Trading Patterns

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ForJL
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Trading Patterns

Post by ForJL » Sun Jun 05, 2016 9:45 pm



Every now and then I get the urge to post about the dying art of reading trading patterns if for nothing else to show others how you can make money in the markets using some very low tech skills. In fact my very first trade of any kind was back in ’88 in Scudder International Fund. I put 2 large into it which was practically everything I had and did 23% ROI over 3 months. The criteria used in making that trading decision … chart patterns … patterns that still hold up to this day. Without a doubt I use a lot of advanced, complex approaches in my work but still use chart patterns right alongside of them. So today I want to go over some really nice pattern setups that occurred this week and perhaps make a few converts along the way.

Now before I get started I just want to point out that all of this can be done and done easily in Wave59. It’s just that I don’t like to tie ’59 down with this kind of stuff and usually use it for the more complex work that I do.

In the first chart below, a 16 minute YM, we see a tried and true Head and Shoulders bottom. Head and Shoulders are great patterns to trade off of as they are fairly reliable and they project well. There was a very interesting phenomenon with this pattern that begins at the light blue x. It appears at that point that it will be the right shoulder and the market does indeed run up to the neckline before weakening and falling again. It finds support before rallying back again and finally breaking through the neckline. Now some might question the validity of the pattern because of the 3rd neckline touch but I don’t. However it is significant because it is spent energy and ultimately means the breakout will have less energy to propel it higher. This gives us two very important pieces of information. First, the rally should be stunted and less dynamic which can easily be seen after the breakout. Ergo we don’t want to stay long the market for any extended period of time. Second, we can expect selling pressure to resume off of what is essentially a rally failure. For measuring purposes we usually measure from the Head to the Neckline and add it to the breakout. However there was a lot of interesting relationships in this chart. Chart #2 shows how taking the measured move using Gerbino Sequence ratios and placing them on the marked swing points gives us the exact high at 17848. The Third chart shows the top off the x swing using fib and the final expansion is 50% of measured move off of the break. Bottom line is we had a lot of confluence at 17848.
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Last edited by ForJL on Sun Jun 05, 2016 9:50 pm, edited 1 time in total.

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ForJL
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Re: Trading Patterns

Post by ForJL » Sun Jun 05, 2016 9:47 pm

The next pattern I wanted to discuss is a simple channel which I sometimes will refer to as a Running Rectangle. In my own work I find these patterns to be somewhat unreliable but worthy enough to note anyway. As we look at chart #4 we might be tempted to think why bother? However there is useful information here if of course you know what to look for. The way you want to draw these things is to find as many touch points as possible. The more touch points the more valid the pattern. As you can see I have 3 touch points in both the upper and lower channel. As we moved to the breakout of the channel, a bit pas point c on the lower channel, I was not expecting a big move. The reason for that broaches the subject of GEF (Gerbino Energy Flow) and potential energy but is not part of this discussion. However, if you like consider E=(Hd/Hr)^2 where E is energy potential (i.e. price movement) , Hd is harmonic density , and Hr is harmonic range. It’s actually a bit more complex than that but it’s a place to start if you so choose. Anyhow, there is nothing spectacular here in so much as measuring targets go. The only confluence we get is with Fib off of point c on the upper channel and 50 of channel width off of the breakout as seen in chart #5. There are a few other things that are going on with price action but don’t want to get bogged down in minutia but do want to point out the area circled in yellow. Notice how the market came back down to test the channel and how support held. This was a clear and simple clue that the market would rally back up. The last thing I want to point out here as I circle back to the channel breakout is its failure to take out the low at point a of lower channel … another indication that the market would move higher. (chart #6)
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ForJL
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Re: Trading Patterns

Post by ForJL » Sun Jun 05, 2016 9:48 pm

The last pattern I want to discuss is the Right Angled Ascending Broadening. I like this one because it tends to be reliable. Here we find confluence at the first touch point of the ascending line and the breakout point using Fib and GS respectively. It is also interesting to note how the market rallied back up and through the breakout level but was unable to sustain the rally closing below it as seen in chart #7.
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ForJL
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Re: Trading Patterns

Post by ForJL » Sun Jun 05, 2016 9:49 pm

The last thing I wanted to discuss here today is the 82% rule study which I have written about many times in the past. For those of you who not familiar with it, it is a study that I did some time ago that states that when a market retraces at least 64% of the previous swing then it will go on to retrace at least 82% of said swing most of the time. There are nuances as to how to use it but that’s a subject for another day. While there where many instances recently where the rule worked I’ll just focus in the last. In chart #8 we see at point A that the market has closed above the 64% level thus triggering the rule. However the marker is unable to sustain the bid and falls back below the 64% level. I am now sitting chilly waiting for the market to rally back again. A very simple method to trade this move would be to go long on the trendline break (blue dotted line) while putting a stop at the B swing low red dotted line). [Note: I don’t personally recommend entering the market on nothing more than a break of a trendline and is only used as an example here.] At point C we see that our price objective has been met.

So there you have it. There is a lot to be said for keeping things simple. Perhaps after reading this post some of you might feel the same.

All the best,
Joe

PS I don’t get to many questions these days but just in case there are any I’ll be out of town until the 13th.
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abacaba
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Re: Trading Patterns

Post by abacaba » Sat Jun 11, 2016 10:08 pm

Joe,

I'm sure I speak for everyone here in offering gratitude for your enormous efforts here. I personally have to admire the fact that you find the time (!) not to mention inclination to do this. It is just too easy for everyone to get involved with "taking care of business" and that makes cogent responses not to mention posts of new material take the back burner...

Todd

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ForJL
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Re: Trading Patterns

Post by ForJL » Mon Jun 13, 2016 1:52 am

Hi Todd,

Let me start by saying your comments are very much appreciated. I actually enjoy doing these posts and for a number of different reasons though won’t bore you with any of them. While it certainly would be nice to have more participation in these discussions it’s also not necessary. Every now and then I’ll get a PM, e-mail, or even a reply like yours thanking me for something and that’s enough for me. If I get but one trader to think in terms he has never thought of before, and perhaps get another over the hump of mediocrity to profitability then I feel I’m doing something worthwhile.


All the best,
Joe

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