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"The Inside Secrets of Elite Traders -

Patterns"
Living the Laptop Lifestyle
- Discover How Elite Traders Consistently Achieve Excellent Growth and
Income Each Year!

by Peter Varcoe
Chapter Page

Foreword by Vladimir Ribakov 3

Author Profile 5

Introduction 7

Glossary of Terms 9

Overview of Patterns 10

Pattern formation 15

Trend / Directional Change Patterns 23

Continuation Patterns 43

Practical Exercises 51

Effective Pattern Identification in Real Time 67

Trading Patterns for Profit 88

Practical Trading with these Patterns 113

Conclusion 245

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Foreword
Vladimir Ribakov

I’ve been involved in trading since the early 2006, and been reading materials about trading,
even earlier. There are so many books written about the subject of technical patterns, so
many books about price action, endless articles and video sources. There are good and there
are bad out there, but there is nothing that can compete with the fantastic creation by Peter
Varcoe.

The value you will get by reading this book is, not only will you understand how to draw the
technical patterns like flags, triangles, head & shoulders and others, but you will understand
how to trade them! And let’s admit it – we are here to make money of trading, not just to
draw impressive lines….

I’ll say it simply – this book is way beyond compare to any other books I’ve read on the
subject and books that are considered to be “the bible” of technical patterns and technical
analysis.

Peter explains everything in a very simple language, very down to earth, understanding that
his readers are coming from different backgrounds. He takes you through all the essential
steps of trading the patterns. How to recognize them effectively, how to spot them, how to
measure them, how to value them, how to estimate the risk and the reward and mainly –
how to trade them.

He takes you through the journey of his own trading experience, shares with you his own
trades, his management and his personal tips and conclusions.

I’ll summarize it simply – if trading is something you want to do for living and in a
professional level, read this book. Thank me later.

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Vladimir Ribakov – Profile

Age – 36 (in 2019)

Status – married + 17 yrs (2 kids, 1 cat, 14 KG )

Years of trading experience – 13+ (started in 2006)

1. Dealer, trading room manager, chief analyst in brokerage house

2. Private capital hedge fund trader

3. Full time retail trader in Forex, indices, stocks and commodities (CFD)

Currently involved in -

Owner of the popular trading blog – vladimirribakov.com

Owner of the top-rated live trading online Forex club – Traders Academy Club

Owner of one of the biggest social channels in FB and YouTube

Author of 2 books

Boost Your Forex Profits With Unique Convergence Strategy: Sell The Rally, Buy The Valley

Profitable Trading Mind

Motto –

Trade slow and grow, or trade fast and blow

Nickname – Vladstrodamus - given by Club Members

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About Peter Varcoe
Peter Varcoe commenced trading in 1999 when he joined the share trading
education group - Wallstreet Group of Companies.

Peter commenced the education process in September of 1999 - a time which was in
the middle of the "Tech Boom". Any Stock with Technical connotations (Yahoo,
Microsoft, Anything.com, Blue Sky rocket.com) seemed to skyrocket. They were
heady times. He was initially trading Equities on the Australian Stock Exchange on
weekly time frames.

After several months, Peter was so enamoured with trading that he left his previous
employment and joined Wallstreet Group, setup their Brisbane (Queensland,
Australia) office in March 2000 and became the Queensland Manager. After
approximately 12 months, Peter became involved in the educational side of
Wallstreet Group and really enjoyed this side also - helping people to become
consistently profitable in trading.

In 2003, Peter left Wallstreet Group and joined Stock Market Investors Group as
their Queensland Manager it was a role in which he was involved in travelling around
Southern to Central Queensland educating Primary Producers in the concepts of
share trading and using Futures Contracts to "insure the future value" of their crops -
products to protect them against adverse moves in the market price.

In 2004 Peter moved from direct Equity Trading to trading Equity CFD´S (Contracts
for Difference) over ASX300, which he felt was much more flexible than direct
Equities and a more effective use of Capital, still working with Weekly Time Frames.

In 2005, after having lived out of a suitcase for 2 years with the travelling, Peter
joined ACOFE - Australian College of Financial Education, based on the Sunshine
Coast (Queensland, Australia) as the Senior Lecturer. In this role Peter's main
responsibility was assisting clients in the practical application of the techniques they
were learning, rolling the sleeves up and smoothing the rough edges off their real
time application of these techniques, to actual, live trading accounts.

Peter remained in this role until the end of 2009, when he wanted to focus on other
things and could not devote the required time to ACOFE. He then took on some
individual students in a 1- on - 1 basis and continued in this educational role while
developing business for his partner's Financial Planning business.

In 2006 Peter added trading Equity CFD´s over US Equities by trading the Equities
covered by the S&P500 constituent list again using Weekly Time Frames.

Late in 2010 Peter was approached, through a referral, to join WIN Trading Signals
as Senior Analyst, then rose to Chief Executive Officer, a role which he maintains
today.

In 2010 Peter added the FTSE350 constituent list and Futures to his traded
instruments, again on Weekly Time Frames.

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In 2011 Peter added Forex and Futures on Daily Time Frames, while maintaining
Weekly Time Frames for Equity CFD´s on ASX300, S&P500, FTSE350 & Futures.

In 2014 Peter released his book ¨Inside Secrets of Elite Traders – Patterns¨. This
book was commissioned by 2 major Brokerages in Australia, for their Traders amd
clients. This book is a complete 2nd Edition re-write with much additional material.

In 2016 Peter dropped Equities as a trading instrument and concentrated on Futures

and Forex on Daily Time Frames.

In 2018 Peter added trading Forex and Futures on H4 (4 hour) time frames and
maintains his trading of >Forex and Futures on Daily and H4 time frames.

During the period, 1999 to current day Peter retained his passion for trading and the
adaptation and improvement of existing techniques in order to be able to better
adapt to changing market conditions.

Peter has also spent countless hours studying, working with, refining exact
identification and confirmation parameters for trading patterns and has become one
of the pre-eminent traders and educators in this field.

Peter also developed and taught techniques during late 2006 and 2007 which
allowed people to protect their Superannuation (retirement savings - also known as
401K in the US, Pension scheme in the UK etc). This protection was available for
people in public offer superannuation schemes as well as Self-Managed
Superannuation Funds.

Several of his students have told Peter that these techniques allowed them to retain
between 85% and 90% of the peak values in their Superannuation Funds from late
2007.

Another technique that Peter developed has put people in a position to protect their
Funds from the collapse of CFD providers, such as Sonray Capital Markets in
Australia in 2010 and MF Global internationally in 2011. These techniques have
been able to give people a lot more confidence in this arena, in addition to protecting
themselves from losing their Capital in the advent of the collapse of their Service
Providers, and several others have collapsed since then.

Peter was, in 2014, asked to advise the Manager on a new Wholesale Trading Fund
– a division of a large, International Multi Continent Financial and Investment Group.
Peter´s role is to define all the potential trades and place all the orders for execution
for this fund.

Since Peter accepted this position, he has become the Primary trader for this fund
and it has grown to where he is, at the time of publication, trading an amount of mid
9 figures for the Fund.

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Introduction

I would like to take this opportunity to publicly thank the two primary mentors I have
had in my trading life, Robert Lennox and Leon Wilson. Robert was my first real
educator and mentor in trading and has spent much time with me over the years in
discussion, technique definition and testing ideas and came into my trading life early
in 2000.

Leon came into my trading life during the 3rd quarter of 2003 and both he and
Robert have been a source of inspiration and encouragement and I owe them both a
debt of gratitude for their support, encouragement, challenges and overall belief in
the ability of people to be able to learn trading.

Their encouragement and words of advice helped maintain within me the drive to
keep testing, identifying, refining the identification techniques, and retesting of these
techniques through the thousands of hours of testing which I went through, and
without which these hours, at times, did not seem worth the effort.

I can tell you that today I look back and know that without this encouragement, I
would not have developed the pattern skills which I have acquired and used to great
effect over the last few years.

Mentor Achievements:

Rob Lennox Primary educator for a number of respected organisations

including Wallstreet Group of Companies, ACOFE, Fintel and
others. Rob is a trader and has been an educator in the industry
since around 1997. Rob has educated in excess of 2000
students who are very happy with the techniques which have
been taught and many of whom have gone on to become
professional traders trading their own accounts as their primary
source of income.

Leon Wilson Leon has been trading since 1992 and is acclaimed as one of
the best developmental traders in the World. Leon has written
three books on the subject of trading - "The Business of Share
Trading" - "The Next Step in Share Trading Success" and
"Breakthrough Trading". Leon is one of only two non US traders
who have been asked to contribute to the Worldwide publication
"Stocks and Commodities". Leon is also the only non US trader
to be a regular contributor to this same publication. Leon has
also been invited twice to speak as a keynote speaker at the
annual conference of the International Technical Analysts
Association.

I would urge any that want to develop these skills to their full potential, please find
someone who can encourage you, offer constructive advice, play devil’s advocate,
challenge you and overall support you in your efforts to learn.

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I would also suggest that, to the greatest extent possible, you avoid those who decry
what you are trying to achieve as this only serves to create doubt in your mind, and
you will experience enough of this during your development as a trader, without
having outside sources pile in on you as well.

The trading lifestyle can be a lonely lifestyle, as your friends do not understand what
you are doing. Most believe it to be gambling, and many of my friends believe it is
akin to witchcraft and that I should accordingly be burned at the stake.

Every successful trader that I know has a mentor or several mentors. They are fellow
traders with whom they can chat and explore concepts. You need to be able to freely
express your opinions without the threat of ridicule.

You need also to be able to listen to others' concepts as we can all learn from each
other. Everyone tends to look at things from different angles and there are many
angles which we may not have thought of ourselves.

Mentors and Trading friends who can challenge you are a huge asset, Trading
discussions with Leon were full contact events, making a point and then defending
your position, while under full assault were interesting times, but they do make you
think your position / strategies through effectively.

I would also suggest that you join a good Trading Community which can assist you,
with good education by Traders who really know their stuff and can explain it
effectively. An important part of this process is also good support and a variety of
opinions, Chat groups with a lot of traders with experience ranging from new traders
to people with 20 years experience in the industry.

Traders Academy Club is the best community of its type I have seen in more than 20
years of trading. Vladimir and his team really know their techniques well, and the
chat community is a great support and conversation tool feel free to check it out at
www.tradersacademyclub.com

There are a wide range of techniques discussed in the chat groups, so you do get
exposure to a lot of great trading ideas.

There are also Webinars by other traders which also cover a variety of beneficial
subjects – a lot of education overall.

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Glossary of Terms

CFD – Contract For Difference

ROM - Range of Movement (distance between the High – Low)

R:R:R - Reward to Risk Ratio (calculated reward / risk taken)

FRL – Falling Resistance Line

RSL – Rising Support Line

HRL - Horizontal Resistance Line

HSL – Horizontal Support Line

SL – Stop Loss

ISL – Initial Stop Loss

TSL – Trailing Stop Loss

TR – Trade Risk

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Overview of Patterns
There has been a huge amount of material written about patterns and their reliability
in trading. However, much of this is difficult to interpret, a lot of it is extremely vague,
which is useless for effective application in real time. This has driven many people to
abandon this highly effective trading technique, purely because they could not clearly
identify and use them.

The correct identification and use of patterns for the technical trader can be a very
profitable trading strategy. For it to be effective we need to be able to determine, with
a high degree of probability that we:

• have correctly identified the formation;

• know what will probably occur when and if the breakout occurs;
• know what to do if the breakout does not occur as expected.

The real strengths of Pattern Trading come in a trending market for continuation of
trend (Triangles, Flags & Pennants) and for change of trend confirmation (Double
Tops, Double Bottoms, Head & Shoulders and Inverted Head & Shoulders).

Let us diverge for a minute here and explore the two sides of technical analysis that
many of us have been able to identify. I borrow some comments here from the major
mentor in my early trading days and the man who taught me how to trade - Robert
Lennox. I am also adding comments of my own here.

There are two types of technical analysts. They are theoretical and practical
technical analysts.

The practical technical analysts are primarily concerned with using tools which will
help them make consistent profits and follow the precept of "How can this assist me
in making money." Practical technical analysts invest much of their training time in
practice in the area of high probability formations and adaptation of techniques. The
ultimate goal of this is to increase the reliability of the signals and increase their
trading account balance.

The theoretical technical analyst (some call them technical Anal-ists) tends to be
someone who is primarily concerned with how accurate the identification is
compared with the "Text Book" description. Most of the theoretical analysts "do not
trade", they are Theoreticians. They can give you all the reasons why something will
or will not work, why they did or did not work etc. Their primary concern is not in
practical application, but in theoretical correctness.
A wise man recently told me -The difference between analyst and trader is that the
analyst will explain tomorrow what the trader does today.

I agree with the many "traders" I know, and that is, we are less concerned with how
accurate this formation is compared to the "Text Book" than we are with correctly
identifying a high probability, profitable entry for the purpose of making a profit.

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We also agree that most practical technical analysts are traders, whereas most
theoretical technical analysts are not and many of them write very large books on the
subject with lots of verbiage and little substance. Most of the theoretical technical
analysts have embarked on the road of "We are going to be continuously learning
and are going to stay at school to achieve that end", rather than the road of getting
out there and committing themselves to increasing their account balances by trading
and actually making money.

I know I have just upset quite a number of people by these statements, however, I
am totally prepared to retract them and apologise to all theoretical technical analysts,
if and when I am proven wrong.

I will do this at exactly the same time as the theoretical technical analysts can
provide their trading account statements and prove they can make a higher
percentage profit on their trading account in the same time frame as most Practical
technical analysts. The Trader´s proof is in the Trading Account Balance, and I
would love some feedback on this from anyone who would like to comment - the
Trading Account Balance is SUPREME, please let us know your thoughts.

[email protected]

While I am being Politically Incorrect, I know there are right now many decrying what
I am saying. If you truly believe me to be wrong, I invite you to stand out from the
crowd and to do as Einstein is credited with saying when asked about the fact that in
excess of 100 scientists disagreeing with him - ¨100 people disagreeing is
irrelevant – It ONLY takes 1 person to prove me wrong!!!!!!!¨

Let's get back on track.

Patterns can tell us not only the expected direction of price action, once that price
achieves a pre-determined entry position, but also how far we can expect the price
action to travel, thereby showing us a price target which it should achieve. This is of
great importance in assisting in the determination of the R:R:R for each transaction,
and thus assessing the viability of each trade.

There is much more to this ability than most people realise. Knowing with a high
probability of success automatically gives the trader a target which, once the pattern
continues in the expected direction, automatically gives the reward to risk ratio
involved in the trade without having to do a lot of calculation. It is just mere division
of the known trade risk into the known potential profit margin.

Target 1 is what I have used for these assessments, many times I have seen these
patterns achieve Targets 3 & 4 in situations where the R:R:R would not have allowed
entry except for the Pattern target as defined by Target 1.

