Patterns, patterns everywhere.
Patterns are defined as regularity in the world. Stock chart patterns are price movements that occur with enough regularity to be identifiable.
The reason I teach Trading Challenge students patterns is because…
… they happen again and again.
Which means they can be potentially be predictable. (My lawyers will hate that last sentence. But it’s true.)
Now, let’s satisfy the lawyers…
Just because you know and recognize a pattern doesn’t mean you’ll be successful with it. There’s a LOT more to trading than patterns. Pattern/price is one of seven key indicators I use to determine if a trade is worth the risk.
Here’s the deal…
There are a TON of patterns. And there are variations on patterns. There are arguments about patterns, disagreements about acceptable time frames for patterns… ugh.
There are only about a dozen patterns I consider relevant. I only trade a few select patterns. At any given time I focus on one or two. I rarely stray from my pattern du jour until it stops working. Then I adapt.
Table of Contents
- 1 Why Should You Learn Stock Patterns?
- 2 Stock Chart Patterns Worth Knowing
- 3 In Closing
Why Should You Learn Stock Patterns?
Humans like patterns. We’re drawn to them. From buildings to fine art. From speech to music. We seek patterns.
Check this out…
Because humans crave the regularity of patterns and…
… because they’re so appealing to our psyche…
… we search for confirmation. We like to be right.
Which means price action that looks like it could be a stock chart pattern…
… has the potential to turn into a self-fulfilling prophecy.
That’s probably the most important idea in this entire post. Along with the idea that pattern/price is only ONE of SEVEN key indicators I use to determine if a trade is worth the risk.
Why Is Pattern Recognition Important for Trading?
Traders like patterns. Many technical traders watch and wait for the right price action. They want to see the chart confirm their thesis before they enter a trade.
Again, they recognize how patterns look on the chart and trade according to how the pattern should play out.
When enough traders have the same thesis and make the same move in a short period of time, the pattern plays out. Somewhat predictably. It’s one of the great cat and mouse — or bull and bear — games of all time.
Let me reiterate — every trade is different. This is not an exact science. Sometimes the pattern doesn’t work. You WILL take losses as a trader — it’s part of the game. My goal is for you to learn to take losses the right way.
What if the pattern doesn’t play out? If you trade conservatively like me, you get out fast. Rule #1: cut losses quickly.
Which Patterns Should You Look For?
As a member of the Trading Challenge: You need to know what patterns I trade and what patterns I don’t. Focus on the patterns I and my top students teach. I’ve been trading for two decades and teaching for one.
If you study consistently using the resources my team and I put together, it’s possible to learn the patterns I teach in a few years. (The exact amount of time depends on how much you study and how fast you learn.)
Big picture: Learn as much as possible about every stock chart pattern.
It takes time and effort. YEARS. Don’t be fooled into thinking you’ll understand the details and nuances of every pattern in a short time. It’s not gonna happen because it’s not an exact science.
Why learn about patterns you don’t trade? Because someone out there is trading it. A powerful recent example is newbie short-sellers. They’re trying to short anything that spikes which has led to a lot of short-squeezes.
So even if you don’t short because you’re a newbie or small account holder, there’s opportunity. You can ride the long side of a short squeeze. To be perfectly clear and transparent: I don’t like trading short squeezes. They’re too choppy, and you don’t know how long they’ll last. But several students report doing well recently.
The following is a list of patterns worth knowing. It’s not comprehensive. First I’ll give examples of some common chart patterns. Then I’ll give examples of a few of my favorite patterns. Keep reading as I’ll explain which patterns I’ve been seeing recently.
Stock Chart Patterns Worth Knowing
These stock chart patterns are only a few of the many you should eventually be able to identify. Again, I don’t trade every pattern. Nor should you. Understand the human brain looks for patterns. Learning to recognize stock chart patterns can give you an idea of possible outcomes. It can help you understand possible future price action.
Candlestick charts use Japanese candlesticks to represent price movement. Steve Nison introduced them to the west in his classic book “Japanese Candlestick Charting Techniques.” Most traders I know use candlestick charts for analysis and trading.
Learn more about how to read candlestick charts here. That post includes chart examples of some of my favorite patterns, as well. This basic diagram will help you with the rest of this post:
Keep in mind that candlestick charting techniques are a study in and of themselves. If you want the ins and outs, read Nison’s book. Then study historical charts in different time frames and backtest what you learn. And just like all patterns: adapt to the current market.
