BEST TECHNICAL PATTERNS

AND HOW TO TRADE THEM

BY SUNNY JAIN

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 Contents

INTRODUCTION
FLAG PATTERN
TRIANGLE PATTERN
CHANNELS
CUP & HANDLE PATTERN
HEAD & SHOULDER PATTERN
DOUBLE BOTTOM/TOP PATTERN

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INTRODUCTION

When people talk about technical analysis, the first thing that comes to mind is
charts. Technical analysis in general is the study of an instrument (Stocks in this
case) based on its price (using charts in this case). The chart shows us the price
behavior of a particular stock on a particular time frame. Technical analysis itself
is a vast subject to dive into, which includes hundreds of indicators (RSI,
Stochastics, MACD, etc.), various chart types (Candlesticks, Line, Bar, Heiken Ashi,
etc.), different patters (Flag, Triangle, Channel, etc.), and much more.

To make it very simple and effective, we will discuss about various chart patterns
and how to make money from them. It will be discussed in the context of both
Intraday and Positional traders. I wont go into much of the theory as that can be
googled. I will strictly stick to the technical aspects and mainly show how to
identify them.

Chart patterns are very important to learn because they tend to repeat over and
over again. It all depends on our ability to visually spot them on charts on various
time frames. With time and practice the task of identifying and spotting these
patterns will become easier.

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FLAG PATTERN

This pattern says it all in the name. Yes, it looks just a flag.

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This is one of the most commonly found patterns on charts. The definition is very
simple: for a buy, a stock needs to be trending up, followed by a sideways
consolidation, and then continue the move up.

Whether it is intraday or positional, this pattern will be used in the same manner.
Only in intraday profit booking may differ a little.

Bullish Flag Pattern: this set-up is formed when a stock is in an uptrend and the
breakout happens on the upside

Bearish Flag Pattern: this set-up is formed when a stock in in a downtrend and the
breakout happens on the downside.

This is a purely breakout pattern and trades are to be taken only on breakouts.
Some people like to enter before for a better risk to reward but I avoid this as
there may be a lot of false trades. Taking trades on the breakouts ensures we are
in the right direction of the trend.

Please see the attached chart examples for proper entry, exit, stop-loss, and
targets.

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TRIANGLE PATTERN

This is one of the simplest technical patterns one can trade. It is also one of the
most re-occurring ones. Its quite similar to the flag pattern. We can segregate a
triangle pattern into three different categories: Symmetrical, Ascending, and
Descending. Some other names for a triangle pattern can be known as: Wedge,
Pennant, etc.

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This pattern is also a purely breakout play. We can also trade this by buying at the
support and selling at the resistance, but I like to avoid this. Timing the breakouts
is very crucial and we will show how in the chart examples.

Symmetrical Triangle: a stock can be in an uptrend or downtrend but needs to be

followed by a consolidation as shown in the examples above. The consolidation
needs to be shaped in a triangle for this pattern to form. Entries may happen on
the buy side or the sell side, depending on which side it breaks.

Ascending Triangle: for this pattern to occur a stock generally needs to be in an

uptrend. This pattern can be formed in a downtrend but it would be best

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suggested to avoid them. For this pattern the tops need to be aligned, meaning, a
point where it is finding resistance 2-3 times.

Descending Triangle: the same applies for this pattern but here the stock needs to
be finding support at a given level at least 2-3 times. Look for this pattern in
downtrends or sideways markets.

Wedge: a wedge is basically a rising or falling triangle pattern. This can occur in
downtrends and uptrends. In a downtrend, we want to look for a rising wedge for
a continuation of trend. In an uptrend, we want to look for a falling wedge for a
continuation of trend.

Please see the attached chart examples for proper entry, exit, stop-loss, and
targets.

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CHANNEL PATTERN

A channel is basically a price consolidation between two parallel levels. Price

continuously tends to trade in that zone for however long until it breaks the level.
This means that price is not taking any direction and is waiting for some trigger or
news for it to create a new direction.

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There are two ways to trade a channel: 1. Trade the breakouts, or 2. Buy at
support and sell at resistance. A channel can have many false breakouts. It really
requires a strong trigger for the price to breakout and continue in the same
direction.

Please see the attached chart examples for proper entry, exit, stop-loss, and
targets.

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CUP & HANDLE PATTERN

This is also a purely breakout pattern. This pattern does not occur as often the
others but if identified it can give huge gains. It is one of the most effective
patterns in terms of probability of success. It works best on the higher time
frames like daily or weekly.