I have recently had a Double Top achieve Target 9, which is amazing, this was on
NZDCHF – H4 – confirmation bar was 00:00 GMT 23rd July 2019. Shown below

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NZDCHF H4 Chart – Double Top – Reached Target 9

In this book on pattern trading, we shall cover some basics of patterns and their
uses. This includes:

• Their shapes.
• Their correct identification.
• Their target determinations.
• How this can help us in our trade entry determinations.
• How they can aid us in our risk management applications for trading
purposes.
• How they can allow us to enter some very profitable transactions.
• How they can also help, importantly, keep us out of potentially harmful
positions.
• Their applications in bull and bear markets, (they work equally well in either
direction)

For the highest probability of effectiveness, all patterns should move through the
following phases:

• Formation
• Identification
• Development
• Confirmation
• Breakout

As the patterns begin to form, we need to be able to identify them, (and their
potential, in real time). Once the boundaries to this formation are identified we watch
the pattern develop to breakout. Prior to breakout, we need the correct confirmation
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that the pattern, once it has broken out, will continue its current price direction. This
greatly increases the reliability of the pattern by filtering out most of the non-
successful patterns.

When this progression is synchronised we have a high probability situation that

allows us to either enter a transaction or stay out, depending upon how this fits within
our risk management parameters. "Risk Management" you say - what is that? We
will cover risk management in detail in a later publication.

As for staying out of a transaction, I have said for a long time, that, sometimes,
Sitting on your hands is the best trading which you can do……………….

Risk Management is vitally important aspect of trading which many are either
unaware – or ignore, very much to their peril.

Ironically it is this confirmation technique that is lacking from most of the current
writings regarding patterns. Yet these techniques significantly increase the
probability that the pattern will complete satisfactorily, greatly increasing its reliability
and as a consequence of this reliability, and vitally their profitability. I then have to
ask the question - "If these confirmation techniques are not included in current
writings, why are they not?" Does this mean that the authors are theoretical technical
analysts or practical technical analysts - I suspect that I know the answer to this
question - however I can make a very educated guess.

To continue this a little further, in the case of the authors being practical technical
analysts, does this mean that they have achieved a level of reliability they are
comfortable with or does it mean they have not been able to explore other ideas and
improve their results? Either way there is no derision in this text of these analysts at
all. If they are comfortable with their results and are happy to go along with their
current techniques and are achieving the level of results with which they are happy -
so be it.

If, as I suspect, these authors are Theoretical Technical Analysts, who are they to
compose volumes in an effort to ¨teach¨ others, who are achieving what these
authors cannot?

Many of the traders I know (myself included) are never satisfied with current results
or techniques and are constantly exploring different ways to improve our techniques,
adaptations of current techniques or adaptation of ideas during conversations. We
do this in order to constantly grow as traders and refine new or adapted techniques
to produce better results in the same market conditions, or similar and better results
in an ever changing market.

Remember that Trading Account Balance is SUPREME and continuous careful,

consistent growth of that is the Ultimate Goal.

Keep that thought in mind - the market is ever changing and a number of the
techniques and confirmation combinations many of us used up until end 2007, have
not worked effectively since then. The market changed. That is a very sobering

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thought that the market changes, therefore so does the effectiveness of techniques
used until that change.

What does this mean to us as traders? We need to be looking for market changes
and as a result, need to be able to adapt our techniques to take advantage of these
changes.

The conclusions reached and explored within this discourse are not solely my
conclusions or discoveries. Everything I discuss here is the culmination of my
experiences since commencing trading in September 1999, countless hours (my
best estimate is around 30,000 hours plus…..) studying all I could find on the
subject, discussions with other successful traders, testing and working with their
hypothesies – then, the adaptation of the cumulation of both their and my ideas.

This is not just my original conception or conceptions but importantly are also
adaptations of conversations and ideas from my mentors, and trading friends. Much
of this discourse is from the combined thousands of hours that each of us have spent
refining these techniques and their results.

This has been a long road with many disappointments but many, many revelations
and achievements.

Applying the above process to the many patterns available, two types stand out as
potential trading aids. They are:

Trend Change patterns

• Head & Shoulders – Inverted Head & Shoulders.

• Double Top – Double Bottom.
• V-Top – V-Bottom.
• Rounding Top – Rounding Bottom.
• Bullish or Bearish Cup and Saucer

Continuation patterns

• Flags
• Ascending Triangle
• Descending Triangle
• Symmetrical Triangle
• Pennants

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Pattern Formation
Chart patterns are formations of price action which produce similar, readily
recognisable shapes, which tell us the expected direction of the continuation of price
movement.

Chart patterns fall essentially into 2 categories as discussed - trend change

patterns and continuation patterns.

The basis of these patterns is that they are predictable, and this predictability has
created a large group of sceptics. I would suggest that these sceptics have not been
able to master the identification process, as I have successfully identified and traded
many pattern trades since the year 2000.

These Patterns are identifiable and tradeable across every instrument I have traded
since 1999. What was especially addictive with Continuation Patterns (Triangles,
Flags, Pennants) during the ¨Runaway Bull Markets¨ from early 2003 until late 2007.

In excess of 4.5 years of single direction did not help trend traders much, and during
that period of time, my statistics show that I took 9.546 Pattern trades for each
directional change (most of these were short term pullbacks, not trend change)
trade. This only proves that a good trader requires multiple techniques to be
mastered in order to be able to fully take advantage of markets – because they do
change character.

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Trend Change Patterns
These patterns confirm that price action has changed direction and that a
predetermined price target is, with a high degree of probability, going to be reached.

The predominant Trend Change Patterns are:

Head & Shoulders

As the name suggests this pattern forms a shape similar to a Head and two
Shoulders.

• The price action in an uptrend forms a peak

• Retraces to form a low point
• this is followed by another rally or trend forming a higher peak
• This is followed again by a strong pullback in value creating another low point
• Followed by a shorter rally – called an ¨Exhaustion Rally¨
• Then complete price failure and dramatic fall in price value

The Head & Shoulders pattern confirms a trend changing from rising to falling. The
Inverted Head and Shoulders pattern confirms a trend changing from falling to rising

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Double Top / Double Bottom

Double Top is a formation where:

• The trend rises and forms a peak

• This is followed by a retracement forming a low point
• This is followed by price rising again to form another peak in the same region
as the previous peak
• Then by directional change into a down trend

The formation looks much like a large M in shape

Double Bottom is a formation where:

• The trend falls and forms a low

• This is followed by a strong rally forming a high point
• This is followed by price rising falling to form another low in the same region
• This is then followed by directional change into an uptrend

The formation looks much like a large W in shape.

The Double Top pattern confirms a trend changing from rising to falling. The Double
Bottom pattern confirms a trend changing from falling to rising

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Continuation Patterns
These patterns confirm that the current price direction should continue and that a
predetermined price target should to be reached.

The Predominant Continuation Patterns are:

Triangles, Flags & Pennants

Triangles:

Three types of triangles can form after a very weak trend or a sideways movement or
trend in price action. These shapes form and assist greatly in the identification of the
probable direction of price continuation.

Symmetrical Triangle

This formation is a standard, horizontal triangle which does not need to be

"Symmetrical" in the mathematical sense of the word. It is simply a triangular shape
with the upper momentum line falling and the lower momentum line rising. Both lines
meet to give a triangular shape.

The breakout on this pattern can occur in either direction with around 50:50
probability, when it is formed from sideways price action. When there is a distinct

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bias in the incoming direction, there is a higher probability that the breakout will
continue in the original direction.

My experience with this formation on Equities on weekly time frames shows while
the pattern has a 50% probability of breaking out either direction, once this has
happened, there is an 80% probability of achieving target- these are my experiences
with this pattern

Ascending Triangle

This pattern is a right angled triangle with the upper momentum line being horizontal
and the lower momentum line rising to meet the horizontal line.

The breakout of this pattern occurs usually in the penetration through the horizontal
momentum line in an upward direction. This pattern normally forms from sideways
movement, often after overall upward price direction.

My experience with this formation on Equities on weekly time frames shows the
pattern has a 65% probability of breaking out through the horizontal, and, once this
has happened, there is an 85% probability of achieving target- these are my
experiences with this pattern

If this shape forms in a downward movement – it is not an Ascending Triangle and

breakout probabilities drop below 50% - totally ignore it

Descending Triangle

This pattern is a right angled triangle with the lower momentum line being horizontal
and the upper momentum line falling to meet the horizontal line

The breakout of this pattern occurs usually in the penetration through the horizontal
momentum line in a downward direction. This pattern normally forms from sideways
movement, often after overall downward price direction.

My experience with this formation on Equities on weekly time frames shows the
pattern has a 65% probability of breaking out through the horizontal, and, once this
has happened, there is an 85% probability of achieving target- these are my
experiences with this pattern

If this shape forms in an upward movement – it is not a Descending Triangle and

breakout probabilities drop below 50% - totally ignore it

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Flags:

Long

The long flag pattern is a formation where the price action rises significantly and
pauses in a consolidation. The consolidation can run slightly against the original
direction or it can be horizontal.

The consolidation cannot run in the same direction as the price action preceding the
pause, as this is merely price slowing down (not pausing in a consolidation), and
generally precedes a reversal of direction.

This consolidation is a flag when you are able to surround the consolidation with
parallel momentum lines.

My experience with this formation on Equities on weekly time frames shows the
pattern has a 65% probability of breaking out through the horizontal, and, once this
has happened, there is an 85% probability of achieving target- these are my
experiences with this pattern.

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Short

The short flag pattern is a formation where the price action falls significantly and
pauses in a consolidation. The consolidation can run slightly against the original
direction or it can be horizontal.

The consolidation cannot run in the same direction as the price action preceding the
pause, as this is merely price slowing down (not pausing in a consolidation) and
generally precedes a reversal of direction.

This consolidation is a flag when you are able to surround the consolidation with
parallel momentum lines.

My experience with this formation on Equities on weekly time frames shows the
pattern has a 65% probability of breaking out through the horizontal, and, once this
has happened, there is an 85% probability of achieving target- these are my
experiences with this pattern

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Pennants:

Pennants are like flags with the following difference - there is a triangular
consolidation at the end of the price run.

Long

This formation is an upward run in price action with the price forming a consolidation
in the shape of either a symmetrical or an ascending triangle.

This consolidation is a definitive ¨Pause¨ in price action prior to a strong continuation

of price in the original direction

My experience with this formation on Equities on weekly time frames shows the
pattern has a 65% probability of breaking upwards, and, once this has happened,
there is an 85% probability of achieving target- these are my experiences with this
pattern

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Short

This formation is a run downwards in price action with either a symmetrical or a

descending triangle forming as the consolidation.

This consolidation is a definitive ¨Pause¨ in price action prior to a strong continuation

of price in the original direction

My experience with this formation on Equities on weekly time frames shows the
pattern has a 65% probability of breaking downwards, and, once this has happened,
there is an 85% probability of achieving target- these are my experiences with this
pattern

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Trend Change patterns

Trend Change patterns

• Double Top – Double Bottom

• Head & Shoulders – Inverted Head & Shoulders.
• V-Top – V-Bottom.
• Rounding Top – Rounding Bottom.
• Bullish or Bearish Cup and Saucer (a variation on the Rounding Top / Bottom)

Trend change patterns confirm not only that the price direction has probably
changed but also, they tell us how far we can, as a minimum distance, expect the
price to go with a very high probability of reaching that target (some say and my
experience with this pattern suggests this probability could be as high as 90%).

These Probabilities are all based on Equities on weekly time frames. My experience
is indicating that they are close on Forex and Futures on Daily and do reduce on H4.
This occurrence is indicating that it is not the instrument which affects these
probabilities but the Time Frames.

It appears that Longer Time Frames are more reliable – go figure, I think I remember
that from somewhere…..let me think…….yeah, I have it – we are all taught that – the
longer the time frame the more reliable the signal. Well who would guess that would
carry over to pattern target achievement probabilities……………….

What we then need to do is explore how these patterns are able to assist us in our
trading. We shall cover this in more detail with specific examples when we discuss
these patterns in detail in the next part of this section.

There are many possible trend change patterns. Five of the most common are
shown above two of them are detailed below. While there are others, we will deal
primarily with the first two patterns as they are the ones I have been able to identify,
confirm and use with a high degree of success.

I have not yet been able to make the ‘V tops and bottoms’ or the ‘Rounding tops and
bottoms’ or the "Bullish & Bearish Cup and Saucer" formations work with the same
probability.

The reason for this may be as simple as my inability to find a reliable confirmation
technique to use with these patterns to give me the reliability I need to use them.
This statement is by no means intended to say that they do not work, just that I
personally have not been able to generate the same reliability in real time as others
have stated they can, in their own publications

Many of the experienced traders I know need to be able to get a reliability factor, in
real time application, of at least 75% from any technique they use, or are about to
use, in order to make sure that it provides them with a better outcome than they
were previously getting, before they will adopt and incorporate it as part of their
overall strategy.

24
I have also made the decision to use this same ratio before adopting new strategies.

Directional change patterns have proven to be unreliable, as a trading pattern for

most people, when trading the break of the pattern, and that is because many people
will not tolerate the size of the Entry – Stop Loss spread required to trade the
neckline break.

This is because they will frequently penetrate their confirmation points - which is
frequently the entry point many people use, but then reverse direction and penetrate
the area where the stop loss would have been placed, this generates a larger
number of losing trades than is acceptable.

Many of these false entries occur immediately prior to the price action fluctuating and
ranging around what was the entry point – and before continuing in the original
direction.

Their benefit is that they can confirm the directional change and give us a target to
which we can aim for the price to achieve. We can then make use of this when we
use other techniques such as falling resistance and rising support entries giving us
an even higher probability of success.

In order to trade these effectively, the Initial Stop Loss must be placed at least 60%
away from the neckline of, the distance from the neckline to the extremity of the
pattern. Most people will not tolerate an entry – Stop Loss spread that wide.

I have found that trading the Trend line breaks within these patterns is much more
reliable and profitable than trading the neckline breaks.

Directional change patterns can be very, very, very useful in the confirmation of other
entry signals when used correctly in this fashion. We shall explore this when we
cover the directional changes. Some of these occurred in 2001 and at the end of
2007.

The "so called" GFC – Global Financial Crises (2007 – 2009) (also known as the
¨Good For China¨) provided some very high probability entries which most people
missed because they were unfamiliar with how to use these signals or were of the
mistaken belief that the huge uptrend, which was the biggest "bull run" in living
memory for most people, was going to continue.

We may go into this in more detail in a subsequent book entitled "identification and
profitability of the GFC" which should be published in the Future.

This book is not an urgent priority because it will be some time before "another one"
("GFC" that is) occurs and there are more important subjects, on a priority basis
which need to be covered in the meantime.

An example of how to use these trend / directional change patterns is that the
pattern largely overrides the effects of or considerations for previous
resistance/support levels. These may otherwise have kept us out of a continuation or
even a trend change entry under our risk management guidelines (more details of

25
these will be covered in depth in our "Risk Management Book" (which is a higher
priority than GFC identification).

Many of the entries which we may have otherwise been kept out of include for
example falling resistance line entries because of other resistance levels which
would not have allowed us to take the trade because of Risk: Reward parameters in
our trading plan.

The Targets indicated by these directional change patterns do consistently override

these otherwise entry-cancelling levels which can keep us out of potentially profitable
transactions. However, taking the directional change confirmation targets can then
get us into these trades with a much higher probability of making a profit.

This is a great Boon to the ¨Trading Account Balance¨.

Double top & double bottom patterns

A double top is also commonly called an ‘M’ pattern and a double bottom is also
commonly referred to as a ‘W’; the associated graphs illustrate the reason for this
naming.

These patterns are directional change confirmations and can correctly be used in the
following circumstances:

The identification of these patterns is relatively straight forward and very reliable.

