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Do Or Die

Trading Regime Analysis Using Chart Patterns- Part 1

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Hi,

 

Most of the trading techniques overlap in some form; none of them exist in isolation. For example, a Bollinger bands breakout strategy may overlap with chart pattern breakout strategy.

 

Similarly, trading regime analysis can be carried out discretionary through chart patterns. I am writing few articles which will hopefully be helpful to Price Action traders (those who do not use indicators). Related articles are Trading Regime Analysis Using RWI, Trend Following Vs Mean Reversion: Trading Regimes, Introduction to Understanding Volatility, Trading Regime Analysis Using RSI and Relative Strength - Internal.

 

For the purpose of Trading Regime Analysis, we can categorize patterns into

  • Trading Range Contraction (coiling)
  • Trading Range Expansion
  • Price Shocks

 

There are few things I will like to highlight regarding trading regime analysis using chart patterns:

  1. When we see a coiling in price action it usually means that the current trading regime is a range and the next trading regime will be a trend.
  2. Mark these patterns on one time frame higher than the time frame you trade. So the practical implication is to trade using a trend following strategy on one time frame lower.
  3. For the sake of Trading Regimes, a lenient definition of the patterns will do; i.e. you do not need to go strictly by the books in marking them.
  4. The price target for a breakout (magnitude of a following move) is usually the broadest part of the range of the chart pattern.

For Time Frames (TF) I’m referring to the popular ones in the order- monthly, weekly, daily (eod), hourly, 30 minute, 10 minute and 5 minute. Suppose you are trading on 60 minute TF, in that case you will need to look for patterns on EOD TF. These are generalizations only and you may like to pick one depending upon your trading style.

 

Range Compression Chart Patterns:

 

Ascending triangles generally occur when the market has been in an uptrend (or experienced at least a partial up move before the pattern). They are indentified by flat topside resistance and rising uptrend support.

attachment.php?attachmentid=25563&stc=1&d=1312433444

Descending Triangles generally occur when the market has been in a downtrend (or experienced at least a partial down move before the pattern). They are identified by flat support trend line and falling downtrend resistance line.

attachment.php?attachmentid=25564&stc=1&d=1312433444

Symmetrical Triangles generally occur after the market has been in trending period either up or down (or the market has experienced at least a partial up or down move prior to the pattern developing). They are defined by converging levels of support and resistance, leading to a classic coiling of the price.

attachment.php?attachmentid=25565&stc=1&d=1312433444

attachment.php?attachmentid=25566&stc=1&d=1312433444Wedges are similar to triangles, except that they are not so remarkably bounded by trend lines. Corrective wedges tend to follow the double or triple zig-zag structure.

attachment.php?attachmentid=25567&stc=1&d=1312433444

Rectangles can occur anywhere as in an uptrend, downtrend or during reversal. The price action during a rectangle is identified by prolonged period of sideways action where the upper and lower bounds are horizontal or very slow sloping.

attachment.php?attachmentid=25568&stc=1&d=1312433444

Flag is another range-trading regime that comes after a strong trending move, and it usually leads to a continuation of the trend. It is basically a rectangle marked on one time frame higher. One of the important elements in identifying a flag consolidation pattern is that the preceding move is a strong, almost vertical move.

Pennant is similar to a flag in that it is occurs after a strong move and will therefore generally occur in the shorter time fractals. It can be regarded as a scaled down symmetrical triangle although, as with the flag, it can have a slight slope.

 

Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

5aa710940ef26_AscendingTriangle.png.e2eeeacea724e7bee62442c093b84632.png

5aa710946d36b_DescendingTriangle.png.eed77d1f5047124828a4d2acf5ff73a0.png

5aa7109471171_SymmetricTriangle.png.12a13669b1f9b138e58331c0a807fad9.png

Wedges.png.fc675f07196a2780df62bb550c5671bb.png

rectangle.png.b7e13f14cb1515bbf9627b90fb450a8b.png

weekly.png.3e26e9383612a6cd8c0d27f04d9390e0.png

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