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You will very rarely find a bearish cup & handle pattern. If you find a bullish one
on a daily or weekly time frame that’s a sign of a big move coming in the near
term. Do not miss such an opportunity, and if possible ride it for a longer period.

For this pattern to form, a big U shape or a saucer or rounding bottom is required
followed by a smaller U shape known as the handle. By the books, this pattern will
look like this. But this pattern can take different shapes and forms and I will show
a few examples.

Please see the attached chart examples for proper entry, exit, stop-loss, and
targets.

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HEAD & SHOULDER PATTERN

This is one of my favorite patterns to trade as its highly effective and gives
massive gains quickly. It would be highly advised to trade this on the daily or
weekly timeframe to avoid false signals.

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Head & shoulders is a bearish pattern where one arm is formed, then the head
followed by another arm. Inverse head & shoulders is a bullish pattern. These
patterns don’t occur so often and so when do they make sure to take advantage
of the opportunity.

Please see the attached chart examples for proper entry, exit, stop-loss, and
targets.

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DOUBLE BOTTOM/TOP

This pattern is one of the best signals to identify reversals. A double top means
that it has twice tried to make a high but failed to and same goes for a double
bottom. There is also something called as a triple top/bottom, where price tries
three times to make a high or low.

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These can be seen frequently in intraday time frames but may not be as effective
as on the higher time frames. Again, the best way to trade this pattern would be
to take the breakout of the midpoint.

SUMMARY

Most of the patterns mentioned above are breakout patterns. I personally like
trading breakouts because they can give rapid moves within days. I usually trade
them intraday. I identify the patterns on the higher time frames: daily or weekly,
and take whatever gains I get during the day itself. Some breakouts can give 4-5%
intraday.

Hope you have got a fair understanding of the patterns, how they take shape,
what can be expected from them, and how to trade them. I don’t use any scanner
to find stocks with these patterns. I manually go through around 50-100 charts
every day and try to look for them. It takes me no longer than a few seconds to
make out whether a pattern is forming or not. I also look for stocks which could
potentially form one of these patterns and so keep them on my watchlist. Many
times you will see multiple patterns occurring at the same time. For instance, you
may see a flag pattern with the flag being a triangle pattern. This only makes the
case stronger.

The chart examples attached are just some of the ways we can draw and identify
the patterns. There is no exact science that they have to look like this. A head and
shoulders can be drawn diagonally, the connecting points can be different, etc. It
is all up to you and how the pattern looks to you. It will most definitely differ for
every trader as we all see things the way we want to see them, not the way they
are. And there is nothing wrong with that. Just make sure your risk management
is in place.

The same patterns can be applied to intraday but be very careful as their
probability of success is much lower. If trading on the higher time frames (I prefer

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Daily) trade with caution as the stoploss might be quite large. Position size your
trade accordingly and make sure you have enough capital to take multiple trades.
On a daily basis I find 2-3 stocks fitting the criteria of these patterns so make sure
you diversify accordingly.

Nothing in trading/investing is guaranteed so don’t think these are sure-shot

patterns. We will never know whether the breakout will be a successful one.
There a lot of factors which come into play to determine the success probability.
Here are a few points which you should keep in mind: 1) What is the overall trend
of the stock; 2) What kind of pattern is forming where; 3) During the breakout is
there any kind of support or resistance nearby; 4) What kind of a stock it is (Penny
Stock, Large-Cap, Mid-Cap, etc.). There are many other points but these are some
of the most important ones to keep in mind.

The best advice I can give is that keep practicing and keep going through charts.
This will drastically improve your visual skills and you will be able to identify
patterns with more ease. You can join our chat group where I daily post charts
with these patterns. This has helped many accelerate their learning curve.

If you have any queries or would like more help with this you can always get in
touch and we will be more than happy to help.

Sunny Jain
+91-9819219358

[email protected]
www.themastertrader.in

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DISCLAIMER

All trades, patterns, charts, methods, etc. explained in this file are for
illustrative and educational purposes only and not construed as specific
advisory recommendations. No system or trading methodology has
ever been developed that can guarantee profits or prevent losses. The
examples used herein are exceptional results which do not apply to
average people and are not intended to represent or guarantee that
anyone will achieve the same or similar results. Trades taken are at
your own risk for your own account.

Trading and investing in any market securities contains substantial risk

and is not suitable for every investor. An investor could potentially lose
all or more than the initial investment. Past performance is not
necessarily indicative of future performance.

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