawn in the above chart connecting theprevious "swing high" and "V-bottom."
I . Enter a "long" trade above the high of the trend line breakout bar.2. Place a "stop" order below the pattern low or "swing low."3. Target the previous "swing high" prior to the "V-bottom."
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The example above illustrates a "V-bottom" pattern from the NASDAQ Futures (NQ) weeklychart. From April 2006 to June 2006, NQ fell sharply and closed below 1500. In July 2006,NQ reversed and started to climb up. A trend line is drawn in the above chart connecting the"swing highs" to position the "long" trade. A close above the trendline signals the trendreversal and a "long" trade.
1. Enter a "long" trade above the high of the trend line breakout bar.2. Place a "stop" order below the "V-bottom" pattern's low.3. Target the previous "swing high" prior to the "V-bottom" pattern.
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Double Top Pattern
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"Double Top" patterns occur when prices fail to make new highs at significant previous highlevels. "Double top" patterns are relatively reliable and easy to trade. Also, these patterns failas they may potentially form "triple" or "multiple" top formations. "Double tops" usuallysignal the end of a bull run, depending on the width of the top formation. Volume in the firstswing should be heavier than the volume on the second swing. In addition, the volume maybeheavier on the breakdown bars. If the breakdown volume is weaker, it may be signaling a"triple" or "multiple" top formationTrade:A "Double top" pattern confirmation occurs at the breakdown level of "swing lows" atneckline. Enter a "short" trade below the previous "swing low" at neckline.Target:"Double Top" patterns do offer a good risklreward ratio. Measure the distance between the topof the pattern to the neckline for potential target range from the trade entry.
Stop:"Double tops" also fail and form "triple" or "multiple" top patterns. Usually the "Double top"pattern failure occurs when prices reverse and trade at the middle of the "Double top" pattern.Enter a "stop" order at the middle of the pattern range to protect the trade.
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Trading Double Top PatternEBAY - Daily L=30.90 -1.03
3/3/07io:3oAM
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Trading Double Top Pattern
The example above illustrates a "Double top" formation from the EBay daily chart. EBayformed a "Double top" pattern from November 2006 to January 2007 around $47 level. LateJanuary 2007, EBay started to decline from the "Double top" level and closed below $42.This close below neckline signaled a potential "short" trade. The depth of the "Double top" is$5.1. Enter a "short" trade below the "low" of the breakdown bar at $42.50.2. Protect with a "stop" order at the middle of the channel at $453. Place a "target" at the depth of the "Double top" pattern below the breakdownlevel to $37.50.
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Trading Double Top Pattern1 6 3 ~ -~6102 Tick Bars L= 819.20 2.40
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4/6/07 11:37AM
Source: TradeStation
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Trading Double Top Pattern
The example above illustrates a "Double top" formation from the Russell Emini 610 (ER2)tick chart. ER2 formed a "Double top" pattern on April 3,2007 near the 8 19.5 level. The nextday, ER2 started to decline from the "Double top" level and closed below the "swing low" of8 16.5. Price closing below the neckline signaled a potential "short" trade. The depth of the"Double top" is 2.5 points.1. Enter a "short" trade below the "low" of the breakdown bar at 816.5.2. Place a "stop" order at middle of the "Double Top" channel at 818.53. Place a "target" at the depth of the "Double top" pattern below the breakdownlevel to 8 14.
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Double Bottom Pattern
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"Double Bottom" patterns form when prices fail to make new lows at a significant bottomarea. Most of the time, the lows on the two "bottom bars" form within 2 to 5 percent of theapplicable price range. "Double bottom" patterns are easily detected after the apparentformation, and can be traded with good confirmation signals. Volume may provide a goodconfirmation signal as the volume in the first swing would be heavier than the volume in thesecond swing. Volume may also be heavier on the breakout. If the breakout volume is weaker,it may be signaling a third bottom.Trade:A "Double bottom" can only be traded after confirmation of the pattern breakout.Confirmation of the pattern occurs when prices close above neckline. Enter a "long" tradeabove the high of the breakout bar from the neckline.Target:"Double bottom" patterns also have a good riskheward ratio. The first target would be 100%of the swing range of the pattern. The second target would be 127% to 162% of the depth ofthe "double bottom" pattern.Stop: "Double bottom" patterns do fail. This pattern failure occurs if the price closes below inthe middle of the pattern for multiple bars. Trading below the bottom of the pattern could be asignal of triple bottom. Place a "stop" order below the middle of the pattern to protect thetrade.
