How to Swing Trade Summary (C9): Trading Patterns

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There are certain patterns that show up again and again in the charts.

Recognizing these patterns and using them with sound risk/reward calculations will help you capitalize on profitable trades.

There are many patterns, but to prevent information overload, we will only cover five that are fairly easy to recognize and relatively common.

Like many indicators in trading, these patterns work because many other traders are looking for the same thing and activating accordingly. They are a self-fulfilling prophecy. For this reason, it is important that you go with the trend.

In swing trading, the trend is your friend.

A double top is shaped like an M and indicates a reversal from an uptrend to downtrend (a bearish reversal).

The double bottom is the opposite: a W shape indicating a bullish reversal.

Either of these patterns is quite reliable, especially when another indicator confirms the action.

For a double bottom, enter just as the second leg rises above the middle peak. Place your stop loss on the low of the W. Prior resistance levels can be your profit target, or you could use the top of the W.

Flags are continuation signals and can either be bullish or bearish. This is evident by the overall trend of the asset.

The flag is a consolidation period before the trend continues.

A bull flag starts with a strong bull move which is the flagpole. It then has a pullback which forms the flag, before breaking through to the upside and continuing the bull trend.

Enter the trade just above the top of the flag as it breaks out. Your stop loss can go halfway down the flag.

Your profit target can be prior resistance levels or measured with the flag pole. Whatever the distance from the bottom of the flag pole to the bottom of the flag, use that same distance from the top of the flag at the break out point and that is your first profit target.

A bear flag pattern is the reverse.

Bull and bear pendants are similar to flags. The pole is the same but the shape off the pole is different.

With flags, the support and resistance levels created by the consolidation period are parallel. With pendants, they converge into a point.

Enter the trade just above the breakout of the pendant. Place your stop, where the narrowing action of the pendant started to occur. Your profit target can be prior resistance levels or by using the flagpole measurement, as is done with flags.

The ABCD pattern is based on the principle that stock prices move in waves. Your goal is to anticipate the next wave so you can get on it early and ride it as long as possible.

You are looking for a price movement followed by a flag and then a trend continuation. These patterns also often end with a double top or double bottom and perhaps even confirming dojis.

To trade a bullish ABCD pattern, first look for a stock with a strong uptrend. This is point A to point B. The B point is overextended so it drops back down to C. At this consolidation point, draw your support and resistance lines, then plan and execute your trade. Enter around C, put your stop loss a little below C, and take profits at point D and/or beyond.

A bearish ABCD pattern is the reverse.

Head and shoulder is a bearish reversal pattern. There is also the opposite, an inverted head and shoulders, which is a bullish reversal pattern.

These patterns are considered to be quite reliable.

The head and shoulders pattern traces out a top as the left shoulder, a pullback, then a higher top as the head, another pullback, then a final top as the right shoulder before the final decline.

Another way to look at it is as a triple top.

A trendline can then be drawn across the neckline, which connects the tops of the two shoulders.

To trade this as a short, enter at the break of the neckline on the right shoulder. Place your stop at the top of the right shoulder. Set your profit by measuring the top of the head to the neckline and using that same distance from the neckline down.

For an inverted head and shoulders, just inverse everything.

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