A double top needs to have a trend coming into its first peak, (this tends to make
sense when we remember that this pattern is "Trend Change" pattern - therefore if
there is not a trend coming into the formation then it is not a trend change. While this
seems self evident, it is however a point which is ignored or forgotten in many of the
writings about this pattern) followed by a retracement, to form a low. This is followed
by a rally to form another peak, with a valley between the two peaks, followed by a
fall in price action to below the low in the middle of the valley.

Conjecture surrounds the relationship between the two peaks and the Theoretical
Technical Analysts tend to insist that the maximum variation in price, between the 2
highs or lows is 3% on Equities

However, many of us have seen that a 3– 5% variation between the two prices
seems to be where the major consensus lies with Practical Technical Analysts. My
own experiences have shown me that a 5% variation is perfectly acceptable and has
proven to have the same reliability in the correct identification process for these
patterns. These percentages apply to Equities, Forex requires a differential
approaching <=1%

To give an example, if the first peak is at $10.00, the second peak needs to be
between $9.75 and $10.25. Once the variation becomes larger than 5%, the
reliability of these patterns does seem to fall away for all practical identification
purposes.

26
A horizontal line drawn from the low point in the valley, for a Double Top, between
the two peaks forms what is called the ‘neckline’ of the pattern; this is the critical
element in the confirmation of a double top pattern.

The confirmation which seems to be the most reliable is a "close below" the
neckline. Patterns of this type which do not work tend to have a price penetration,
but no close, below the neckline. Evidence seems to suggest that the close below
the neckline gives a much higher reliability to the pattern, and therefore higher
probability in its overall use.

This close below the neckline is the confirmation of the pattern and that it will
continue to its defined target. Enter any continuation entry after this confirmation, a
Rising Support Line entry prior to the pattern confirmation is an acceptable and
reliable entry, providing the entry is close to the neckline.

Also, enter any Trend Continuation signal prior to this as the reliability overrides any
impediment to the overall Trend Continuation target a high percentage of the time.

This reliability with these patterns is in reference to the probability of the price action
reaching the target which has been determined from the Pattern itself, this probability
is quoted in a number of texts as around 90%.

These conclusions have been drawn partially from work I have collaborated on with
Rob Lennox (trader and Dean of Studies, Australian College of Financial Education
and Leon Wilson (trader and author, The Business of Share Trading and Next Step
Share Trading Success and Breakthrough Trading). In addition to this work there
have been thousands of hours of research into Identification criteria for a higher
success rate.

The same interpretation can be applied to a double bottom, the reverse of a double
top. Here price action falls, turns and provides a Low Turning Point, rallying to give a
High Turning Point, retracing to give a second Low Turning Pont (within 5% of the
price of the previous low), then rallying again. This then forms a W shape and the
confirmation is a close above the neckline (horizontal line from the "High" of the rally
in the middle of the formation.

The horizontal line which is placed at the High Turning Point in between the 2 Lows
is the neckline. We then need to see a close above the neckline formed from the
ridge between the two lows.

This close above the neckline is the confirmation of the pattern and that it will
continue to its defined target. Enter any continuation entry after this confirmation, a
Falling Resistance Line entry prior to the pattern confirmation is an acceptable and
reliable entry, providing the entry is close to the neckline.

Also, enter any Trend Continuation signal prior to this as the reliability overrides any
impediment to the overall Trend Continuation target a high percentage of the time.

27
There are many trend change techniques that help identify entry signals for either
long or short positions and which occur earlier than any signal given by the pattern
and its confirmation. However, the double top/bottom pair of patterns have an Entry
– Stop loss spread too wide for most people to tolerate, for a trade entry from the
pattern itself.

The real strength of double tops / double bottoms is to provide a target price, which
can assist in the confirmation of a trend change or continuation entry, as a direct
result of giving a higher probability than the potential resistance or support levels
With continuation entries between the entry and the target, therefore overriding the
ability of these levels to stop price action, which would otherwise keep us out of the
position based on Risk : Reward.

This can be of huge benefit to us in our Trading because the reliability of the pattern
reaching its target is significantly higher than the probable support/resistance levels
exhibited by previous low or high turning points, or other levels.

We can use the target price of the pattern to give a stronger support/resistance level,
and to therefore calculate our risk management and reward-to-risk ratios on this
level, rather than on intervening levels. This enables us to enter transactions which
we would otherwise have been kept out of, because the Pattern Target has a higher
probability of being reached, than not entering because of these intervening levels.
This means that we have been able to enter another successful transaction and
profit from it....

This chart demonstrates the formation of a double top, in January 2000.

28
We have a clear upward trend (higher high turning points along with higher low
turning points) coming into the peak of the week ending 5th February 1999, being
followed by a low week ending 23rd April 1999, followed by a peak week ending 13th
August 1999.

The neckline is defined by the clear low point of $7.68 for the week ending 23rd April
1999

We can also see three penetrations and one touch of the neckline prior to the last
week, and here we can clearly see there is a close at $7.67, which is below the
neckline of $7.68 during the week ending 21st January 2000. It is this close below
the neckline which confirms the pattern and gives it the reliability. Take any
continuation entry from here.

It is these 3 false penetrations that most of the written descriptions cover and many
people use as the entry signal for these patterns. The subsequent rallies each would
have hit the initial stop loss Levels that most people would have in place, thereby
causing additional losing trades unnecessarily. The reliability of this as an entry
technique seems to lower the reliability to less than 50% for these entries.

To calculate the price target for a double top, we draw a line across the two peaks of
price. We then measure the distance from this line to the neckline of the pattern and
then project this distance down from the neckline value.

As we can see in this instance, the target was achieved and penetrated in 17 weeks
and it is this target that overrode the previous support levels from October 1998 as

29
we can see on the next chart. This is quite a common occurrence that necklines of
Double Tops and Double bottoms do coincide with major support / resistance from
around previous levels.

Double Bottom

A double bottom is merely a reverse of a double top, and all analysis is identical, just
with a different price direction. We are looking for a low turning point, followed by a
rally with a high turning point, followed by another low turning point. We then apply
the neckline to the high turning point.

A very good use for them can be to assist in getting into a transaction we would have
otherwise stayed out of for various reasons.

In the chart below, most traders would have not entered on the directional change in
March of 2000 because of the existence of the significant resistance levels. These
levels being at $22.54 and also at $23.39, which we can clearly see, is in the same
area as previous resistance going back to 1998.

This is followed by further resistances at $25.00, and another at $25.72

This previous resistance would have not allowed sufficient reward to risk for many
people and as a result they stayed out of the transaction.

30
What most people did not see at the time, in this example is the Double Bottom
formed from the Low of $19.88 from the week ending 25th February 2000, followed
by the high of week ending 3rd March 2000 and then followed by the Low of $20.00
for the week ending 10th March 2000.

When we apply the target identification process as above to this double bottom, we
can clearly see that the target is approximately $25.12. This target has a much
higher probability of being reached than the resistance at $23.39 has of stopping the
price action.

It is interesting to note, but not uncommon, that the Primary (1st) target is very close
to an important resistance level.

It is this target which gives us the opportunity to take advantage of a potentially

profitable trade we would otherwise have stayed out of due to the lack of reward for
the trade risk which would have been taken.

31
When we apply our trend bands in order to assist in the determination of an entry
price for the trend change entry off the falling resistance line, we can see that the
resistance level from the double bottom and the entry are so close they essentially
cancel each other out, so this resistance level is not of concern to us.

Entry at approx. $22.20 with a stop at approx. $21.22 gives a trade risk per share of
$0.98 and an expected resistance at $23.39 showing a potential profit of $1.02 show
a reward to risk ratio of 1.21:1, which is unacceptable, in that it is insufficient, for
most people.

The resistance at $23.39, however would normally be of significant concern, but

when we begin looking at the bigger picture, taking into account the double bottom
and its target of approx. $25.16, we get a different picture.

Therefore, we can ignore the $23.39 resistance as it is negated by the double bottom
target.

Entry at approx. $22.20 with a stop at approx. $21.22 gives a trade risk per share of
$0.98 and an expected target at $25.16 showing a potential profit of $2.96 show a
reward to risk ratio of 3.02 :1, totally acceptable for a blue chip company and most
people would be happy to enter the transaction based on this RRR.

The double bottom target $25.16 has a significantly higher probability of being
reached than the price stalling at the $23.39 level, therefore opening the reward to
risk ratio up quite significantly, as we can see, and therefore allowing a directional
change entry, which would be proved to be a profitable transaction.

32
Overall, a double top or bottom can be very useful to the technical trader who knows
both their strengths and (importantly) their weaknesses and uses them in their
calculations accordingly.

33
Head & Shoulders

A head & shoulders pattern is another trend change pattern, but this is a stronger
pattern than a double top or double bottom, and it is quite a rare pattern and does
not commonly occur - but when it does, grab it with both hands.

Like double top/bottom, there is a lot of information written about head & shoulders
patterns and their application, most of which is incorrect, confusing, vague or any
combination of the above.

The research and testing conducted by myself and my mentors, has debunked
many of the myths about this pattern and simplified its, identification and use.

While both of these patterns are trend change patterns, the head & shoulders is also
known as a Primary Trend change pattern, as opposed to a double top/bottom,
which, while it is a trend change pattern it more frequently occurs in Secondary
trends which are normally 12 – 50 periods in duration.

A Primary Trend is generally recognised as being a minimum of 60 -90 periods in

duration, therefore these formations are usually incorrectly identified when the trend
into them is less than 48 periods, and particularly if the incoming Trend is less than
24 periods

The absolutely best example of Head & Shoulders which I have seen is in the
following chart, at the beginning of the 21st Century, as shown next, it is without a
doubt that this is the cleanest, clearest and obvious head & shoulders pattern which I
have personally seen.

There has been a lot of misinformation written about the head & shoulders patterns
in many publications.

34
A head & shoulders has a trend coming into a significant high turning point, followed
by a retracement which may or may not be a trend – it does not matter here, which
forms a low turning point. This is followed by a new rally or trend to provide a higher
high turning point, followed by a (usually) sharp fall which establishes another low
turning point. This is then followed by another rally forming a new high turning point
and then another fall.

The first high turning point is called the left shoulder, middle high turning point is
called the head and the third high turning point is called the right shoulder, with the 2
low turning points in the formation being called the left and right neck points.

When we draw our lines on, as above, we see this multi triangular formation with a
higher central triangular shape and this is where the name comes from, the head
being higher than either of the shoulders.

The psychology behind this pattern is that there is a strong primary trend running into
the formation which we can clearly see. This peak forms the left shoulder. Then
there is a secondary trend which runs down to the left neckline point. This is then
followed by another secondary trend which peaks at the head. These are followed by
a significant fall to what becomes the right neckline point, and then by what is termed
as an "exhaustion rally", then complete directional failure, this failure is confirmed
by price action, penetrating and "closing below" the neckline. Important note - It is
this close below the Neckline which confirms the pattern

We can clearly see that the price action running from the right neckline point and
right shoulder starts off quite strongly and decreases significantly, hence the term
exhaustion rally.

It is important to note that the right Shoulder ¨Exhaustion Rally¨ range is smaller than
the Left Shoulder range.

The target on a head & shoulders is determined by taking the distance vertically from
the top of the head to where it intersects the neckline and is then applied to the point
of break below the neckline, as demonstrated below.

We had to include a lot more information on the screen in order to get a look at the
bigger picture. While we can see that the target was $2.05, there was a lot of
support, over a number of years, 1994 – 1999 at around $2.30, which you can
clearly see if you look back 5 years, that this $2.30 support could also be looked on
as the target range for this particular pattern.

35
This pattern did not specifically reach its target, but in October 2002, the price did get
down to $2.44, which could be seen to be, arguably, within market noise level of the
target price.

For the price to reach market noise level from the target seems to be close enough,
based on the hundreds of hours involved in the study of these patterns over a period
of 20 years with either, the head & shoulders and double top / bottom patterns, to
say they have reached their target, or close enough to it to have completed their
influence over price action.

Because these patterns have such a strong influence over the price direction, an
entry signal which goes against the predicted direction from the pattern could be
seen to be a much lower probability than if the pattern was not there, and as such
could also be seen to be very unreliable as a signal.

Once the pattern reaches its target however, its influence over price action no longer
exists and we can then look forward to entering any confirmed entry signal we can
find at that point

36
The real benefit for me at the time with this pattern was the lesson learned from my
Mentor at the time, and his guidance when I identified a potential Falling Resistance
break in 2001. I really wanted to trade this position as it was a really strong looking
transaction.

37
The MACD is a very good confirmation tool for Trend Changes if used under specific
conditions and is my tool of choice for this application

The market noise from the falling resistance line was about to be penetrated by price
action, the MACD will be positive and will confirm the entry, if price penetrates the
upper market noise band. When the MACD confirms positive during the same week
as the price penetration of the market noise, this gives a probability of around 83% -
according to extensive research done by Rob Lennox.

I asked Rob what he (he was my teacher of technical analysis at the time) thought of
this for a trade. It was politely suggested that I go back to the basics of what I saw,
and come back to him with relative probabilities, and would hopefully answer the
question for myself. This is normal for Rob, he doesn't answer the question, but asks
you questions which will assist you in determining the answer for yourself

I looked at the head & shoulders and compared the probability of that reaching its
downside target, and also that there were 2 other downside signals, both of which
had high probabilities of reaching their Targets. I then compared that to the
probability of the directional change being successful.

The probabilities these 3 downside signals had were 90%, 85% & 85% respectively,
compared with a single signal with a maximum of 83%. Doing the maths on these
the answer was really very obvious really.

38
When I got back to Rob, he pointed out that I had indeed answered my own
question, so I did not enter the trade, based on the head & shoulders and 2 other
Patterns influences over price action each of which had probabilities of reaching their
downside targets higher than the change of direction's influence.

Was this the correct decision, 3 weeks later I wasn’t so sure, but 23 weeks later,
when the price action would have stopped the trade out at a loss – after 23 weeks –
with no real place to have exited with a profit in the meantime, did answer the
question without doubt.

As we have seen previously with this pattern, the head & shoulders influenced the
price in its total run down to $2.44. Which would have resulted in a losing
transaction, so in this case the pattern assisted in keeping me out of a losing
transaction.

Interesting thought process isn't it "the use of multiple techniques" to assist in

determining the highest probability combination to assist in whether to enter or stay
out of a position in order to minimise the number of losing or increasing the number
of successful transactions.

39
Inverted Head & Shoulders

This chart, the price action is showing an inverted head and shoulders formation.

These formations work in exactly the same way as a normal head and shoulders,
only in reverse.

Here we can clearly see the primary trend commencing the week ending 8th June
2007 and bottoming the week ending 13th March 2009, a period of 20 months, we
then see the strong rally till the week ending 8th May 2009, followed by an
exhaustion retracement, to then see the price rebound from mid July.

Trend into the left shoulder low week ending 21 Nov 2008, left neck point week
ending 9 Jan 2009, the head week ending 13 March 2009, right neck point week
ending 8 May 2009 and right Shoulder week ending 10 July 2009.

The price closed above the neckline during the week ending 24th July 2009,
confirming the head and shoulders formation and setting the price target of
approximately $6.23.

To identify this target we can use Fibonacci price extensions of 100, 200 & 300, or
simply calculate the dollar difference between the low point of the head (A) and
where a vertical line from the low which is the inverted head, intersects the neckline
(B), and apply this dollar value to the point where the confirming week for the pattern
crosses the neckline as shown above.