EIDouble Bottom
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Doubk Bottom
The example above illustrates a "Double bottom" pattern formation from the Dow Eminifutures (YM) chart. YM made a double bottom from June, 2006 to August, 2006 at the10,800 level. The "Double bottom" pattern is relatively easy to trade. A "long" trade wastriggered at the breakout of the swing high (at level " A 11,500).1. Enter a "long" trade above the high of the breakout bar at level "A" at 11,500.2. Place a "stop" order at the middle of the channel (trading below may be "triplebottom").3. Target the depth of the "double bottom" pattern (600 points) above the trade entry.
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Trading Double Bottom Pattern~GOOG- Daily L=471 19 0.17
I'
4/6/0712:02 PM
I
Source;Trddtation
T r a d i n ~the Double Bottom PatternThe example above illustrates a "Double bottom" pattern formation from the Google (GOOG)chart. GOOG made a "Double bottom" from June 2006 to August 2006 at $370 level. The"Double bottom" patterns are relatively easy to trade. A "long" trade is triggered at thebreakout of the "swing high" (at $430). The depth of the "Double bottom" pattern is $60.1. Enter a "long" trade above the high of the breakout bar at $430 level.2. Place a "stop" order at the middle of the channel (trading below may be "triplebottom").3. Target the depth of the "Double bottom" pattern above the trade entry.
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Triple Top Pattern
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"Triple Top" patterns are multiple top patterns indicating when prices try to make new highsand fail on the last attempt. "Triple top" patterns look like "Head and Shoulders" patterns, andare moderately reliable patterns to trade. However, "Triple top or bottom7' patterns do fail andfailures may be probably more reliable and stronger as they trade in opposite direction. Most"Triple top" pattern lows occur within 2% to 5% of price range. "Triple tops" are relativelyeasy to detect and offer a good risk to reward ratio. A confirmation is needed before trades areinitiated. Heavy volume is traded in the first swing up, but the remaining swings will incurwith diminished volume. In addition, heavy volume is followed at the breakdown of thepattern.Trade:There are two types of possible trades that occur in "Triple top" patterns. An aggressive trade(short) is placed near the last attempt at the lower high of the previous two swing highs. Thesecond trade is possible when prices close below the lower low of the previous two swings atbreakdown.Target:"Triple top" patterns have excellent risWreward ratio. Measure the depth of the "Triple top"between swings and subtract the depth from breakdown level.Stop:"Triple top" patterns fail when prices attempt to close above the highest "swing high" of thepattern. Place a "stop" order above the "swing high" of the "triple top" to protect the trade.
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Trading Triple Top Pattern
nTriple Top
Trading Triple Top PatternThe example above illustrates a "Triple top" pattern from an intraday Russell Emini futureschart. On February 28,2007, Russell made a significant "Triple top" at the 798 level and washesitant to cross at the 798 level. On its third failed attempt to close above 798 failure, thepattern suggested a potential short entry.1. After a failed third top, enter a "short" trade one-tick below the low of previousbar at 796.2. Place a "stop" order above the "swing high" at 798.5.3. Targets are set at pattern depth from the "swing low" of the "Triple top" pattern at786.
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Trading Triple Top Pattern
Trading Triple Top PatternThe example above illustrates a "Triple top" pattern from Dupont's daily chart. FromNovember, 2005 to January, 2006, Dupont attempted to cross above $43.5 and traded in aprice range between $42 and $43.5. In December 2005, Dupont made a final failed attempt tocross the $43.5 level and closed below $42 on its reversal. Closing below the $42 level gave ashort trading opportunity.1. Enter a "short" trade below the low of the breakdown bar.2. Place a "stop" order above the last "swing high."3. Target the depth of the "triple top" pattern from the price entry.
