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Trading Patterns

I trade using just a handful of trading patterns. I primarly use moving averages, and volume for my technical indicators. Everything else is based off of time, and price; supply and demand. My style, and chart trading patterns used, are mainly derived from techniques used by Jeff Cooper, Steve Nison, Oliver Velez, and Greg Capra. I don’t use many technical indicators when trading. I believe when you start adding too many indicators, it just confuses the situation. All technical indicators are based off of time and price anyway. Pattern recognition is one of the first steps to becoming a profitable trader. I hope some of these patterns will help you.

I’ll use real trading examples for this page, and the abbreviations I created for each trading pattern I use in my trading journal.

LONGS: BL1, BL2,

SHORTS: BS1, BS2,

LONGS:

BL1: In the two charting examples, this trading pattern is used on the daily chart. It occurs when the stock closes near the low after three to five days in that direction, but gaps open higher than the previous wide range candlestick. In essence, bears are trapped, or those that sold will need to buy the stock back which causes buying pressure. The success of this day trading pattern is very reliable.

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BL2: This setup is a classic chart trading pattern. It’s basically a trade in which you follow the trend by buying the dip. The trade works best when the pullback is 3 – 5 bars. Watch for moving averages that are moving the same direction as the trade, which would be up, with this pattern. In the first example chart, you see the stock gap higher and trade up with higher than average volume. The stock proceeds to pull back 4 bars on decreasing volume. An entry is taken when the stock makes a higher high. In this case, it’s on the 6th bar. A stop is placed under the pivot low, or the day’s low based on your amount of risk. This trading pattern is in play on all time frames.

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SHORTS:

BS1: This trading pattern is directly opposite of what occurs in the BL1 trading pattern. I’ve found this to be quite a profitable stock trading pattern, because like the BL1 chart, it catches traders off guard. As you can see from this daily chart of HANS, the stock closes near it’s high (look for 3-5 days in this direction). Bulls are feeling good. The next morning, the stock opens below the low of the previous day’s candlestick. Those buyers are now in panic mode. This allows an opportunity to short the stock under a 5-minute low, or using another intraday technique to enter this trading pattern.

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Here’s another example of the BS1 trading pattern from a 032807 trade.

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BS2: This second trading pattern in the Shorts category occurs after a stock has seen some buying strength. This usually happens on a bounce after the stock has found some support. The trigger will usually occur after 3 – 5 bars. A stop is placed above the 4th bar in this example of TOL, or above the high of the day. Look for moving averages heading down in whichever time frame you’re trading the setup. This pattern works in all time frames. 5-minute – monthly charts.

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{ 4 comments… read them below or add one }

Kumar March 13, 2008 at 6:22 pm

Mate,

Thanks for nice for the trading patterns and its very useful. I have three questions

– could you pls advice for day trading which timeframe best suites in your opinion
– do we need to adjust moving average based on timeframe or always use same MA irrespective of timeframe
– Which MA average you suggest

Cheers
Kumar

Online Stock Trading March 14, 2008 at 9:42 am

Hey Kumar,

Usually I’ll trade off of the 15-minute time frame, but the best answer really is.. use the time frame which gives the clearest and cleanest picture of the pattern… and if you can combine a daily chart setup with an intraday chart setup, it becomes more reliable. (I’ve got a good example of this I’ll do a post on this weekend)

Time frames I watch for every equity I trade include…

monthly
weekly
daily
60-minute
15-minute
5-minute
2 minute

Now I really don’t check the monthly or weekly charts for every trade, because my time frame in trades is usually much shorter. I include them for an overall uptrend, or downtrend view.

The key is finding one of the patterns, and combining it with another charts pattern, or combining it with uptrends and downtrends, or combining it with stocks making new highs, or combining it with stocks breaking down… etc. The more pieces you use to validate.. the better.

As for moving averages. I use simple 20, 50 and 200. So if I was looking at a daily chart, I’d call it the 200 dma. If I was looking at a 5-minute chart, I’d say 200 ma. I do make this distinction in my posts.

I’ve also got the 8 ma on my 5-minute chart, but don’t use it much, except if a stock is extended and I’m picking spots to sell.

The 200 ma is an excellent indicator for choosing targets on intraday charts. Search for “200 ma” and you’ll find some posts where I write about this.

Here’s a post on multiple time frames that should be helpful too.

Hope that helps,

Mike

Kumar March 14, 2008 at 1:16 pm

Hi Mike,

Thanks for the valuable response. I’m regular visitor to your web site and its very useful tips. I saw “multiple time frames” post earlier.

Have a nice weekend!!!

Cheers
Kumar

Online Stock Trading March 18, 2008 at 9:30 pm

Happy to help 🙂

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