I’m sure you saw the stock market mini-crash last Thursday (Nov. 5).
Some market pundits said it’s the start of a bigger crash. Others called it a pullback before a push to new highs next year.
I have no idea who’s right.
Even though I think a big crash would be healthy, I won’t try to guess.
Either way, it brings up a very important part of trading that a lot of newbies miss…
Pattern recognition.
It’s nothing new. In fact, I mention patterns in almost every blog post, video lesson, and course I’ve ever created.
If you read a trading book, it’s almost guaranteed to include chart patterns.
So, you know it must be important, right?
But when you actually start trading, something happens.
You get caught up in emotions and it’s easy to miss what the chart is telling you.
That’s why it is super important to not only learn to recognize the patterns, but also to be able to spot them as they happen.
Table of Contents
How To Spot Chart Patterns Fast
I’m not necessarily talking about esoteric patterns you might find in an old book.
I like spotting those patterns, too (and they do show up on charts).
But some people get so enamored with chart patterns that they turn it into an intellectual exercise…
“Technically that isn’t a cup-and-handle because the handle isn’t formed of a perfect 30% pullback in relation to the depth of the cup…“
Blah, blah, blah…
Meanwhile, the opportunity is gone.
So, let’s start with something most successful traders do (whether they talk about it or not)…
Study Historical Charts
SO many newbies chase moves without any idea about a stock’s history.
The crazy thing is, all you have to do is zoom out (or in) on hundreds of charts, and you’ll start to notice undeniable patterns.
(By zoom out, I mean change the timeframe.)
For example, check out the Riot Platforms Inc. (NASDAQ: RIOT) chart from Thursday (Nov. 5):
As you can see, RIOT sold off with the rest of the market that day.
What if you wanted to buy the dip? How would you know when to buy?
For me, the first thing I’d do is zoom out.
Here’s the 5-day chart. I’ve added a few support and resistance lines…
Now you see how an active trader might approach the dip buy, right?
There’s a clear support level around $13 where buying the dip might make sense.
But a pro trader would zoom out more, just to confirm.
Let’s zoom out to the 2-week, 15-minute chart with the same support and resistance lines…
By zooming out, you can quickly confirm whether certain price levels are important.
With RIOT, $13 had acted as both support AND resistance in the past two weeks.
This way of thinking applies to pretty much every pattern and every stock.
The good news is, most of the stocks I (and my students) trade, follow just a few different patterns.
Those patterns fit into a larger framework I’ve been trading for years, called the 7-Step Framework.
One more thing you should understand, just in case Friday’s market bounce doesn’t hold…
Different Markets Favor Different Patterns
You have to become a student of stock market history (seriously).
I’m a glorified history teacher (and that is EXACTLY why so many of my students are successful).
Patterns repeat in both bull and bear markets.
But during a bull market, certain types of patterns are more prevalent than in a bear market. And in a bear market, you’ll see other opportunities.
Again, the patterns happen because of price action, psychology, and human nature… but the overall market creates an environment where you might see one type of pattern more often.
For example, when the S&P 500 is breaking to new highs, you’re probably going to see more breakouts. Makes sense, right?
And what happens when it starts to consolidate and chop sideways (like we saw for the past month)?
Choppier plays. Or more double tops and rejections at breakout levels. It starts to feel like you can’t get a clean breakout anywhere.
For example, DarkIris Inc. (NASDAQ: DKI) double-topped in premarket trading last Wednesday:
As you can see, DKI was a chopfest. But we’ve seen a LOT of plays like that recently.
What about when the market is doing a mini-crash? Or a big crash?
Look back at the RIOT chart above.
If the market crashes more, I expect we’ll start seeing hundreds of panic dip-buy opportunities.
If you’re interested in learning more about chart patterns and different styles of trading, I highly recommend you check out the StocksToTrade Network. Just follow the link below…
3 Tips To Spot Chart Patterns Like a Pro
Here are three things you can do to get better at spotting patterns as they happen:
- Put in screen time. It’s okay to just sit on the sidelines and watch price action. It’s one of the best ways to get a feel for the pattern developing in real time.
- Study as many charts as possible. All my top students have taken hundreds, if not thousands, of chart screenshots so they can study them.
- Practice with small position sizes (or paper trade) so you get a feel for how it plays out when you are in a trade. In other words, learn to focus on the pattern without getting emotional.
Key Takeaway
If you ask any successful day trader with years of experience what they saw before they took a trade, at some point they’ll mention the pattern.
It could be a breakout, a dip buy, consolidation followed by a squeeze…
In other words, they always come back to patterns.
If you want to spot chart patterns like a pro, you have to study like a pro.
You have to see the different patterns, and their variations, enough times that you recognize them quickly.
And if you want to recognize them in real time, you have to watch live price action.
Study up, and I’ll see you in chat.
Cheers,
– Tim Sykes
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