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Triple Bottom Pattern
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The "Triple Bottom" pattern is a reversal pattern that occurs at major market bottoms. The"Triple bottom" pattern is formed when prices fail to make new lows on three differentoccasions. Most "Triple bottom" pattern lows occur within 2% to 5% of price range. "Triplebottoms" are relatively easy to detect and offer good risk to reward ratio. A confirmation isneeded before trades are initiated. Heavy volume is traded in the first swing down but the restof the swings will have a diminished volume followed by heavy volume at breakouts.Trade:The "Triple bottom" patterns offer excellent risk and reward ratios. There are two types ofpossible trades. The first trade is an aggressive type to buy near the higher of the first andsecond swing lows and protect the trade with the "lowest low." The second type of trade istriggered after a confirmation of the pattern. This confirmation of pattern occurs when thehigher of two prior swings is traded. Enter a "long" trade above the high of the breakout bar.Target:In both trading cases above, targets are set from 62% to 100% of the depth of the three swings.Stop:Protect the trades by placing a "stop" order below the "lowest low" of all three swing lows.
mTriple Bottom
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Trading Triple Bottom Patterne E R 2 . D - Daily L= 787.70 +4.90-
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Trading Triple Bottom Pattern
The example above shows a "Triple bottom" pattern from the Russell 2000 daily chart.
1. Enter first "long" trade above the high of a reversal bar after three "swing lows" at685. Enter another "long" trade on the breakout of the "swing high" of the "Triplebottom" pattern (at 749).2. Protect the trade by placing a "stop" below the "lowest" of three "swing lows."3. The targets are set from 62% to 100% of the depth of "Triple bottom" patternabove the breakout level.
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Trading Triple Bottom Pattern
IQCOM - Weekly L=43.15 -0.50
Trading Triple Bottom PatternThe chart above shows a "Triple bottom" pattern from the Qualcomm's (QCOM) weeklychart. From January 2005 to June 2005, Qualcomm attempted to close below the $33 levelthree times while attempting to make a "Triple bottom" pattern. After the third failed attempt,QCOM rallied above the neckline of the "Triple bottom" pattern to provide an opportunity totrade long.1. Enter a "long" trade above the high of the breakout bar at $39.2. Place a "stop" order below the low of the recent "swing low" at $34.3. Place a "target" at the depth ($5) of the "Triple bottom" pattern ($5) above the"neckline".
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Dragon PatternThe "Dragon" pattern is similar to the " W pattern or the "Double Bottom" pattern with fewdifferent trading rules and different targets. "Inverse Dragon" patterns are similar to "M"pattern. "Dragon" patterns usually form at market bottoms. Dragon patterns work in all timeframes and in all market instruments. Like most "Double bottom" patterns, "Dragon" patternspresent excellent trading opportunities with low risk to reward ratios.The "Drgaon" patterns start with a "Head formation and price declines from the head levelform two legs of the "Dragon". These two legs in a "Dragon" pattern usually form within 5%to 10% of the price difference. The second leg has a strong indication of reversal as it posts akey reversal bar, or a "divergence" in any oscillator indicators. The price rise in the second legis usually followed by a spike in the volume. A trend line is drawn connecting the head of the"Dragon" to the hump. When the price closes above the trend line and confirmed by priceaction or divergence in any oscillator, it signals a reversal. The second confirmation of"Dragon" occurs when the price closes above the hump, 38% to 50% of the range from head tothe low of the first leg.Trade: Aggressive traders enter a "long" trade when the price closes above the trend line. Abetter trade entry may be signaled when the price closes above the hump level. Enter a "long"trade few ticks above the hump level.Target: Targets are usually at 127% of the second leg range and another target is set at nearthe " h e a d level.
Stop: Place a "stop" order below the "lowest low" of the two legs.
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Trading Dragon Pattern
Trading Dragon PatternHeadFormation of "first leg."Hump (must be 0.38 to 0.5 of AB)."Second leg" (can be 0.61 8 to 1.27 of AB).Trend line "breakout" (Long Trigger).First "target" at 1.27 of CD.Second "target" at 0.886 to 1.O of BC.Third "target" at 1.38 of AB.STOP: Place a stop few ticks below the lowest low of two legs.
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Trading Dragon Pattern.
Trading Dragon PatternThe example above shows a "Dragon" pattern formation from the Dow Emini futures 30minute chart. On January 3,2007, Dow futures formed the head of the "Dragon." Pricesdeclined until January gthin the first leg formation. On January 8'" prices tried to recover asthey rallied to 12520. A trend line is drawn connecting the "top" of the "head" and "top" ofthe first leg. On January loth,the second leg was formed as prices retraced from the humparea to 12420. A confirmation of "Dragon" is first signaled when prices closed above thetrend line at 12500.1. Enter a "long" trade at 12,520 (close above the high of the breakout bar).2. Target the first "swing high" prior to leg (I) at 12,570 and "head" area at 12,640.3. Place a "stop" order below the lowest low of the two legs at 12,410.