40
You will all be able to see that the target here is very near the existing, established
resistance level from the weeks ending 13th March & 8th June 2007.

What I do find interesting with both of these trend change patterns – head and
shoulders and double top / bottom is that the targets from them are frequently near
previously established significant support or resistance levels.

In Summary

This was a practical exercise in how we can use these patterns to help us trade
more profitably, by sometimes staying out of a transaction by taking into account the
bigger picture.

Since that time we have all (Robert Lennox, Leon Wilson, myself and many others)
done a great deal of research on these trend change patterns and come to similar
conclusion, they are unreliable as trading patterns, when using the Neckline Break
as the entry – UNLESS you are prepared to tolerate the width of the Entry – Stop
Loss spread required to effectively trade these patterns.

However, when we look at the bigger picture, where their influence lies,
understanding their strengths and weaknesses and then use this information for
trading purposes, they can be of enormous benefit to us, as traders by helping us
identify more potentially profitable trades, along with helping us identifying potentially
losing trades.

These patterns, as discussed, have proven to be unreliable as trading patterns over

the years and this has a great deal to do with the fact that frequently, when they
penetrate the neckline, they whip around this neckline for two or three times. in most
instances. Trading these patterns using the Trend line breaks is a valuable, effective
and profitable method for trading these patterns

Many people reduce the amount of information they have on a trading screen, to
help them to better see what is happening now, and I can understand the reasons for
this, and they do make sense.

However, it could prove prudent to also look at the bigger picture, in order to
determine whether there are any other influences over price action which cannot be
seen with only 50 - 75 periods of data on the screen.

A good example of this is the situation with Fairfax and the head & shoulders which
formed in 2000, which was shown here, with only 75 periods of data on the screen.
We saw a fantastic down trend with four points of contact on the trend line, three of
these being major high turning points, making this a very strong trend, which was
about to change direction, giving a very valid signal on this change. A confirmed
entry signal, which we did get, would have had us enter what proved to be a losing
transaction.

41
However, when we had 200 + periods of information on the screen, an entirely new
picture emerged, which showed a major head & shoulders formation formed and
confirmed, prior to the possible directional change. This head & shoulders formation
has a much stronger influence over the likely direction of price than the possible
directional change, which helped keep us out of what proved to be a losing
transaction.

42
Basic Rules

• Identify the pattern

• Identify the target
• Identify the pattern confirmation
• If a sufficiently strong trend change entry appears - Trade it
• Once the pattern has been confirmed trade continuation entries in the
direction of the target
• Ignore any previous resistance levels, as barriers, prior to the price reaching
the target

Invalidation

Double Top / Bottom

These patterns are invalidated if the price rallies / pulls back in excess of 60% of the
pattern height.

If this occurs, either before or after the confirmation of the pattern, it is invalidated
and no longer exists.

Head & Shoulders / Inverted Head and Shoulders

If the right Shoulder exceeds 60% of the pattern height, or if after confirmation, the
price rallies or pullsback in excess of 60% of the pattern height, the pattern is
invalidated and no longer exists

I would caution any trader to endeavour to keep an eye on the bigger picture
involved with the charts they are trading, looking for other influences over price
action which they may have not seen so far.

Remember, capital preservation is your primary objective in trading, profit is

secondary, and is the natural consequence of well executed and effective application
of proven entry and exit strategies.

The cruel mathematics are, if you lose 25% of your capital, you will need to make
33% profit just to break even. If you lose 50% of your capital you need to now make
a 100% profit to break even, and this last scenario is unlikely to happen if you have
just lost 50% of your capital.

There are a number of reasons for this and they include the psychological impact of
losing half of your account and the fact that there is no switch which can be flicked
on the turn a person into a super trader.

Many people ignore the influence of these patterns and then wonder what went
wrong when they have a losing situation.

My mentors and I believe that to ignore the influence of these patterns, is to do so at

your own potential peril.

43
Continuation Patterns

Continuation patterns

• Ascending Flags
• Descending Flags
• Ascending Triangle
• Descending Triangle
• Symmetrical Triangle
• Ascending Pennants
• Descending Pennants

We will commence with a discussion on the trading patterns of flags, ascending /

descending & symmetrical triangles and also pennants.

While many more continuation patterns have been identified, these are the ones I
have specialised in since 2001.

These patterns are continuation patterns and have proven to be a highly successful
tool for the technical traders who have or can master them as part of their overall
trading strategies.

While this book is about patterns and their tradability and reliability, I would like to
point out that successful traders have a range of proven entry and exit techniques in
their armoury of tools, and are able to adapt to changing circumstances, as has been
made so obvious by the events of late 2007 and 2008 and the changes to the
directionality of all markets since then.

We shall explore this concept in detail after the pattern series.

Continuation patterns are an interesting, much misunderstood, much maligned area

of trading, often accused of being closely related to witchcraft and that pattern
traders by default should be burned at the stake. My own experiences within this
discipline of trading tell me that these accusations are quite simply – totally
unfounded and probably levelled by people who were not able to grasp the
intricacies and subjectivity of these patterns.

It is interesting that in the 1980’s, Bill Eckhart and Richard Dennis, both great
commodity traders in their own right, disagreed on individual traders. One said they
were born the other said they could be trained, so they put forward a training
schedule, advertised for applicants, received 1000 responses, and conducted
interviews. They reduced the number of applicants from 1000 to just 20 and
proceeded to put them through a rigorous training schedule, and thus was born the
legend which became the “Trading Turtles”.

The training regime these people were required to undertake was extensive,
rigorous, and difficult. Those that were successful emerged as traders with
extraordinary Discipline (The dreaded ¨D¨- word), Highly specific Trading strategies
and Plan and importantly – highly definitive and restrictive ¨Risk Management¨. They

44
were also subjected to huge Psychological Testing to be able to endure the issues
that came with the trading of the structures they were required to stick to.

The thing which interests many others the most people is that not only can complete
novices be trained to a level of competence, they can be trained and then mentored
to a level of expertise. Which should give much encouragement to any who are still
trying to come to grips with trading and its ups and downs.

But what I also find very interesting is that in his book – “The Way of the Turtle”,
Curtis Faith states that although all of the turtles had the same opportunities and
training and continuous support and mentoring, nearly half of them did not follow
their training (their mapped out strategies) and as a result, failed to complete their
trading with any real success. In fact several of them lost their entire trading
accounts, even with exactly the same training, support and mentoring as all the
others. I found this book to be a very interesting read and insight into the psychology
behind trading and the different effects of circumstances on individuals who all
receive the same tools.

The issues that arise psychologically where some of the traders could not handle the
long losing streaks and then they began to pick which of the confirmed entries they
would take - leaving some alone. Some of the others spent too much time 2nd
guessing themselves - analysis paralysis. They would look at a situation, identify a
setup, analyse, re-analyse, analyse again and again until such time as the
opportunity was missed.

What is also very interesting here is that the trading style of the Turtles doesn’t suit
everyone. They were trading commodities contracts on an intraday basis and a lot of
them couldn’t cope with the pressure this system and time frames imposed on them.

Another point with their system seems that it wasn’t highly successful, in that the
percentage of successes to entries was not high, but they had very strict risk
management sitting under each transaction in order to mitigate the risks involved,
and it seems that a large percentage of them couldn’t psychologically handle the
failure rate this system produced.

It also points out to me that trading is not for everyone, and the key is to recognise
this as a fact and adjust to it.

For those who persist with learning trading techniques, there are several broad
technique types which need to be looked at, they include:

• Trend trading
• Momentum Trading
• Continuation Trading

45
Trend Trading

Trend Trading, as the name suggests, is trading with the major direction and is
usually used where directional change parameters are met, such as significant
penetration of falling resistance lines (called going long) or of rising support lines
(called going short). This can be a very profitable trading technique but is limited to
times when there are a lot of directional changes which are readily observable.

The biggest problem with this type of market is that the trends can be short lived,
and therefore reduce profitability from the signals. They can also be very long
(several years) which means that entries can be very rare at times thereby greatly
reducing trading opportunities.

A time which produced a limited number of entries from this type of trading was the
bull run from March 2003 till December 2007. The trend change entries from early in
this period were, for the most part, very profitable, the problem was that there were
very few of them after late 2003 upon which to enter and profit.

Momentum Trading

Momentum trading tends to be short term trading requiring constant attention, as this
type of trading is reliant, to a great deal, on short term bursts of price and volume.
Once mastered can also be very profitable. The key term here is – “once mastered”,
as there are a lot of false breaks. There is usually a long learning curve to be able to
succeed at Momentum trading, as there is a distinct correlation between price action
and volume here.

During our discussions, Leon Wilson and I both agree that many people never
acquire the skill level to trade this type of technique, as this is also usually based on
end of day or intraday trading where decisions have to be made more quickly than
on weekly time frames. The shorter time frames create a lot more pressure because
of the decreased time to analyse the data, and many cannot handle the pressure or
the fast decision making process.

Don’t let these comments discourage you. It just means that some forms of trading
are not for everyone. As Dennis & Eckhart discovered with their experiment, that can
more frequently mean that the trading style some people are using does not suit
them or their psychological makeup. Many of these people still became successful
traders in their own right, by changing to a different trading system or style.

I relate trading to driving. Everyone basically goes through the same set of
instructions and training, but as we all know, when we are out on the major highways
with all the trucks, cars, and motorcycles, in order to avoid being crushed, we are
involved in a whole new ballgame. Some people should never be on the road, or
maybe they should only drive around suburban streets, because they are unable to
handle the speed of the decision making and 110 kph. Many of them are fine at
60kph (although there are still some who should not even be there). Then there are
many who aspire to achieve the competence to become a successful, skilled and

46
competent racing driver, then there are those who desire to - but will never achieve
this level of competence.

If you apply these same criteria to trading using monthly, weekly, daily and intraday
time frames, I am sure you will appreciate the analogy.

Continuation Trading

I find the real strength of continuation patterns to be in existing trends, and have
found them to be less reliable when used on a changing trend, unless there is a
confirmation of the trend change prior to the pattern break. Hence the bull run from
March 2003 to December 2007 proved to be a happy hunting ground for those
skilled in the use of these trading tools.

There are a number of continuation patterns, My own preference is for:

• Ascending, Descending Flags

• Ascending, Descending & Symmetrical Triangles
• Ascending, Descending Pennants (a triangle on a pole, like a flag)

We will explore the basics of these patterns and their application, and I hope to be
able to impart a basic knowledge and skill level which will allow you to be able to
take the base techniques and develop them to suit your own style, and to assist you
in making more profitable decisions in your trading.

There are a few different opinions regarding patterns and when the exit should be. I
have always preferred to not exit at the target, but to let my trailing stop do its work
and to let the price action run as far as it will, in order to exit on the pull back or
directional change.

Daryl Guppy did a lot of very good work on these patterns and has advocated exiting
at the pattern target. I believe he did this because, when he developed his
techniques, price action seldom went very far past the target before reversing.
During the late 1990’s and up to 2000, this was a reasonable strategy, but when I
look back, the method of letting the trailing stop do its work rather than exit at target,
really made a lot of difference to the overall result in most cases. One example of
these was a flag entry on Toll Holdings January 2001 at $11.30 ish and the price
went through to around $43.

I know several people are going to go and check this out and will see that the price
doesn’t reach anywhere near these figures, for these time frames. Toll had a share
split shortly after the peak price in 2002. I think it was in the vicinity of an 9:1 split,
which leaves the high of 2002 just below $5.00.

However, from 2001 onwards, exiting at the target would have cost people a lot of
profit, because these price directions continued, and didn’t change or pull back
dramatically as they had done during the previous 4 – 6 years. The market changed
again in 2003 and turned into the biggest Bull Run in living memory for most people,
thus target exits didn’t work very well.

47
Why do I point this out? It demonstrates that the market does change therefore the
successful trader needs to be able to recognise that a change has occurred and be
able to adapt to it.

I believe that the single biggest thing to remember when looking at patterns is –
“Price is the ultimate equaliser - and reigns supreme as the Ultimate King”.

A logical extension of ¨Price is King¨ is that ¨¨Volume is Queen¨ and they rule
together. Wherever you can get good volume, it is advantageous to learn to be able
to read volume as you learn to read Price Action.

Continuation patterns assist in the confirmation that the current price direction will
continue and then they give us a predetermined target for the price to reach. The
probability that this target will be reached can be very high.

We also need then to determine how these patterns can assist us in improving our
trading results, and we will be covering in detail how this happens in the section on
continuation patterns

Continuation patterns are also known as ‘mid-move consolidations’ - thereby

indicating that the current direction has a high probability of continuation. It is also
important to understand that the directional change confirmation needs to have
occurred already - otherwise the probability greatly decreases. It is also important to
understand these are consolidations, not retracements, of which more will be
covered below.

It is the term - mid move consolidations - which I believe probably confuses more
people than it does help people. Let us consider the three words – mid – move –
consolidation.

Mid move defines that there is already a move or a confirmed direction in price
action, and these patterns seem to work best after we have seen a confirmed
directional change, not when they are the change itself. To give an example, if a
pattern (flag, triangle, pennant) is identified after a trend change confirmation has
occurred, it seems to have a higher probability of success than if it is identified prior
to a trend change confirmation.

This gets back to the mid move part of the definition.

The other very important part of this is the “consolidation” part of the definition.
Consolidation, not temporary change of direction or retracement, so its stands to
reason here that we need to look at a definition of each of the following:

Consolidation - pause in price action

Retracement, Pull Back - Temporary change of direction

If we consider that a consolidation is a pause in price action and a retracement is a

temporary change of direction, it stands to reason again, that it should also be
relatively easy to determine the difference between the two.

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Consider, if you will, a cross country runner. Halfway through the run, he or she gets
to a large hill, and commences to run up this incline. About halfway to the top the
runner soon realises that they need to take a break and regain some energy.

Seeing a tree providing some shade, would you expect the runner to sit under the
tree and do nothing, to run around taking large strides like he was running the
course, or to take smaller, less frequent steps to retain his energy and get his
breathing under control?

The not so obvious answer to this is that he would walk around, keep moving but
more slowly in order to keep flexibility in his muscles, while taking time to regain his
composure before setting off again. It is this analogy which I believe gives us our first
clue in the identification of a consolidation.

We should then expect to see reduced range of movement (ROM - the range from
high to low) in the price bar, and/or reduced volume during this period in comparison
to the ROM & Volume on the run into the peak. Based upon results, it appears that
this is the start of consolidation identification.

In trading, retracement activity usually seems to be volume driven, and frequently

seems to have a larger range of movement - (ROM) than the run into the change.
We could relate this to the runner reaching the tree and stumbling, but instead of
falling, starts to take greater strides in order to regain balance.

The problem here is that the direction of this would be downhill prior to the stumble,
therefore has started to run downhill. It makes sense here that when he is running
downhill, the strides are larger than on the way uphill.

This melds in very well with our definitions so far regarding a consolidation being a
pause in price action rather than any change in direction, as the pause is much less
violent in nature than a retracement.

*** HINT***

If in doubt about whether a section of price action is a retracement or a

consolidation, place a 1 period Moving Average onto price, it makes things
quite a bit clearer

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Let us take some time look at and consider the following charts:

Chart 1

Would we call this a retracement or a consolidation, based on the previous

definition?

Has there been a reduction in the range of movement or a reduction in the volume or
an increase in either or both?

