Patterns to Profit

A bunch of candlesticks together or individual give rise to a pattern that is identifiable and that has the potency to yield a trending move. We divide our understanding into two distinct parts. The first being ‘Behavior’ and the second being ‘Trigger’

Behaviour

There are four broad types of price behavior that we seek in a base (stage 1) or a pullback after a trending move (stage 2)

Wedges: After a sharp move up, price starts declining sharply, almost as if there has been a rejection of sorts. Sometimes we see two legs down as is shown. The broad suggests a wedge like pattern which eventually halts and reacts at a previous level of support. Wedges are terrific opportunities. Since the original move has been retraced significantly, an entry here can setup a great risk-reward ratio.
Flat Base: Flat bases are the easiest to spot. Price moves up and then consolidates sideways with minimal volatility. You know the lows and highs distinctly of such a pattern. Eventually these breakout on either side, and your job is to enter immediately if its upwards. The closer it happens to the moving averages, the better.
Cup: A variation of a wedge which after steeply declining, gently starts climbing in a uniform manner. As volatility reduce in the bars which were heading down, volatility increases on the bars moving up. The symmetry makes it look like a rounding bottom. You obviously will look to enter at the break of the previous highs once you have another retest.
VCP: The volatility contraction pattern is a wider version of the flat base but with progressively contracting lows. The VCP can also be a form an inverted head and shoulders. The idea is that the upper portion is flat whilst the lows start rising. This means that the volatility of the sideways range is reducing with every move. A breakout is imminent at the top.

Note there are several patterns but focusing and perfecting on these is more than sufficient.

Trigger

With respect to either of the above price behaviours, the trigger is the 1 to 4 bar pattern that tells us to enter the trade. The trigger is the exact action when we make the decision to buy a stock.

1. Bull Bar: The most common trigger is the “Bull Bar”. A big bullish bar closing near its highs which occurs after a series of small bars, has exceptional volume- way more than seen in the immediate past and forming at the relevant juncture of any of the 4 previous price behaviors we’ve witnessed is the sign to enter a stock

2. J Hook: A side note to this is the handle or the J hook. This is again a bull bar but which was preceeded by 2-3 narrow descending bars. The J hook is an even better entry. The handle with the cup or the handle forming at the last leg of a VCP is a great pattern

3. Pivot Buy: One can alternatively place a resting stop at a prior high pivot. This is not the best entry but when you have a clear pivot formed by the market and are waiting to enter, you may choose to enter at a the previous high formed with a stop below a prior low

Bonus

Gap down reversal bars

In any uptrend, one of the most potent bottoming/reversal action is a gap down reversal bar. A bar which opens considerably below the low of a prior bearish bar (one that’s a significant down bar) and closes near its highs which have knocked out a lot of the prior bar’s red. These sort of bars indicate that on a daily timeframe, a significant buying power has supported the bearish pressure. This becomes even more significant if this is occurring at a prior horizontal i.e. price support or rising i.e. trendline/moving average support.

180 degree gaps

A 180 degree gap is another potent reversal. Imagine there’s all gloom with a huge selloff bar. Something changes fundamentally and the market opens the next day way above the prior bars high. Bingo. All shorts are trapped. If the market continues to show strength and closes the day at its high, the buy signal is usually very, very convincing.