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Trading Inverse Dragon Pattern
Trading Inverse Dragon PatternThe "Inverse Dragon" is an upside down "Dragon" pattern and its trading rules are similar to"Dragon" rules. The "Inverse Dragon" is a rare, but a very reliable pattern. The "Dragon"pattern starts with a "head," "hump" and two "legs" (inverse). The hump area is usually at38% to 50% of the range between the "head" and the first "leg." A "close" below the trendline triggers the first "short" trade. A "close" below the "hump" line to trigger another "short"trade.
1. Enter a "short" trade below the trend line.2. Target the "swing low" prior to the first "leg."3. Place a "stop" order above the highest high of the two legs.
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Inverse Dragon is an upside down "Dragon" pattern with trading rules similar to "Dragon"rules. The hump area is usually formed at 38% to 50% of the range between the "head" andfirst "leg." A close below the trend line triggers the first "short" trade. A "close" below the"hump" line confirms the "Dragon" and signals another short trade.1. Enter a "short" trade below the trend line.2. Target the "swing low" prior to the first leg.3. Place a "stop" order above the "high of the second leg.
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Sea Horse PatternThe Sea Horse pattern is a variation of the ABC pattern which I discovered in 2005. It isrelated to the ABC pattern theory, and is quite reliable in trending markets. The "Sea Horse"pattern may be rare in daily or weekly charts, but it occurs frequently during intra-day trading.The primary difference between the ABC pattern and "Sea Horse" pattern is its trade setup,and the retracement ratios along with the angle of descent. The ABC pattern trade triggers aftelABC pattern completion; whereas, in a "Sea Horse" pattern, the trade occurs after a fullreversal and trend confirmation.In an ABC pattern, the BC retracement occurs at the 0.61 8 to 0.786 range; whereas, in a "SeaHorse" pattern, the retracement occurs from 38% to 50% of the prior swing. In "Sea Horse"pattern, the angle of descent is much faster than ABC pattern, and the retracement will be atabout 38% to 50% of the entire range. The trade-action point in the ABC pattern is aftercompletion of the pattern, and in "Sea Horse" pattern, the trade-action point is after the pricereversal and trading above the retracement at C level.
Trade: The "Sea Horse" pattern trade occurs after its price reverses, and trades above theretracement level. Wait for the prices to close above the retracement level at C, and enter a"long" trade above the high of the breakout bar.Stop: Place a "stop" order below the "swing low" prior to the retracement level.Target: Place a "target" (at F) 100% of the range from the retracement level to the swing low.
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Trading Sea Horse Pattern
Trading Sea Horse PatternThe example above shows a "Sea Horse" pattern from the Wynn resorts (WYNN) daily chart.WYNN traded from a high of $58 to $46 and formed the first phase of the "Sea Horse"pattern. Then it retraced to $52 before declining to $42 to complete the pattern. In November2005, WYNN traded above the "Sea Horse" retracement level at C (at $5 1SO) to give a longtrading opportunity.1. Enter a "long" trade above the C level (at $52).2. Place a "stop" order below the low of the retracement at B level ($46).3. Place a "target" at 100% of range (from C to D) at E level to $60.75.
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Trading Sea Horse Pattern
Trading Sea Horse PatternThe example above shows a "Sea Horse" pattern from the Russell Emini (EM) 610 tick chart.On May 10, 2007, ER2 formed a "Sea Horse" pattern, and traded from 827 to 820. Later thatday, ER2 reversed its downtrend and closed above the retracement C level (at 825). The BCrange was 50% of AB swing.1. Enter a "long" trade above the high of the bar at E level (at 825.5).2. Place a "stop" order below the low of B level (at 822).3. Place a "target" at 100% of the range (from C to D) 4.5 points from E level to 829.