Bull Flag Pattern
The bull flag pattern is a continuation pattern. The price action looks like a flagpole, a flag, and a breakout.
What to look for: a strong upward trend followed by a consolidation period. During the consolidation, the stock trades within a narrow range, forming the flag. Then there’s a strong breakout over the consolidation range.
The body of the flag is a battle between the bulls and the bears. Kraig Biocraft Labs (OTCQB: KBLB) is a recent runner off its highs. It spiked again on June 17, providing a great example of an intraday bull flag pattern.
Check out the chart:
Notice the midday spike (flagpole) followed by a period of consolidation (flag). Then the stock broke out and continued up.
Inverse Head and Shoulders
The inverse head and shoulders pattern looks the same as the head and shoulders, except it’s upside down. Both head and shoulders patterns are reversal patterns.
What to look for: In an inverse head and shoulders, the price is trending down prior to the left shoulder. The shoulders have higher lows than the head. Coming out of the right shoulder, the trend has reversed from downward to upward.
Take a look at the Social Reality, Inc. (NASDAQ: SRAX) chart below:
Notice the volume spike as the price breaks through the resistance coming out of the right shoulder. This isn’t a perfect inverse head and shoulders. But most patterns aren’t perfect. That’s why I’m including real stock charts instead of graphic representations.
Cup and Handle Chart Patterns
The cup and handle is a breakout pattern.
What to look for: A cup and handle looks like a cup with a downward sloping handle. The handle is a brief pullback coming off the cup’s left rim. The cup and handle pattern is most commonly considered a multi-day/multi-week pattern. But as with all patterns, they can, and do, happen intraday.
Check out the REEMF chart below:
Rare Element Resources (OTCQB: REEMF) is a clear example. The stock was a multi-day runner near the end of March. Then it dropped after the company did a financing. It consolidated in a nice cup shape, getting back near the April high on May 20.
Then it pulled back and consolidated, forming the handle part of the pattern. On May 28, news suggested China was considering withholding rare-earth metals from the U.S. due to the trade war. REEMF went full supernova on May 29 — spiking 124% in one day.
A pennant is a variation of the flag pattern.
What to look for: In the pennant, the price action narrows. Lower highs and higher lows converge until the bulls and bears are at a standoff. Some analysts require a specific number of up and down moves before they consider it a true pennant. Whatever.
The point is, when a stock spikes and then bases or consolidates, it’s proving it can hold the new level. The exact shape doesn’t matter too much.
Regardless of the shape, if the stock holds, it can lead to another breakout. That’s what bull flags and pennants are meant to do. But keep in mind, sometimes there’s a fake-out instead of a breakout. Other times the stock tanks after consolidation.
That’s why pattern/price is one of seven indicators. It’s only 20% of my reason for a trade. Use the Sykes Sliding Scale to help you determine if a stock has more going for it than just a pattern.
Check out the Nightfood Holdings, Inc. (OTC: NGTF) chart below. As you can see, more than one pattern discussed in this post is on the chart:
From the end of November 2018 to the beginning of February 2019, the candles formed a cup and handle. It’s not perfect but you get the idea.
Then the stock spiked 154% in two days on news that its ice cream scored a ‘product of the year’ award. For the next 19 days, it consolidated in a pennant formation. The breakout on March 12 had another 35% of upside. There was also a beautiful first green day gap up at the market open on March 13.
Here’s another pennant example:
Zalemark Holdings Co Inc. (OTCPK: ZMRK) recently spiked based on a letter of intent to acquire AeroPonLeaf Canada.
Check out the chart:
The above chart is a 5-day chart with 5-minute candlesticks. I’ve drawn in yellow lines to show the pennant shape.
Now take a look at ZMRK again — this time the chart is a 15-day chart with 1-hour candlesticks:
Again, the yellow lines indicate a triangle/pennant shape on the chart. My reason for including this chart is to impress upon you how important it is to look at different time frames.
And I hope you research this stock to see what happened next. Did the triangle formation consolidate into a continuation? Or was it a fake-out?
Some of My Favorite Patterns
So far I’ve shown you a few of the patterns you should learn. Not necessarily to trade, but to understand what’s happening when you see them. Preparation is key. If you focus on preparation by learning as much about patterns as possible, you’ll potentially be a better trader.
The following patterns are strong recent examples of patterns I’ve been trading for two decades. And they’re still relevant.