Has there been a pause in price action or has the price stumbled and the runner
tripped and is running out of control down the hill? Albeit temporarily.

Therefore is it a drive down (retracement / pullback) or a pause

Conversely, would we call this a consolidation or a retracement, based on the

previous definition?

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Chart 2

Has the range of movement and / or volume decreased?

Is this price action pausing or retracing

It all seems really obvious when we look from this perspective. However, in real life,
when we see the start of these formations, and we are anxiously waiting for
something which we want to see happening, emotion gets involved, and distorts our
version of reality.

I remember having an extensive discussion with a student back in 2006 over the
Chart 1 example, and she had a lot of trouble coming to grips with the definition. This
chart clearly has much greater range of movement than the average in the run into
the formation, whereas Chart 2 clearly demonstrates a pause in price action. Chart 1
has extended ROM, along with being a clear drive down in price action rather than a
pause.

I am going to include some charts for you to identify for yourself whether they are
consolidations or retracements. Following these exercises, I will give you my
identifications and reasons. Please take the time to complete these examples and
see how you go with this exercise for yourself.

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I trust you all enjoy the challenge with these charts and their identification. Good
luck.

In the next section we will start to get into specifics on individual pattern
identification, after we complete the general identifications common to all.

Pattern Exercises

Let's now go through some exercises based on what we covered so far.

Have a great time with these identifications and I look forward to any comments.

Please feel free to print these pages off and work on them.

I highly recommend that you draw lines all over them as many as necessary (you
can print them more than once).

The notes section allows you to record your reasoning and ideas.

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Chart 3

Notes

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Chart 4

Notes

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Chart 5

Notes

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Chart 6

Notes

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Chart 7

Notes

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Chart 8

Notes

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Chart 9

Notes

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59
Pattern Exercises - Suggested Answers
Lets now go through the exercises and though processes from the previous section

Chart 3

With Chart 3 we can clearly see that a directional change occurred in May 2005 and
an uptrend, which was confirmed in September 2005 by breaking through the
resistance level to give us a higher high. In addition, the higher low already in place,
has been in place since.

While this was technically an uptrend, it is not a strong one and the price action
really seems to be mostly wallowing along sideways. The resistance levels are not
very far apart. However, an interesting thing occurring here is the significant rises in
the low turning points, during this period.

This sort of price action demonstrates a compression effect within the action and
prepares the way for a possible consolidation.

Another observation we can make from here is that within the last compression, the
average range of movement (distance between the high and low of each bar) is
getting smaller, it is also compressing.

This is also another indicator we can use to assist in identifying consolidations and
therefore potential trading patterns. With this in mind and the distinct fall in late
volume, we are calling this a consolidation. The last volume bar being so large based

60
on the small ROM of the price bar. With the close at the high this indicates that a
breakout is close by

Chart 4

With Chart 4, we also have a directional change occurring in August 1999. It followed
by a significant fall in price action, significant support level occurring at around $7.63.
It wasn’t until January 2000, that the down trend was confirmed by the lower low
during the week ending 7th January.

The lower highs which occurred merely confirmed that price action was
compressing, indicating a possible consolidation. But it wasn’t until January that we
were able to confirm that the average range of movement had definitely decreased
and that this was more likely to develop into a probable consolidation, for the
purpose of trading.

With the significant support at $7.63, ROM reducing in addition to the late volume
decreasing, we are calling this a consolidation

I probably need to pause here for a moment and make what I believe to be an
important point. There are many patterns and formations, that have been identified
by a large number of people over the last 50 or so years. Many have been identified
by theoretical technical analysts who do not actually trade, but study technical
analysis.

61
As a result many of these formations have not been tested in the rigorous
environment called trading, by traders who have their hard earned money on the
line, where mistakes can, and frequently do, cost the trader money, sometimes
serious amounts of money.

I am not putting down these patterns or their credence as a theoretical subject, but
when looking to learn from anyone, the major question you need to ask yourself is –

“Do I want to learn from someone who has only studied the theory, or from
someone who has taken the theory, applied it in real time to the markets and
through continuous testing and refinement, proven them to work?”

There are also, many patterns which have been developed by traders and the
developers of these patterns apply a great deal of credence to them, such as V-Top,
V-Bottom, Cup & Saucer, and many others.

Many of these, I have not been able to make work to the same degree of probability
that I have with the patterns I am covering in this publication. This is not to say that
the patterns do not work. It may be as simple as myself not being able to correctly
identify them. May not have devoted enough time to testing, or I may not be able to
develop a set of acceptable confirmation parameters to apply which could give them
the same level of reliability as the ones I use.

Hence my use of the term for the purpose of trading, as opposed to the term, for
the purpose of study.

Again, I urge you to do your own testing and development. Don’t take what I, or
indeed any other author, have to say and blindly follow it. Please have a healthy
measure of scepticism and be prepared to – as I tell every student – give it your
best effort to attempt to prove me wrong. You will learn a lot more with this
mindset than scepticism - the knowledge growth occurs in the process of the
application to prove rather than dismiss.

62
Chart 5

With Chart 5, we can clearly see that directional change occurred in August 2006
and a strong drive up resulted in this change. We then see that price seemed to
change direction in September of 2006. We have a low turning point late in
September, followed by a rise in price, then a fall again beginning mid October. This
does not work with our definitions of either trend change or continuation patterns.

The question we need to ask here is: “Is this formation a consolidation, or a
retracement? This evolves into to the question - will it possibly form a pattern which I
can reliably identify and trade?".

There is no doubt that there is strong support at around $3.30. There is one low
turning point and two lows at that level, during which time price formed a new high
turning point. So we can assume that price action is compressing, is it forming a
consolidation?

It could be argued that the ROM (range of movement) has reduced, but if we look at
volume during this period, it has sustained or possibly increased.

Remembering that most retracements seem to be volume driven with sustained or

increased volume during the formation, is this more likely to be a retracement or a
consolidation, when looked at in conjunction with the fact that ROM has not reduced
a great deal.

63
A price compression does not necessarily equal a consolidation, therefore, every
compression we identify needs to be looked at in the context that this can be a
precursor but is not always an identifiable consolidation or pattern.

We are calling this retracement activity rather than consolidation.

Chart 6

With Chart 6 we can clearly see that there was an existing uptrend in place until end
of December 2005. Then the price action proceeded

to drift sideways incorporating a series of lower highs and higher lows as has been
illustrated.

This price action is definitely forming into a compression, but will it form a tradeable
pattern? Is it a consolidation?

We can also see that while there has been a reduction in the range of movement, it
did not occur until late in the compression and when we look at volume, it also has
remained high until late in the compression.

This late reduction in ROM and volume is a common trait for triangular patterns,
which we will go into in more detail when we start into individual pattern
identification. But bearing in mind this is a common trait, we can keep this formation
on our watchlist a little longer. This formation is a consolidation for trading purposes
and is forming a potential Symmetrical Triangle.

64
Chart 7

In Chart 7, we can clearly see an uptrend in place from the low turning point in
January 200 until the peak of price in early May 2008. Apart from the 2 weeks
leading into the peak of week ending 9th May, the ROM of the weekly bars was quite
small compared to all that came after the week ending 25th April 2008.

What is also apparent from the price action is that the price has changed direction
and has formed a downtrend, as is evidenced by the successive low highs and lower
lows.

This price action is neither a consolidation nor a retracement, it is a directional

change which has become a downward trend and is heavily supported by volume.

There is no way that this is a continuation pattern, of the type we are discussing
here, for the purposes of trading and making a profit.

65
Chart 8

With Chart 8, we can see an extended run up in price to the peak in May 2006. But
what happened after this is a retracement or pull back in price. The price has just
driven down, and this is supported by sustained volume during this period.

There is no pause in price action, there is no compression of price action, there is

just a change of direction, and therefore cannot be considered as a continuation
pattern or "Mid Move Consolidation".

66
Chart 9

Chart 9 is a relatively easy retracement to identify. A very clear change of direction, a

significant drive down in price and when we look at volume this was also sustained.

While the range of movement has actually decreased during the fall in price, this is a
straight drive down in price and is not a consolidation nor even a compression. It is a
classic retracement.

67
Effective Pattern Identification in Real Time
Now we are getting towards the business end of this identification process for what is
undoubtedly, for many, one of the most profitable trading techniques of all during
long (time wise) trends.

Why would I say that? Unlike many other techniques, continuation patterns work
equally well whether prices are going up or down - commonly called going long or
going short.

Therefore, because the combined trending time going up plus going down is longer
than the time they go sideways, the informed and practiced trader is presented with
more pattern entry opportunities than many other entry techniques.

During the Bull run from March 2003 to December 2007, I experienced
approximately 10 pattern entry opportunities to every trend change opportunity. Now
while this seems logical in hindsight, it wasn’t until late 2005, early 2006 that it was
realised that we were in the biggest Bull run, in Australia anyway, since the run into
1987.

During November & December 2007, there were a large number of directional
change (Trend Change) entries which presented themselves. However, since
December 2007, these continuation patterns have also presented a large number of
entry opportunities, during the downward run, and have continued to do so since the
market changed direction again in March of 2009.

At the risk of repeating myself, I think it important here to re-state a view I have long
had, which is also backed by many successful traders –
Price reigns
Supreme – indicators are confirmation tools only.
The share price itself will tell you everything you need to know about when to get in
and when to get out – too many people look for the latest, "you beaut, you can’t
bend it" indicator with a 100% success rate.

Please do not fall into this trap. It is an easy one to fall into. Why is this? The answer
is twofold and simple - firstly the above described indicator (if it exists) will only work
until the market changes (anything approaching this accuracy is extremely,
highly specific in nature - by definition) and will not be of any further use -
secondly it means that we don’t then have the necessary skill sets to be able to
adapt to whatever the markets change to, or throws at us. This then means that we
will have a short-lived trading life.

Let us consider what indicators actually are in comparison to Price Action: With Price
Action you have multiple pieces of information – Forex has 4 (Open, High, Low &
Close) – if you also have access to the Futures Contract Data – you can raise this to

68
6 pieces of information (Volume & Open Interest), Equities have 5 (Open, High, Low,
Close & Volume), Futures has 6 (Open, High, Low, Close, Volume & Open Interest).

This means that within Price Action there are 4 - 6 pieces of information available
within your Raw Data given by price action.

ALL Indicators are a mathematical manipulation of usually 1 or 2 pieces of that

information. Moving Averages are a manipulation of (usually) closes. RSI is a
manipulation of closes expressed as a percentage, Stochastic is a manipulation of
closes compared to Highs and lows expressed as a percentage

ALL indicators are mathematical manipulations.

I will ask the question – How can a manipulation of part of the data tell
you more than the complete set of Raw data?
Answer is – it cannot.

This is never more true than with continuation patterns. Price is what tells you
whether it is a continuation pattern or retracement. Price tells you when to get in and
when to get out.

Now we have established that price action reigns supreme, let us look at
how we can utilise what we have covered so far – what does a pattern actually tell
us? It tells us which direction the price is expected to travel and gives us a minimum
destination point or target for the price to reach.

Research has shown that a continuation pattern, as discussed in this chapter, has a
probability of directional continuation in excess of 70% (sometimes as high as 80%)
once that direction has been confirmed.

When the breakout has occurred the probability of these patterns reaching their
defined target can be in excess of 85%.

In other words, once a correctly identified pattern has broken out in the expected
direction, there could be a 85% or greater probability that it will reach the target price
level, giving us a minimum profit to expect

Furthermore, experience tells me that of the remaining 15% that do not reach their
targets, we can expect to exit with a profit on approximately 50% of these. Therefore,
the potential to make profitable trades can be in excess of 92% regardless of
whether the target is reached or not.

This is very exciting news as we not only know the intended direction, but also the
distance to be travelled or in other words, the minimum expected profit from the
transaction. This aids us enormously as it then tells us immediately, with a very high
probability - greater than or equal to 85% potential and we need to calculate what

69
reward to risk we are likely to achieve should we enter the transaction. In addition to
the above, it is also telling us that we can probably achieve an exit with a profit, in
excess of 92% of the time, even of the price does not achieve target.

Many of the novice traders amongst us are, at this stage wondering why we should
be excited by this. Many are not aware of what good risk management strategies
mean or how they are an integral part of their survival as a trader.

Let me digress for a moment.

Reward : Risk

If you were to risk $1.00 per share on a transaction ($1.00 being the difference
between your entry figure and your Stop Loss – otherwise known as Trade Risk per
share) – would you like to see a potential return of $1.00?

Or would you like to see a potential return of $2.00 per share for each $1.00 risked?

Or would you like to see a potential return of $3.00 per share for every $1.00 risked?

Or would the potential return which you would like to see, be linked to whether the
company involved was a blue chip, midcap or speculative company?

Personally, I like to see a potential return as follows:

For Equities

Blue Chip 2:1

Mid Cap 3:1

Speculative 5:1

For Forex & Futures

Minimum 1.5:1

Preferable 2:1 plus

For Patterns

Triangles 1.5:1 plus

Flags 1.5:1 plus

Pennants 1.5:1 plus

The major advantage with continuation patterns in regard to risk management is that
they immediately show you what you R:R (reward to risk ratio) is expected to be,
therefore allowing greater flexibility in decision making.

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I will go into this in greater detail in later chapters, but I was taught to take into
consideration, several risk management parameters, by my mentor Rob Lennox to
whom I owe a great deal for all the extra time, effort and energy he put into me while
I was a student under him learning, essentially, from scratch.

The basic risk management parameters Rob taught then were, in combination:

Capital Exposure – how much capital exposed to a single trade

Capital Allocation – the amount of your capital exposed to Blue Chip – Mid
Cap – Speculative

2% rule – Max of 2% of capital exposed as a trade risk on an individual

transaction

Reward to Risk ratio parameters

These guidelines have stood both myself, and my fellow students who followed
them, in very good stead since the year 2000 – Thanks Rob.

Getting back on track – the target allows us to pre plan, with great accuracy, more so
that directional change trades, our R:R and therefore confirm whether the trade is
viable.

Let's get more specific.

Pattern identification guidelines:

All continuation patterns need to firstly be identified by the formation being a

consolidation. After that we get more specific for each type of pattern.

Flag: Ascending

Descending

Triangle: Ascending

Symmetrical

Descending

Pennants: Ascending Right Angle

Symmetrical

71
 Descending

Right Angle

Symmetrical

With flags, we need to be able to place a pair of parallel lines around the
consolidation (we will call these – momentum lines), with at least 2 touches on
each of the lines. The upper momentum line needs to be drawn very, very
accurately to ensure highest probability factor.

The lower momentum line can be a line of best fit, but it needs to have very little
overlap and underlap, which will make more sense with a practical example

In the case of flags, the target is determined in the following way. The distance
(price difference) between the beginning of the run into the consolidation to the
peak of price action, is applied to the lowest point contained within the
consolidation and projected in the same direction as the run into the
consolidation.

This will make more sense when we delve into the practical examples and show
you the targets in real time application.

Market Analyst has a great tool to help determine these targets and this is the
Price Extensions tool under the “Levels” section in “Tools”.

We shall start here with Flags:

With a flag we need to picture what a flag pole with a flag at the top looks like.

There is a run upwards in the price action, with a consolidation at the top which is
rectangular, and stands out from the pole, I have drawn several examples of this
in the following chart.