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Scallops Pattern"Scallops" are J-shaped patterns that form in ascending and descending markets. In ascending"Scallop" (Bullish) formations, the pattern resembles a "J" letter and has a rounded bottomwith a steep ascent. In descending "Scallop" (Bearish) formations, the pattern looks like a"Mirror Image of J." Usually the volume between the top peak and the bottom "J" peakresembles a "U" shape formation. In ascending and descending "Scallop" formations, thehigher "Scallop" size or lower "Scallop" size becomes smaller as they progress. "Scallop"patterns are relatively easy patterns to trade and have a moderate success rate compared to the"flags" or other continuation patterns.Trade: Descending Scallop patterns are visible once the bottom part is made and the pricestarts to rise. Also, descending "Scallops" are potential short trades once prices trade below thelow of the "curved bottom." In ascending "Scallops," after the first "J" Scallop formation, aretracement is needed for another "J" Scallop. Depending on the market strengths, theretracement is from 38% to 62%, and hence the failure rate in ascending patterns is relativelyhigher than descending "Scallops."Stop: In descending "Scallops," the trade is initiated below the low of the pattern. If the pricesrise back above the right side of the "J" peak, then the pattern is considered as a failure. Inascending patterns, a "stop" is placed below the low of the "J" pattern.Target: Targets are usually at the height of the "J" pattern from trade entry. For ascendingpatterns, the height of the "J" shape is added to the entry. In descending patterns, the height ofthe "J" shape is subtracted form the entry.
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Trading Scallops (Ascending) Pattern4/14/076:00 PM
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Tradin; ~ s c e n d i n g ~ c a l l o pPatternsThe example above illustrates an "Ascending Scallop" pattern from Amazon's daily chart.Amazon formed its first ascending "Scallop" from $36 to $42. A retracement is needed forthis pattern to trade another upside "Scallop" pattern. After a steep decline, Amazon formed around bottom at $37 to $39. Once the pattern started to breakout of the round bottom, it gavean opportunity to enter a "long" trade.
1. Enter a "long" trade above the right side hump at level A ($39).2. Place a "stop" order below the low of the second "Scallop" bottom ($37).3. Targets are placed at the height of the first "Scallop" from level B ($42).
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Trading Scallops (Descending) .Pattern
Trading Descending Scallop Pattern
The example above illustrates a "Descending Scallop" pattern formation from the XMSatellite (XMSR) daily chart. XMSR formed its first descending "Scallop" in March 2006 asit declined from the peak of $30.50 to a low of $20. In April 2006, XMSR retraced above $24and started to decline to form another descending "Scallop." The first "Scallop"' height was$10 and the low was at $20.1. Enter a "short" trade below the low of the Scallop at $20 (level A).2. Place a "stop" order above the high of the "Inverse J" at $24 (level B).3. Place a "target" at the height of the "J" shape from level B to $14 (level C).
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Trade Chart Patterns Like The Pros
GapsGaps are formed when a price imbalance occurs in its buy and sell orders. Most gaps areusually driven by news or economic reports, earnings reports or upldowngrades. The dailygaps are defined in stocks when the day's opening price (begins at 9:30 am EST) is eitherhigher or lower than the prior day's closing price at 4pm EST. Most stocks and index futuresgap about 20% to 25% of the time during the year.Although "Gap" trading is very profitable, trading gaps is relatively difficult for many traders.Many traders avoid gap trading as "Gaps" are usually manipulated by professional portfoliotraders and large institutional traders. However, experienced traders employ some successfulstrategies to trade gaps by a popular method of fading them. Traders watch pivots, support andresistance areas within the gaps and fade them.Additionally, "Gaps" form during intra-day trading (on time-based charts) and may offer somepotential clues to price-action. During intra-day trading, gaps formed in higher time framecharts such as 30 minute or 60 minute offer excellent trading opportunities.Gaps are primarily grouped as: Common, Breakaway, Continuation and Exhaustion. Each hasits own way to trade, but the most profitable and relatively low-risk "Gaps" are Breakaway andExhaustion gaps. Exhaustion gaps present very attractive gains and Breakaway gaps offer lowrisk setups. Breakaway gaps are also excellent in finding the breakout candidates for longterm.Here are some basic rules to remember when trading Gaps.
1. Trading "Gaps" is an art and is a specialty by itself.2. Gap trading methods offer reasonable success, but it does present more risk thanother trading methods. However, gap setups such as breakaway, exhaustion andisland reversals offer excellent rewards for the risk involved.3. Stocks which involve gap trading must have a consistent trading range. Forexample, a stock priced at $20 must have at least a $0.50 average trading range(ATR), and a stock priced at $50 must have at least a $1 average trading range.Furthermore, a stock price of $100 must have at least $2 average trading range.4. To consider an upside breakaway gap, the stock must be closing lower