This post is dedicated to the second short term variable that goes as an input into the Trade Selection Tool - Chart Pattern on the 2H charts. It is important to distinguish between a Chart Setup and a Chart Pattern for clarity.
A Chart Setup, as already discussed in the relevant section, is a combination of four 2H candles that ends on C4 or C5, and is particular to our Trading System. You would not find it elsewhere in the same shape or form even though widely used candlestick patterns like the Bullish Engulfing or the Hammer are part of some setups. Many of our setups are completely proprietary, discovered through careful observation and backtesting of price action.
A Chart Pattern refers to a widely known technical pattern such as a Head & Shoulder or Reverse Head & Shoulder, 1-2-3 Top or Bottom, Double Top or Bottom, Ascending or Descending Triangles, Flags, Pennants, Rectangles etc. of which the Chart Setup may or may not be a part.
So why are Chart Patterns relevant to trade selection? When a Chart Setup occurs in conjunction with a supporting Chart Pattern, it helps to build conviction by buidling a body of evidence in favour of the trade, also known as a confluence. This contributes to the probability of success. To be effective, the setup should occur -
Just before the breakout from the pattern during the last leg of the formation
Part of the breakout
Soon after the breakout on the same day or the following day
As breakout from a smaller pattern which is part of a larger pattern
Breakout above includes a breakdown, just to be clear. Chart examples are provided below. Please follow the annotations on the chart which are self explanatory.
(Fig 1.1 - Copper Chart setup)
(Fig 1.2 - Zinc Chart setup)
(Fig 1.3 - Crude Chart setup)
Please click on "Next Post" to know about the next short term variable - Support & Resistance
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