72
In this chart - example A, we see the shape we would actually expect to see with
a real flag pole and a flag outside, in the real world, with a moderate wind
blowing,

Because price action does not normally travel vertically or horizontally, we must
adapt this visually to the reality of normal price action, so what we see in the next
three examples are the reality of what we need to be able to read on our screens.

With a flag formation, examples B & C are what we are expecting to see in the
real world of charts.

There is a decisive run upward, followed by a consolidation in the price action.

Figures B & C demonstrate this. The consolidation can be either horizontal or in
the opposite direction to the run into it – it CANNOT be in the same direction as
the run into it (as D depicts).

Let us go back to our definition – there is a decisive run upward followed by a

consolidation – plus the target is “The distance (price difference) between the
beginning of the run into the consolidation to the peak of price action, is applied
to the lowest point contained within the consolidation”.

The figure D on the right side of the example does not have a consolidation – it
has a slow down in price action. This slow down in price action does however
frequently precede a change in direction and is a dangerous piece of price action
to trade. This is indicative of a weakening of the direction.

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Also, there is no way in which to determine the target – if it was a flag, as there is
no peak in price action yet, until it changes direction. I have seen some people,
with misinterpreted identification rules, use the illustration on the right only to fail
and lose money in most instances - BEWARE THE EXAMPLE on the right.

These patterns work equally well in either direction- going up or down and as
such give us many more opportunities in trending markets.

We are going to look at a potential flag formation as it forms in real time, with real
price bars. Then we will apply the target identification to it and determine whether
it reached its target or not.

Chart 2 from the list above is the company we will look at in this illustration.

We can see that Supercheap changed direction in June 2006, and then had a
strong upward run, with a couple of pauses during that run.

Is this pause another of what we saw earlier in August and September?

Time will tell.

The first thing we need to look at is whether we can apply our parallel lines
around the pause at the top of the upward run. The current answer is yes we can.

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We can see here that there is a little under and overlap on the lower momentum
line - this is an example of a line of best fit and this is acceptable for this
formation.

We can also see that the average ROM (Range of Movement of a Bar) within the
formation is lower than the average ROM during the run into the peak.

What do we do with this chart now. If we believe this is actually a flag we need to
plot targets, determine risk management parameters and providing all is well,
place a conditional order for entry should the price break out during the next
period.

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First thing we need to do is apply our market noise parameters to determine entry
and stop loss positions, then calculate our Trade Risk per share, then determine the
target level. The trade risk per share should be relative to the normal ROM of the
share price being examined, in this case we are using an entry – stop spread of
around 5% or around $0.14

The run starts at $1.461 and goes through to $2.686 before consolidating, giving a
pole of $1.235 in length. The lowest price inside the consolidation is $2.488. So
when we apply $1.235 to the low, our target price becomes $3.723, which is off the
top of the screen in this case. But this shows us a very high R:R potential.

A lot of people are unaware of the concept of Market Noise. This goes back to the
concept of needing to see a ¨Significant Penetration¨ of the Price boundary prior to
entry, in order to not be stopped out by a false break.

The prime part of this concept is the designation of the term ¨Significant¨ - how do we
define that amount of zone above / below the boundary in order to eliminate - if
possible – entry from false break.

Initially traders looked to the Market to define this for them – the defined size of the
term ¨Significant¨ was determined to be what the market showed us, that price could
penetrate the boundary and then retrace, thus the market itself defined that amount.

76
This is a time consuming process as the trader needs to research each individual
instrument and calculate this zone for each instrument.

Numerous ideas were promoted to save this time and effort and allow the trader to
be able to utilise that time to trade a larger range of instruments.

Up until the end of 2006, I was a fan of using a % of the value of price action, as I
was mainly working with ASX top 300 Equities and the amount I was using had
proven statistically viable and reliable.

During 2007 and since, Volatility caught up with and swamped this technique, so a
methodology of determining Market Noise that was more relevant to the actual price
action of each instrument at whatever level of volatility was required.

To this end I, personally favoured a multiple of Average True Range (ATR) as this
was by its very definition applicable to the current price action and was also
applicable to and varied with each individual instrument regardless of type, Equities,
Forex, Futures.

Welles Wilder was very fond of using 14 periods with the development of each of his
indicators and all of them have this as their default periods. I have been unable to
determine why he chose 14, as it seems random. On monthly it is in excess of 1
year, but not 2, on weekly it is in excess of 2 months but not 3, on daily it is in excess
of 2 weeks but not quite 3, on H4 it is in excess of 2 days, but not 3, on H1 it is in
excess of half a day, but not 1, on M30 it is 7 hrs, on M15 it is 2.25 etc..

So do we go with the default or test it at a different value. Personally, I chose 13 as

the default periods for ATR. This was for no good reason other than it is a Fibonacci
number and therefore seems to have more relativity to price than 14 which seems to
be arbitrary.

77
Using the vertical line function, we can see where the breakout, if it happens next
period, will provide our entry. I do believe in calculating this exactly, as I have seen
some very large discrepancies based on the use of cursors and the assumption that
the line was correctly drawn exactly where it should have been.

In this case the entry, should it occur next period will be set at $2.84.

R:R:R for this would be 6.29:1

As we can see in the next chart, our price penetrated the upper momentum line, but
not the entry price. We now have to relocate our upper and lower momentum lines to
keep to our identification criteria, as shown below.

Sometimes at this point, we cannot get a parallel lower momentum line to work
properly with minimal under & overlap – should this be the case, be prepared to
discard this as a trading pattern. Observation indicates that at this time the pattern is
no longer viable within the same probabilities which we have come to expect.

It may be as simple as us being too enthusiastic initially and identifying something

which wasn’t really there – but desperation, self confidence, enthusiasm – made us
see things which weren’t there in the first place. I know that I have been guilty of this
same thing in the past.

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This period our entry price is set at $2.83, with our stop at $2.70, which gives us a
R:R:R of 6.84:1

So what does next week bring?

More disappointment as our price action failed to hit our entry - damn this stuff is
getting frustrating isn’t it?

Or is it? For every period our price action does not hit our entry price, the entry price
falls. The question we need to ask here is, what has happened to our target price,
has it fallen, or is it still the same?

The fact is that because we have not had a lower low within the pattern the target
has not changed and every period that our entry price falls without being triggered is
increasing the distance between our entry and the target, allowing us to expect a
higher R:R:R and importantly higher amount of profit.

79
There is no need to worry yet, what happens next period????

80
Hooray, our entry is triggered, we are in the trade and expecting to reach our target
of $3.723 from our entry price of $2.66. This should show us a profit of $1.063 per
share, thank you very much.

This is a R:R:R of - 8.18:1

Go you good thing gooooo......

Let us jump a few periods ahead to see what actually happened after the entry.

Chart 2

Chart 2 reached its target in 10 periods. We would have made $1.063 profit from a
$2.66 entry or 39.96% profit from our entry price and outlay if we bought the shares
themselves. If we had used the CFD however we would have made approximately
400% on our outlay.

Our trailing stop loss exited this position several periods later at around the target
price.

This is not a normal profit to be expected from a pattern entry. Reality needs to step
in here and bring us back to earth. This was a continuation pattern entry during a
time that was to become the biggest Bull Run in living memory for most of us – these

81
were exceptional circumstances and should not be expected to continue to be
repeated within the near future.

Make no mistake, however, these sorts of situations will repeat themselves. Markets
have cycles. They have booms and busts, and those who do the work now, who are
consistently accurate in their determinations, who spend the time necessary to
become very proficient in the use and application of these, and other techniques, will
be in the best position to make large profits from these situations as they arise in the
future.

My own experience has shown that with patterns, when they are correctly identified,
they usually reach their targets within 10 periods, the normal profit seems to fall into
the 17 – 22% range per transaction as an average.

The R:R:R on this seems to be regularly within the 4.5:1 to 7:1 range.

There is nothing wrong with these figures and they are very good if you are able to
consistently identify continuation patterns in excess of 80% of the time. Let us also
bear in mind, that even those patterns which do not reach their targets, still give you
an opportunity to make a profit.

Imagine with Supercheap, if it only reached $3.50 and then fell away, an effective
trailing stop would have locked in some profit, albeit not as much as we ended up
with, but still a good profit.

Continuation patterns are a highly reliable, very profitable entry technique.

I know that many out there would have looked at the exercises which I left you with
earlier in this chapter, and thought to themselves that – “this does not apply to me”,
or “I already know how to identify consolidations”, or “I am not going to participate in
childish exercises” or some of many other thoughts which constantly appear when
faced with this type of exercise.

Let's see who gets the trading patterns correct and who mis identifies them and
discards them

I have, over many years of being involved in education in this industry, come across
all of these thought processes, in fact I thought some of them myself when I was first
learning, including “Let’s get over this crap, show me the real stuff”.

When I first embarked upon the education route in this industry, my mentor told me
that I needed to ignore these comments and attitudes as they appear. This is
because it probably means that you (meaning I as the ecducator) had failed to
effectively communicate the importance of these exercises to all of the people in
front of me. When hearing these things, I should re examine how I have presented
these thoughts and do what I can to improve the communication.

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So for all of you who did not understand the importance of identifying some of the
nuances which help identify the differences between consolidations and
retracements, I do apologise for my inadequate communication, if that was the issue.

What everyone reading this section of this chapter needs to keep in mind is that
these are based on my own personal experiences, study, input from many years of
practical trading. They are all of this, followed by thousands of hours of refinement of
the techniques, identification criteria. All of this has had to be adapted as the market
changes character, and identifying some very specific criteria which can help to
make these trading techniques very highly relaible.

A favourite quote of mine is a quote from a book called "Good to Great", by Jim
Collins. When he was at university, his favourite professor told the group of students
– “The best students are those who never quite believe their professors totally, but
they should not reject the data merely because they do not like what the data
implies”. I suggest you set out to prove it wrong rather than dismiss it.

Following on from that comment I would challenge anyone reading this to attempt to
prove me wrong - this attitude will then assist in the learning cycle with these
techniques.

Another favourite comment is from Sir Arthur Connan Doyle's character - Sherlock
Holmes "When you eliminate the impossible, whatever is left, no matter how
improbable - must be the truth"

So with that in mind, I would urge you all to take whatever you can from this chapter,
not just this – but all in the series of publication and attempt to prove them wrong, but
all the while keep in mind that we do need to accept what the data are consistently
telling you.

Why would I say that, Because if you approach any exercise like this with the
mindset of trying to prove it wrong, you are not just blindly following, as many do.
You are approaching the subject with an open mind, willing to look at data from
different angles and in this state, you are more likely to develop your own consistent
trading style and refine techniques to suit your own methodologies.

83
Trading Patterns from the exercises
Let us now have a look at each of the identified consolidations and the results of
these consolidations. Which ones actually were patterns which were profitable?

Chart 2 as we have seen, broke out of the formation and achieved its target in 10
weeks.

Chart 3

Chart 3 broke out of an Ascending Triangle at approximately $2.92. The price

reached its Primary Target in around 9 periods, the secondary target in 15 periods
and the tertiary target 17 periods.

Chart 3 eventually exited at around $3.50 or approximately 20% profit on the position
for a trade on the shares or 200% of your outlay on the CFD's.

Around $0.75 per share profit was a R:R:R of – 5.37:1 which is very good from an
Ascending Triangle

84
Chart 4

Chart 4 changed direction in August 1999 and then formed a huge consolidation,
which was a descending triangle after the run down. This formation is a descending
pennant (a pennant is a triangle on a pole).

The price action then broke out of this pattern at the beginning of February 2000 and
achieved its target 2 periods later.

The exit for this entry was around $6.70 several periods later. That is approximately
10% profit on the position if trading the shares or around 100% on the outlay for the
CFD's.

R:R:R was approximately – 1.97:1

85
Chart 6

Chart 6 formed a large Symmetrical Triangle which took 36 periods to form and
breakout. It then broke out in mid August 2006. Chart 6 reached its target in 3
periods and continued in the upward direction.

What many people missed however was the second pattern which formed within 10
periods of the original breakout. This second pattern was an Ascending Pennant

86
The ascending pennant entry reached its initial target within 7 periods and continued
upward for the next 33 periods

The first entry off the symmetrical triangle was $6.64 with the exit at approximately
$11.81. Profit from the share trade was about $5.17 or approximately 78% on the
share trade or 780% on the outlay for the CFD trade.

The Symmetrical Triangle exited exceeding target 5 (5 x the original target distance)
level and exited with a R:R:R – 16.15:1

The entry from the ascending pennant was at $8.38 and the exit was $11.81. Profit
was approximately $3.43 or about 41% on the share trade and approximately 410%
on the CFD trade

The Ascending Pennant exited exceeding target 2 level with a R:R:R – 8.16:1

Many people do not know to look for additional entries after they have taken a
position in a particular instrument. Many times when the market is trending strongly,
you can take additional positions.

During the run from March 2003 till end 2007 there were many companies in which I
had multiple positions, and also on US markets from early 2013 until the end of
2013. In fact I had three individual open positions in Rockwell Automotive (New York

87
Stock Exchange) coming into the end of 2013. These positions all revealed and
confirmed themselves over the period of about 34 periods.

This technique is called pyramiding into the same instrument and is quite common
amongst experienced traders.

88
 "Secrets of Trading Patterns"
Living The Laptop Lifestyle

Trading Continuation Patterns for Profit

This is where ¨The rubber meets the road¨

So now that we know how to identify consolidations from retracements, we now need
to study how we make use of this information, identify which consolidations to place
orders on and how we can make a profit from this effective trading methods.

What we will do now is to cover the basic rules for correct identification of these
patterns. We shall cover each pattern type as there are specific differences
differentiating each pattern.

Basic Rules

• Identify the pattern

• Identify the target
• Identify the pattern confirmation
• Once the pattern has been confirmed trade continuation entries in the
direction of the target
• Ignore directional change entries prior to the price reaching the target

Triangles:

Triangles are the most specific of the trading patterns in that they have the most
rules regarding their confirmation or the need to adjust the momentum lines during
formation of the pattern.

Triangular patterns need to be drawn as accurately as possible as frequently during

the formation price action will slightly penetrate the momentum line, requiring the
momentum line to be redrawn to fit the new parameters.

All triangular shapes have a base, an upper momentum line and a lower momentum
line. The base is on the left side of the pattern and the formation to the right is the
pattern formation.

89
Triangle types, their definitions and directions

The 3 different types of Triangles are:

Symmetrical Triangle

Ascending Triangle

Descending Triangle

All of these triangles must be born of sideways price action. If there is a direct run of
price action into the formation, these patterns become pennants and some different
rules apply. We shall cover this later in this section.

Symmetrical Triangle

Symmetrical triangles have sloping upper and lower momentum lines. The upper
momentum line slopes down and the lower momentum line slopes upwards, at some
time in the future these two lines will meet and complete the triangular shape.

These momentum lines are drawn when there are multiple touches of highs of price
bars on the upper momentum line and where there are multiple touches of the lower
momentum line. The two lines are converging towards each other.

The breakout of the symmetrical triangle can be either upwards or downwards and
therefore once identified, it can be advantageous to have a trading platform which
will allow you to go short and to also have OCO (One Cancels Other) orders. These
are mostly found on CFD platforms such as Saxo Bank

This gives you the opportunity to place a long and a short order so that when one
executes, the other order is cancelled.

The symmetrical triangle is the only triangle that is allowed to break in either
direction.

We can clearly see below that this symmetrical triangle was initially identified, but as
the development progressed, we had slight penetrations of the upper and lower
momentum lines. Each of these penetrations, where there was no close outside the
momentum lines, required a redrawing of the triangle.