I have a few haters who claim I teach 20-year-old patterns. Well, they’re right. Because the patterns keep happening. Why would I stop teaching them and trading them if they still happen?
Again, how well a pattern works can change over time. Sometimes a pattern works and sometimes it doesn’t. That’s why you have to adapt.
The Stair Stepper
UP Fintech Holding Limited (NASDAQ: TIGR) has been on and off my daily watchlist for the last month or so. On June 17, it played out as a beautiful stair-stepper pattern from the moment the market opened until it closed.
Take a look at the chart:
The stair stepper consists of a series of uptrending moves with brief periods of consolidation or slight pullback. It looks like a staircase. Again, it’s not perfect. This isn’t an exact science. Notice the yellow lines on the chart that approximate a series of steps.
A note about this chart: the TIGR chart above uses five-minute candlesticks. When I looked at one-, two-, and three-minute candlesticks, some of the steps looked more like bull flags. One was a clear bull pennant.
This is another good example of why you need to look at different time frames when planning a trade. It’s essential if you want to be a complete trader.
As a Trading Challenge student, you’ll learn more in depth why I look at multiple time frames when considering a trade.
You’ve already seen one supernova on the REEMF chart in the cup and handle section above.
Here’s another recent supernova: Akerna Corp. (NASDAQ: KERN) First, look at the one-year chart:
Notice how KERN did nothing for nearly the entire year. Also, notice the volume spikes that occurred back in October 2018. That was the result of the announced merger between two companies. One’s a software company for the cannabis industry. The other was created solely for the merger.
On June 19, the new company started trading on the Nasdaq. The supernova occurred on news that the company is backed by an early Facebook investor. And, their intent is an aggressive acquisition strategy.
So, a company that was trading around $10 per share spiked to $80 per share in one day. The volume spiked from roughly 41K shares traded per day to 20 million shares. In one day.
And that leads to the last pattern I want to share with you in this post. Check it out…
Midday or Intraday Breakout
This isn’t really one of my favorites unless several other indicators come into play. But it’s been happening often enough recently that I decided to include it. And, several students report success with midday breakouts.
Remember KERN from the last example? Here’s how the stock turned into a supernova. First, look at the intraday chart:
The stock spiked at the open and by 11:00 a.m. had nearly doubled in price. This is where it gets interesting — even though it pulled back a little, it held most of its gains. It proved itself. I added the pink line to show where resistance became support in the $27–$28 range.
Then, around 2:45 p.m. volume started to pick up, and KERN was off to the races. By the close, it had teased $50, and after hours it kept going. As I write, it’s dropped all the way back to the mid $20s, but what a huge run!
A reminder: Pattern/price is one of seven key indicators I use. That means just because you see a pattern you know doesn’t mean it’s a good trade. Pattern/price is only 20% of the Sykes Sliding Scale. Learn how to use the Sykes Sliding Scale by studying My Top No Cost Resources For New Traders.
It’s important to know patterns. But knowing a pattern is different than trading it.
I’m transparent about which patterns I do and don’t trade. If you ask me about a pattern I don’t trade, I’ll tell you that I don’t trade it. It’s no different than going into a sushi bar and ordering pizza. The chef will tell you: “No, we don’t serve pizza. We serve sushi.”
Not all patterns are created equal. I have NO intention of trading patterns I don’t like. Like short squeezes. I have several students who report doing well by taking advantage of short squeezes. But I don’t feel comfortable with them. So, even though it’s a pattern that’s working right now … it’s not for me. I stay away.
That doesn’t mean you can’t or shouldn’t trade a pattern I don’t trade. You MUST figure out what works for you and what fits your comfort level.
Study the examples in this post. Then keep an eye out for these patterns as you add stocks to your watchlist each day. I think you’ll be surprised how often these patterns appear.
That’s a lot of information for one post. You might even be feeling slightly overwhelmed. That’s OK. Think of this as a marathon and not a sprint.
It takes study and practice to learn everything you need to be a profitable trader. And you will lose — especially at first.
My goal is for you to lose as little as possible as you learn the nuances of trading. That’s why my team and I created the Trading Challenge. In my opinion, it’s the most comprehensive trading course you’ll find anywhere.
If you’re serious about the potential for freedom and an awesome lifestyle from trading…
Are you a trader? What stock chart patterns do you use to trade? Comment below. New to trading? Comment below to share how you’ll use this information today. Use it or lose it, right?