Swing and Day Trading: Evolution of a Trader

CHAPTER 3

Swinging Chart Patterns

In the Chapter 2, we looked at short patterns to see how they could help us time the market. In this chapter, we are going to look at the adult versions—the classic chart patterns to see how they can help us swing trade.

Before I get to the best chart patterns for swing trading, let me share this discovery. Knowing that a stock has a tendency to return to the breakout price (a throwback or pullback) is very important to swing traders. I found that stocks with low noise after the breakout (the definition of noise is complex, but it measures how much overlap a price bar has with adjacent bars; low noise means little overlap) tend to have more throwbacks and pullbacks than do their more-noisy counterparts.

Here is my interpretation of this: stocks that form straight-line runs after the breakout tend to throwback or pullback more often than do those not forming straight-line runs. If you are not paying attention, then take another sip of coffee because that is an important finding.

I checked my chart pattern database and found that 152 of 196 cases of a straight-line run during or after an upward breakout lead to a throwback. That is a 78 percent success rate. (The ascending triangle in Figure 3.6 shows an example as do Figures 3.9 and 3.11.)

Pullbacks show the same tendency to occur after a straight-line run down from a breakout. I found 104 instances out of 150 where it was true, for a 69 percent success rate. In other words, if price is making ...