The major reason for this constant redrawing is because the breakout point
compared to the overall length of the pattern greatly influences the reliability of the
triangular pattern.

We can see below what has happened as a result of the formation of this triangle
and its development over of nearly 40 periods.
90
Chart 6

The following few charts show the development of this large Triangular Pattern

Original Triangular Identification of the pattern

91
We now have a slight penetration of the lower momentum line with the close well
back into the formation, we need to redraw the pattern to the price extremities

92
Again, we have a penetration of the momentum line with close well back into the
formation and need to redraw the pattern to fit the price action

Another penetration of the momentum line with the close well back into the formation
and need to redraw the pattern.

93
Finally, breakout is achieved

This process is common with Triangular Patterns. If they penetrate the sloping
momentum lines and then retreat back into the formation, redraw them. If they
penetrate the horizontal momentum line and close back inside the formation, the
pattern cannot be redrawn and is invalidated and disregarded.

Based on my research, the ideal breakout of a triangular pattern is 65% - 80% of the
pattern length. Within this range, these patterns have their highest probability -
around 90% of the time they will reach their targets.

By entering on a breakout in the 60% - 65% and 80% - 85% ranges seems to drop
this probability to around 70% - 75% of entries making a profit.

The research also indicates breakouts at less than 50% or in excess of 90% of
pattern length have a probability of less than 50% of making a profit. These ratios
apply to all three triangular patterns (symmetrical, ascending & descending patterns).

We can also clearly see a definitive wave motion in the price action. This wave
motion is the confirmation of the pattern. If unsure about the wave motion of the price
action, change the time frame to the next time down, weekly down to daily etc. If
there is wave motion on the lower time frame, this is also the confirmation tool for
these patterns.

Below, we can quite clearly see definitive wave motion in the price action in the daily
charts. Both of these patterns fulfil all the identification criteria:

• Essentially Sideways price movement

94
 • Triangular shape
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75% of pattern length

Invalidation
The Symmetrical triangle can legitimately break in either direction, therefore there is
no real invalidation for this pattern

Chart 6 (continued)

Weekly

95
Daily

Ascending Triangle

In chart 6 - with the ascending triangle, we have an upper momentum line which is
horizontal and lower momentum line which is rising from left to right. The Horizontal
momentum line is the upper line and the triangle is created as the price action
compresses into the horizontal line.

The lower momentum line must be drawn very accurately across the rising lows
because it is this line which determines the length of the pattern, and the breakout
percentages and probabilities apply across this pattern as well as the symmetrical
triangle.

The technique I have found to more accurately draw the lower momentum line in
patterns like this below is to draw the line across the appropriate lows only and then
extend it to left until it runs into a price bar. Then extend right until it runs into the
upper momentum line.

This technique has made it much easier for me to be as accurate as we need to be.

As we can see below, the price movement, while essentially sideways, does have an
upward bias, therefore as a continuation pattern, we are expecting the price to break
upwards.

96
The price must break upwards through the horizontal momentum line in order for this
to be an ascending triangle.

Below, we can quite clearly see definitive wave motion in the price action in the
weekly chart and therefore do not need to go to the daily chart to fulfil all the
identification criteria:

• Essentially Sideways price movement

• Triangular shape
• Price action compressing into the upper momentum line
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75 - 80% of pattern length

Invalidation
If the price breaks through the ascending momentum line, then the pattern is
invalidated and no longer exists.

Chart 3

We can also clearly see a definitive wave motion in the price action - this wave
motion is the confirmation of the pattern. If unsure about the wave motion of the price

97
action, change the time frame to the next time down (weekly down to daily etc). If
there is wave motion on the lower time frame, this is also the confirmation tool for
these patterns.

Descending Triangle

Chart 5

With the descending triangle, we have an upper momentum line which slopes
downwards, falling from left to right. The Horizontal momentum line is the lower line
and the triangle is created as the price action compresses into the horizontal line.

The lower momentum line must be drawn very accurately across the falling highs
because it is this line which determines the length of the pattern. The breakout
percentages and probabilities apply across this pattern as well as the Symmetrical
triangle.

The technique I have found to more accurately draw the upper momentum line in
patterns like this below is to draw the line across the appropriate highs only and then
extend it to left until it runs into a price bar, and extend right until it runs into the lower
momentum line.

This technique has made it much easier for me to be as accurate as we need to be.

As we can see above, the price movement, while essentially sideways, does have a
downward bias, therefore as a continuation pattern, we are expecting the price to
break downwards.

98
The price must break downwards through the horizontal momentum line in order for
this to be a descending triangle.

Above, we can quite clearly see definitive wave motion in the price action in the
weekly chart and therefore do not need to go to the daily chart to fulfil all the
identification criteria:

• Essentially Sideways price movement

• Triangular shape
• Price action compressing into the lower momentum line
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75 - 80% of pattern length

Invalidation
If the price breaks through the descending momentum line, then the pattern is
invalidated and no longer exists.

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Target definitions

All of the examples used in this section have been discussed earlier in this
publication during our practical exercises section and in the consolidation definition
section.

Please refer back to these sections for further clarification if it is required. What we
are doing here is showing the practical application of the defined targets for each of
these triangles.

For triangular patterns, we take the height of the base, and apply this distance to the
point of breakout in order to determine the target for this formation.

Symmetrical Triangle

Chart 6

The vertical height of the base of the triangle is added to the price at breakout to
determine the target value, this applies to symmetrical, ascending and descending
triangles.

In the example above, we can see that the height of the base of the symmetrical
triangle is $1.01. We then apply this height to the value of the upper momentum line

100
(which is recalculated each week) at the point of breakout. The target then becomes
$7.47 in this instance.

This then offers us a potential $1.01 in profit or about 16% on our outlay for shares
or around 150% on our outlay for the CFD's

Ascending Triangle

The vertical height of the base of the triangle is added to the price at breakout to
determine the target value, this applies to symmetrical, ascending and descending
triangles.

In the example below, we can see that the height of the base of the ascending
triangle is $0.32. We then apply this height to the value of the upper momentum line
at the point of breakout. The target then becomes $3.17 in this instance.

This offers us a potential $0.32 in profit or about 11% on our outlay for shares or
around 100% on our outlay for the CFD's.

Chart 3

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Descending Triangle

The vertical height of the base of the triangle is added to the price at breakout to
determine the target value. This applies to symmetrical, ascending and descending
triangles.

In the example below, we can see that the height of the base of the descending
triangle is $1.88. We then apply this height to the value of the lower momentum line
at the point of breakout. The target then becomes $6.75 in this instance.

This then offers us a potential $1.88 in profit or about 25% on our outlay for shares
or around 250% on our outlay for the CFD's.

Chart 5

102
Flags & Pennants:

Flags and Pennants are formed when price action has a strong direction and then
consolidates prior to continuing in the original direction of movement.

These patterns are known as "Mid move Consolidations" and "Continuation

Patterns". Both of these terms indicate that the original price direction is probably
going to be continued and that this is merely a pause in price action.

Flags are formed when the consolidation allows us to place parallel lines around the
consolidation prior to breaking out and driving on.

Pennants are formed in a similar manner to Flags. The difference is that the
consolidation is triangular in shape.

Flags and Pennants have demonstrated that they are equally reliable in both upward
and downward price direction. Going long or short with these patterns is equally
reliable.

Flag on Chart 2

We can clearly see that there has been a strong run up in price action and this is
followed by a consolidation, around which we can place parallel lines. This looks like
a flag on a pole.

• Good run into the consolidation

• Parallel lines contain the formation

103
 • Price action compressing into the lower momentum line
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75 - 80% of pattern length

Invalidation
If the price breaks out of the formation against the original direction coming not the
formation – the pattern is Invalidated and no longer exists

Chart 10 - Flag on the short side

If you are having difficulty identifying these patterns in a falling market, most charting
programs have a function which will invert the chart. Many have found this inversion
technique a huge benefit in identification if you are not used to looking for short
opportunities.

We can see the parallel lines around price action in the chart above. We can also
clearly see the wave motion in the price action which is our confirmation for this
pattern forming.

104
Part of the definition is that the price needs to remain contained within the parallel
lines until the breakout in the original direction. A price break in the opposite direction
destroys this formation as a trading pattern.

Above we can also see the price action forming with parallel lines. The possible
issue with this formation is that the consolidation is only 2 weekly bars and we
cannot see any wave motion in the action because of the lack of time in the
formation so far.

In a situation such as this, a 2 bar flag is quite legitimate, providing the price action
demonstrates good wave motion when we change the time frame down one level (in
this instance, from weekly to daily). If you are looking at daily charts, then the next
level down should be a 4 hr chart.

As we can clearly see below, this wave motion in the price is readily identifiable and
quite clear.

• Good run into the consolidation

• Parallel lines containing the formation
• Price action compressing into the lower momentum line
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75 - 80% of pattern length

105
Pennants

Pennant formations are either ascending, descending or symmetrical triangles

forming after a clear drive in price action.

There are a couple of guidelines with pennants which are different from flags. In an
upward direction we can see ascending and symmetrical triangles forming on the
pole and in a downward direction we can see descending and symmetrical triangles
forming on the pole.

A descending triangular pattern forming in an upward direction is not a trading

pattern. Nor is an ascending triangle forming in a downward direction a trading
pattern.

This makes sense when we think it through. The price is compressing into the
horizontal line on each of these formations, and the breakout of these patterns is
through this horizontal line.

With the above descriptions, the breakout through the horizontal line would then be a
directional change, not a continuation of the current direction.

The price needs to remain contained within the triangular shape until the breakout in
the current direction.

In the case of an ascending or symmetrical triangle on a pole, if the price breaks

downwards through the sloping line, delete this line and continue to observe this
formation for the next few periods. The reason for this is that the formation may well
develop into a flag where you can place parallel lines around the price action and the
formation changes from Pennant to Flag.

Pennants can change to flags – they are the only pattern that can change to another

106
Chart 6

We can clearly see the triangular shape during the formation of this Pennant.
However there is no clear wave motion in the price action. If we change the time
frame from weekly to daily, as below, we can clearly see the wave motion in the daily
price action.

107
Chart 6

• Good run into the consolidation

• Ascending Triangular shape
• Price action compressing into the upper momentum line
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75 - 80% of pattern length

Invalidation
If the price breaks out of the formation against the original direction coming into the
formation, it will be invalidated, providing the break is a sufficient distance.

Triangular Pennants can break against the formation direction and frequently form
into a flag with 2 parallel lines instead of 2 converging lines (triangular shape).

If the price breaks too far to be able to form a flag – then – the pennant formation is
invalidated and no longer exists

108
The wave motion above is our confirmation that the pattern is valid and that we
should grab the breakout with both hands and hang on for the ride, when it occurs.

As we can see below, the descending triangle on the downward pole shows us that
this price direction is probably going to continue and we are going to be presented
with an opportunity to jump on board when the breakout occurs and make a
profitable trade.

• Good run into the consolidation

• Descending Triangular shape
• Price action compressing into the lower momentum line
• Range of Movement reducing during formation of pattern
• Volume reducing during the formation of pattern
• Strong wave motion in the price action
• Breakout at around 75 - 80% of pattern length

Chart 4

109
Target definitions

All of the examples used in this section have been discussed earlier in this
publication during our practical exercises section and in the consolidation definition
section.

Please refer back to these sections for further clarification if it is required, what we
are doing here is showing the practical application of the defined targets for each of
these triangles.

For flag and pennant patterns, we take the height of the run into the consolidation,
from the commencement of the run, to the peak of the pole, and apply this distance
to the point of price action within the formation which is further most from the
expected breakout point in order to determine the target for this formation.

Chart 2

We have a clear run into the consolidation, a good breakout and the price drove
upwards and reached the target in 10 periods. This seems to be a consistent time
frame for reaching the target - normally 10 period or less.

With this chart we can see the target is $3.686 and the entry is around $2.60. The
exit however was $3.99 giving us a return on outlay of around $1.40. This translates

110
into approximately 54% return on the shares or approximately 540% return on our
outlay for the CFD's.

R:R:R for this was 10.77 :1

Chart 10

We have a clear run into the consolidation, a good breakout and the price drove
downwards and reached the target in 10 periods. This seems to be a consistent time
frame for reaching the target, normally 10 periods or less.

With this chart we can see the target is $32.74 and the entry is around $37.97. The
exit however was $30 giving us a return on outlay of around $7.97. This translates
into approximately 200% return on our outlay for the CFD's.

R:R:R for this was 4.08:1

111
Chart 6

We have a clear run into the consolidation, a good breakout and the price drove
upwards and reached the target in 8 periods. This seems to be a consistent time
frame for reaching the target, normally 10 periods or less.

With this chart we can see the target is $9.60 and the entry is around $8.25. The exit
however was approximately $11.81 giving us a return on outlay of around $3.43.
This translates into approximately 41% return on the shares or approximately 410%
return on our outlay for the CFD's.

R:R:R for this was 8.16:1

112
Chart 4

We have a clear run into the consolidation, a good breakout and the price drove
downwards and reached the target in 1 period.

With this chart we can see the target is $6.83 and the entry is around $7.60. The exit
however was approximately $6.64 giving us a return on outlay of around $0.94. This
translates into approximately 120% return on our outlay for the CFD's.

113
Glossary of Terms

CFD – Contract For Difference

ROM - Range of Movement (distance between the High – Low)

R:R:R - Reward to Risk Ratio (calculated reward / risk taken)

FRL – Falling Resistance Line

RSL – Rising Support Line

HRL - Horizontal Resistance Line

HSL – Horizontal Support Line

SL – Stop Loss

ISL – Initial Stop Loss

TSL – Trailing Stop Loss

TR – Trade Risk

114
Practical Trading
with These Patterns

The following examples – around 50 patterns - are all trades I have taken over the
years and are a good cross section of the different patterns.

I have included Pattern Formation, identification and confirmation, along with entry
and complete position management until exit for the patterns shown.

The Position Management Techniques I have used here are not for educational
purposes in this book, but are an effort for you, the reader – Trader – Potential
Pattern Master, to get a feel for the thinking processes that went on during these
trades, the exploration of possibilities and probabilities.

The techniques shown are a part of the overall processes that I use in my own
trading and have been developed over a very long period of time in the industry,
since September 1999.

115
Continuation Patterns –
Flags, Triangles &
Pennants

116
AUDJPY D1 – Descending Flag

Consolidation forming, Looks like a Descending Flag at this point. H4 has good wave motion inside
the formation – confirmed

Target 1 – 76.315, Target 2 – 73.66

117
Entry – Sell 78.01, ISL – 78.93, TR – 92 pips, RRR – 1.85:1

Entry triggered

Target 1 achieved - 8 days

118
Price weakening at the lows, open and close at similar levels mid bar – usually precedes reversal,
followed by strong drive up with close at top – close TSL into price

Stopped out at 74.85.

Profit – 316 pips

RRR – 3.43:1

119
AUDNZD D1 – Descending Patterns

AUDNZD 7th Nov 2014

Descending Flag. Formation forming, 2 spike reversals within the formation support the potential
down run through their strong rejection of higher values. A quick check on H4 shows good wave
motion in PA.

Target 1 - 1.09625 and Target 2 – 1.0752.

Entry – 1.1096, ISL – 1.1183, TR – 97 pips.

