Swing and Day Trading: Evolution of a Trader

CHAPTER 6

Swinging Tools and Setups

This chapter discusses tools that may help you swing trade or create ideas upon which you can build new tools and new techniques for success in the stock market. The first tool is the chart pattern indicator, and it is an important one.

THE CHART PATTERN INDICATOR

In 2007, I thought about chart patterns and wondered if bearish patterns appear just before price tumbles and bullish ones appear just before price rises. When you think of a classic double top, it is a bearish top. Price rises up to it and drops afterward. Those twin peaks mark a sentiment change from bullish to bearish.

Likewise, double bottoms do not appear at the top of a price trend. Rather, they appear when price bottoms. Price drops into the double bottom reversal and rises after it.

What would happen if we built an indicator that found all bullish chart patterns and all bearish chart patterns in large numbers of stocks? The bullish patterns would predict higher prices and the bearish ones would signal disaster. The indicator would act as a predictor of a trend change. That is what I did; I made an indicator that shows when the general market is going to change trend, and I call it the chart pattern indicator.

• The chart pattern indicator helps determine when the market changes trend.

Figure 6.1 shows an example of the result. The wavy line near the bottom of the chart is the chart pattern indicator. It bounces between 0 percent and 100 percent (right scale) with signal thresholds ...