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Stock Chart pattern
setups.  Support
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trendlines.

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PATTERN SETUPS:

Trading courses and lessons in trading the stock market, no matter the source, will uniformly provide similar trading rules.  This is so because although there are different styles and types of traders, the market as a whole behaves in one semi-predictable behavior.  Stock market trading courses and lessons are all saying the same thing...there are rules and you must manage yourself while trading.  Simple but difficult at the same time. 

     Pattern setups are situations where all or most of the chart conditions are "right" for an entry long or short.  "Right" conditions, depending on the setup, may or may not include other indicators.  Recall that indicators are simply support cast members to the primary actors, i.e., price action and volume- they indicate or support what the action is- they don't dictate what to do or when to do it per se.  I make a point of that to reinforce who the main players are in setups, namely candle action and volume.  Also important is the fact that many setups are a result of self-fulfilling prophecies of traders who all see the same chart patterns and price action.  So is early identification and perhaps even an early entry important?  Yes.  Is it as simple as just following the rules below?  Yes and no.  An understanding of all influences and indicators and their interpretation is necessary...in short, only experience will get you to understand how and when to use and trust these setups.  Paper trade and use your coach.  Trading is a science and an art and they blend at the point of executing the trade. t So pick a trade candidate, plan your trade and execute your plan.

    These setups are used in all time periods whether swing trading or position trading.  The setups are NOT SET IN STONE, no method is fail-safe as they don't operate in a vacuum but tend to be more reliable than not.  Each setup strength depends on all the other factors affecting the stock the day of your trade.  Determine what else is swirling about that stock, see Off-Chart Checklist.  We are predators now, stalking a stock in the late stages of a developing, identifiable, classic pattern.  We wait, we watch, we position ourselves, we pounce.  All things being equal, we know our exit strategy, and, win or lose, we are out when the pattern suggests an impending end.  We are not greedy.  I shouldn't have to mention that not all setups work 100% of the time.  What can go wrong?  News, good or bad, depending on your position, long or short, at the wrong time.  Makes you think of all the risks in the market, doesn't it?  But you have your stop-loss entered, right?  Right?
 
The Setup
The "Science" Part of Trading
The patterns work through all time
charts.  Use at least 3 time charts to verify.
Note: this is not a complete list. 		Some Suggested Trading Rules
The "Art" Part of Trading
(In mentioning 'short' I also mean buying a put option.)
 Use Investopedia.com for all underlined words shown below.		 General Comments
In no particular order and not aligned
with any particular setup.
Price hitting a support or resistance level.  The more times a price is hit and bounces off, the more support there is at that price level to buy or short. Depending on the daily or weekly primary trend consider placing a trade at just above the support level or a short sale at just below the resistance level with tight stops.
  • The stronger the primary trend the more confidence you should have.
  • Watch for big changes in volume as price approaches targets.  Wait for the bounce to show itself if not confident
  • Increased volume should accompany any breakout.
  • All stop-losses should be set to allow a 2 to 3% loss and no more.
  • Smart money tends to put on trades when markets are quiet; amateurs tend to jump on the news.
  • Buy the rumor, sell on the news.
  • Use 1, 5, 15 minute charts to read gaps.
  • Generally, you may use 1, 5 or 15 minute charts for an entry/exit point and the hourly and daily chart for swing trades.  Play around with various charts but always use more than one time period using the support-resistance levels of one to tell you where your limits are in the other.
  • Remember that buyers wait for pullbacks and sellers wait for resistance
  • Hammer and dark cloud cover candle patterns are powerful reversal signals.
  • Gap downs after strong rallies signal a trend change.
  • Breakouts through triple tops signal major uptrends.
  • Above every resistance level and below every support level lie plenty of orders to buy or sell once price breaks one way or the other.  This is what accounts for major volume increases on a breakout or breakdown.
  • Big volume spikes start and end a rally regardless of time frame.
  • Indicators indicate what is going on with price, they do NOT dictate what you should do.
  • Indicators are either momentum type, showing you strength of the trend, or overbought and oversold type, showing you weakness at support/resistance.
Price hitting a support or resistance level within a channel.   A channel could be ascending, descending or horizontal. Buy the pullbacks at support or short the rally into resistance.  Trade in the direction of the primary trend.
Ascending Triangle  The more mature in time the pattern is the stronger it is.  Trade the primary trend.  Set buy limit just above the highs of horizontal resistance.  Increased volume must accompany the breakout.
Descending Triangle The more mature in time the pattern is the stronger it is.  Trade the primary trend.  Set buy limit just below the lows of horizontal support.  Increased volume must accompany the breakout.
Symmetrical Triangle These can break either way but stick with the primary trend.   Set buy limit just above the high of descending trendline resistance.  Increased volume must accompany the breakout.
Double or Triple Top Look for divergences in the indicators.
Double or Triple  Bottom Look for divergences in the indicators.
Head and Shoulders Top If long, sell when right shoulder has low volume and heading for the neckline, if it breaks any long uptrend and/or a divergence between indicators and prices.  New short position can be established, with a stop at the top of the "head".  This is also good point for a stop-and-reverse order (if stopped out of the short, reverse and go long)
Inverted Head and Shoulders If short, cover the position.  Or go long when the right shoulder has increasing volume, if it breaks any long downtrend and or a divergence between indicators and prices.  
Breaking a Trendline  Remember that trendlines are not a rigid area, they are elastic and a major reversal will have other supporting indicators to rely on. May signal a reversal.  Best to wait for the reversal to establish.  Trendline breaks are not the strongest of setups.  Wait to see if market will push back and fail, the failure to rally upon the second or even third attempt is a stronger signal.  Use tight stops.  The angle of the trendline suggests its strength and steep angles are hard to trade against.
Gap Up  Different types: Breakaway, Exhaustion, Continuation. Discipline yourself to trade gaps after 10:30 a.m. EST.  See stockcharts.com on gaps.
Gap Down  Breakaway, Continuation Discipline yourself to trade gaps after 10:30 a.m. EST.  See stockcharts.com on gaps.
Flag Reversals Bullish  A downward sloping rectangle Downsloping flag in an uptrend, place a buy order above the latest peak of the flag.
Flag Reversals Bearish  An upward sloping rectangle. A rising flag in an uptrend marks distribution so a downside breakout is more likely.  Place an order to sell short below the latest low of that flag.
Rectangles Rectangles are consolidation.  Use stochastic, RSI or Williams for price reversals within rectangles .  Buy at the lower boundary and sell short at the upper boundary.  Stops should be placed near the upper or lower wall depending on position taken.  Use the weekly trend and trade that direction.  Or set buy stops or sell short stops just a few ticks above or below the rectangle high or low to capture a breakout.
Moving Average Crossovers Up Upward sloping and crossing MAs can signal buy signals for many traders.  Follow the MACD for early insight.  Look for additional support from other indicators.  Watch for divergences.
Moving Average Crossovers Down Downward sloping and crossing MAs can signal sell signals for many traders.  Follow the MACD for early insight.  Look for additional support from other indicators.  Watch for divergences.
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