120
10th Nov 2014

Entry Triggered

14th Nov – price has dropped considerably and the Trailing Stop (TSL) has surpassed the ISL and is
now controlling the position risk.

121
20th November 2014

Descending Flag forming, H4 gives good wave motion and a move down will increase compression.

Target 1 - 1.06553, Target 2 – 1.02884 - 104 pips open profit so far – New position appearing

Entry – Sell 1.0905, ISL – 1.1038, TR – 133 pips

26th Nov 2014

122
Entry triggered, strong down thrust. TSL has surpassed the ISL is now controls position risk and profit
trap on 2 positions. TSL has surpassed the ISL and is now controlling the position risk, trade
management etc.

28th Nov 2014

Descending Pennant forming, 2 closes at bottom of bars confirms rejection of higher values, H4
confirms wave motion.

A drive through the entry will highly probably drop the TSL to full protection on 2nd open position –
Therefore, full size order for 3rd position.

Target 1 – 1.04007

Entry - Sell 1.0784, ISL – 1.0933, TR – 149 pips

123
1st December 2014

Entry triggered, close came back a little, not as strong a drive as hoped for.

2nd December 2014

TSL surpassed the ISL for 3rd position and entry for 2nd position, TSL is now controlling 3 positions.

Open Profit Position 1 – 214 pips, Position 2 – 85 pips, Position 3 - -36 pips

124
15th December 2014

Descending Flag forming. Inside bar, H4 wave motion

Target 1 – 0.98855.

Entry – Sell 1.0534, ISL has already been surpassed by TSL – 1.0693, which now controls 4 positions,
TR 161 pips.

Open Profit Position 1 – 510 pips, Position 2, - 355 pips, Position 3 – 234 pips, Position 4 - -16 pips

16th December 2014

125
Entry triggered

23rd December 2014

Price action sideways with spike reversal – looking to possible reversal

5th January 2015

Trailing Stop hit at 1.0539

Closed profit Position 1 – 542 pips, Position 2 – 369 pips, Position 3 – 250 pips, Position 4 - -5pips

Total Profit on the run – 1156 pips

126
AUDUSD D1 – Descending Patterns

Potential Descending Flag - Pattern Formed, H4 wave motion good.

Target 1 - 0.9206. TR – 90 pips. RRR 2.88:1

Target 2 – 0.8870

2nd Flag forming

127
Price Consolidated – good wave motion on H4, last drive down a very strong Engulfing Bar.

Target 1 – 0.8957. TR – 158 pips. RRR – 2.10

2nd Descending Flag entered and drove down to Target 1.

Price moving sideways, if it continues down great, but it broke through the target level, rallied back
to the same level, dropped away and then returned to the target level. Looks like a directional
change, so we now change the TSL to market noise above the Target line

128
Price action exited the positions

Flag 1 – 468 pips profit – RRR 5.2:1 - Flag 2 – 292 pips profit – RRR 1.81:1. Total profit for the 2
positions 760 pips

129
CADJPY D1 – Descending Flag

Pattern Forming – good wave motion on H4 and D1

Target 1 – 81.02. TR – 149 pips, RRR – 3.32:1

Target 1 achieved 9 days

Spike reversal indicates directional change, so TSL will move to Market noise above the High of the
Spike Reversal

130
Exit 81.48

449 pips profit RRR – 2.97:1

131
EURAUD D1 – Ascending Patterns

Potential Ascending >Flag - Pattern Forming – Target 1 – 1.4749, Target 2 – 1.5181

TR – 185 pips, RRR – 1.85:1

Target 1 achieved in 2 days

132
Ascending Pennant forming

Target 1.5612. TR – 195 pips, RRR – 2.21:1

Stopped out 1.5373

Profit Flag – 874 pips. Achieved Target 2

Profit Pennant – 176 pips

Total Profit 1050 pips

133
EURAUD D1 – Ascending Flags

Pattern formed, Wave Motion on H4 is good. 3 consecutively higher closes.

Target 1 – 1.2992. TR – 162 pips, RRR – 1.45

Target 1 achieved 12 days

134
Pattern formed – H4 wave motion good

Target 1 - 1.3733. TR – 198 pips, RRR 4.07:1

Price has achieved Target 2 from 2nd Flag and Target 3 from 1st Flag. Range of Bars has increased –
Volatility expanding, prepare for exit. Close the TSL in tighter. Change ATR TSL multiple from 2.1 to
1.5

135
Exit at 1.4152

ATR stop seems to have been penetrated earlier in the run, but this is purely because we change the
value near the top of the run, which moved the graphical representation in closer to the PA.

Profit from Flag 1 – 1268 pips,

Profit from Flag 2 – 777 pips

Total Profit from the Flags 2045

136
In addition to the flags there was another 1590 ish pips from the Trend change prior to the Flags
appearing Total profit for the run was around 3635 pips made from early April 2013 until Mid June
2013 – 10 weeks for 3635 pips…

137
EURCAD D1 - Descending Flag

May 2018

Descending Flag formed and confirmed - TR – 114 pips, RRR – 4.85:1

Price Triggered the Entry, went sideways and stopped out with a loss. Loss - -10 pips

138
EURGBP D1 – Ascending Pennant

May 2019

TR – 97 pips, RRR – 2.74:1

Pattern formed and confirmed

Price Broke and climbed a little, flattened off.

Stopped out 0.8947 – Profit 78 pips

139
EURGBP D1 – Ascending Pennant 2

August 2019 – Ascending Pennant

If this breaks out next bar, it will be around 50% of Pattern Length which has a very low probability
of reaching its target.

Price broke out and triggered the Entry and then promptly fell and stopped out at a loss. Loss 31 pips

140
EURGBP D1 – Descending Flag

August 2019. Pattern formed and confirmed.

TR – 107 pips, RRR – 1.19:1

Price triggered the entry

Target 1 achieved 11 days

141
Position still open at time of Publishing

Last bar is often part of a reversal setup, TSL moved in closer to price. TSL – 0.8895, if this position
exits Profit will be 182 pips.

If price does not reverse, the position will be managed as Trading Plan

142
EURJPY D1 – Descending Pennant

May 2012

Pattern Formed and confirmed. Good wave motion H4

TR – 140 pips, RRR – 2.73:1

Price nearly at Target 1

Descending Flag formed and confirmed H4 wave Motion

143
Pennant Target 1 achieved

TSL has surpassed the ISL and is controlling both positions

Reversal bar appeared, look for confirmation and close stop in.

Reversal Bar confirmed

TSL closed I to Price action

144
Exit both positions

Pennant Profit – 451 pips. Descending Flag Profit - 104 pips

Total Profit for run – 555 pips

145
EURJPY D1 – Descending Flag 1

January 2015

Descending Flag formed and confirmed

TR – 154 pips, RRR – 3.29:1

Target 1 achieved in 5 days

146
TSL stopped out Feb 2015 – 134.35

Flag Profit – 582 pips

147
EURNZD D1 – Descending Flag

June 2016

Pattern formed and confirmed

TR – 206, RRR 1.94:1

Target 1 achieved 5 days

148
Target 2 achieved 25 days

Price Action Stopped out by TSL 1.5478

Profit from Descending Flag – 827 pips

149
EURNZD D1 – Descending Flag – May 2018

May 2018

Pattern formed and confirmed

Target 1 achieved 3 days

150
Price moved sideways for a few days, then reversed

Close SL into price action

Exit triggered

Loss on Descending Flag – 170 pips

151
EURUSD D1 – Descending Flag

May 2012

Pattern forming, Confirmed H4 – wave motion

Target - 1.1852

Entry – Sell 1.2476, ISL – 1.2642, TR – 3.16:1

TSL has passed the ISL and now controls risk and profit trap

152
Reversal bar appeared – close Stop into price

Reversal confirmed – close stop in closer to price

153
Price gapped over the TSL and closed position - 1.2526

Loss on position – 50 pips

154
EURUSD D1 – Ascending Triangle – December 2017

December 2017

Pattern formed, Confirmed – wave motion D1 & H4

Entry triggered

Target 1 achieved 4 days.

155
Reversal confirmation, close TSL into price action

Price triggered exit 1.1956

Profit from Ascending Triangle – 18 pips

156
GBPAUD D1 – Ascending Flag – May 2013

Pattern formed, confirmed wave action on H4

Target 1.5896

Entry – Buy 1.5179, ISL – 1.5062, TR – 117 pips, RRR: 6.13:1

TSL surpassed ISL and now controls position management

157
Target 1 achieved – 20 days

Strong Engulfing reversal bar after 29 days – low nearly at TSL- leave stop in place

158
June 2013

Exit triggered 1.6257

Profit on position 1077 pips, final RRR on position 9.2:1

159
GBPAUD D1 – Ascending Flag – June 2016

June 2016

Pattern formed and confirmed D1 & H4 - Target 1 – 2.1806

Entry – Buy 2.0572, ISL – 2.0247, TR – 325 pips, RRR – 1.72:1

Entry triggered followed by a pullback.

Last price bar is a reversal bar, so price should reverse again

160
Price climbing, but not well

Price then flattened off, followed by an Engulfing Reversal bar – prepare for price reversal, close TSL
in.

Price has rallied but another reversal bar has appeared, close TSL in further

161
Price exited at 2.1078

Profit from Ascending Flag – 506 pips

162
GBPCHF D1 – Descending Flag – May 2019

Pattern forming and confirmed.

Price penetrated the momentum line and retraced back into the pattern. Must redraw and
reconfirm.

163
Ready to go again

And again – redraw – re confirm

164
Ready to go again

And again – Redraw – Reconfirm

165
May 2019

Pattern Target 1.2078. Entry – Sell 1.2640, ISL – 1.2799, TR – 159 pips, RRR – 3.53:1

Target 1 achieved 43 days

166
10 days later – looks like a simple rally, no real strength appearing in the upturn

2 days later – again, no real strength apparent – close mid bar

167
Taken out – position exit 1.1909

Profit from Descending Flag – 721 pips

168
GBPCAD D1 – Ascending Pennant – June 2015

June 2015

Pattern formed and confirmed.

Target 2.0014. Entry – Buy 1.9560, ISL - 1.9336, TR – 214 pips, RRR 2.12:1

Target 1 achieved 13 days

169
Price action weakening, 3 bars – open and closes mid bar followed by Engulfing reversal. Prepare for
directional change – Close stop in

Position exited 2.0323.

Profit from Ascending Pennant – 763 pips, RRR – 3.56:1

170
GBPJPY D1 – Descending Pennant – Dec 2015

December 2015

Descending Pennant formed, confirmed wave motion on H4

Target 1 – 177.55

Entry – Sell 181.67, ISL – 184.23, TR – 256 pips, RRR – 1.61:1

Pattern entered. Day 2 – TSL surpassed ISL, now controls risk

171
Day 7 – TSL surpassed entry – all risk removed profit being protected

Day 10 – Descending Pennant target 1 achieved

172
Day 15 – Descending Pennant Target 2 achieved

Day 24 – Descending Pennant Target 3 achieved

The reversal bar is a concern

173
Engulfing bar confirms reversal of price action, probable exit coming up

Stop tagged out – position exited

Profit from Descending Pennant – 1351 pips

Position Held – 26 trading days

174
GBPNZD D1 – AFlag – Apr 2013

April 2013 - Ascending Flag forming – Target 1 – 2.0542

Entry – Buy 2.0104, ISL – 1.9798, TR – 306 pips, RRR – 1.43:1

Ascending Flag Target 1 achieved in 8 Days

175
Ascending Pennant Target 2 achieved - 10 days

Ascending Flag Target 3 achieved – 32 days

176
Ascending Flag Target 4 achieved – 36 days

After 49 days and just below Ascending Flag Target 5 – price action is weakening, possibly prior to a
directional change, Close the TSL into price

177
TSL, pulled in, closer to price action, pending potential direction change

Position stopped out at 2.2932

Profit on Ascending Flag – 2828 pips

Trend Change position made around 3200 pips profit.

The entry for trend trade was off the Spike Reversal at the beginning of the direction change

178
Total Profit from the single run around 58 Days – 6000 ish pips

Putting this into perspective and doing the calculations based on the exchange rates for 29th April,
2015 (which was the entry of the flag position).

The combined effect of those 2 positions – the trend change and the Flag – adding around 6028 pips
on a USD$10,000 trading account – would be an approximate USD$4,170 increase in the account
balance – nearly 50% of which was directly attributable to the Flag Trade.

179
GBPNZD D1 – Descending Flag – Nov 2015

November 2015

Descending Flag forming

An interesting observation – the Rising Support and the low of the Flag formation are almost the
same, and the expected support level on the trend trade is same zone as the flag target

180
Descending >Flag Target 1 – achieved 6 days.

7 days, TSL surpassed the ISL and is now in control

181
Increase in volatility is concerning. Increased range of movement, 2 opposing engulfing bars the
stronger being the directional change bar, which is also an inside bar. Close Stop into price action

Inside bar is quite concerning here, tighten the stop in closer

182
Stop now at 2.2748

Major spike through Stop closed the position at 2.2748 - Profit from flag is 312 pips.

Now for the post trade examination and that spike gives cause to start 2nd guessing yourself – was
this a temporary situation, has price direction changed to head down again………. All the doubts
coming out………………….

There is no use 2nd guessing yourselves, you just do the best you can with the information you have
available at the time, and that is, your knowledge and the probabilities you have proven work most
of the time.

183
GBPUSD D1 – 3 Descending Flags – July 2014

July 2014

Descending Flag formed. Target 1 – 1.6772

Entry – Sell 1.6952, ISL – 1.7000, TR – 48 pips, RRR – 3.75:1

4 Days – TSL has surpassed ISL and now comtrols

184
8 Days – Ne descending Pattern formed

Target 1 – 1.6502

Entry – Sell 1.6795, ISL – 1.6882, TR – 87 pips, RRR – 3.37:1

Possible Risk problem – TSL has yet to reach entry from previous Flag therefore some capital is still
unprotected. 2 solutions:

1. Take a smaller than maximum position to compensate.

2. When you know and understand the tools you use – the TSL Will surpass the previous entry
level, thus protecting all capital, should the price break and close below the new entry

Based on this I took a full position for the 2nd entry.

185
5 days – Target 1 from 1st Flag well achieved, TSL has surpassed ISL for 2nd Flag, and now controls.

17 days from original entry.

TSL has surpassed 2nd flag entry – all capital protected

Profit protected and no indication of slowing down yet

186
Price slowing down, 2 short bars, closes in the lower part of bar – consolidation with downward bias
– a New Descending Flag forming

Current price just above target 2 for 1st Flag, and Target 1 for 2nd Flag

Target for 3rd Flag – 1.5967

Entry – Sell 1.6539, ISL, 1.6618, TR – 79 pips, RRR – 5.97:1

187
When flags are this flat – no incline upwards – I prefer to use a wider Stop than a high inside the
formation.

Descending Flag entry occurred day 1, day 6, Flag 1 target 2 achieved, Flag2 target 1 achieved.

Fjag 1 target 3 achieved

TSL surpassed last ISL and now controls

TSL surpassed last entry value – All capital protected

188
Descending Flag 2 – Target 2 achieved

Strong reversal bar appeared, possible direction change.

TSL close enough to current price action leave as is.

189
Stop at 1.6248

Stop triggered, 3 positions exited

Profit from:

Descending Flag 1 – 704 pips

Descending Flag 2 – 547 pips

190
Descending Flag 3 – 291 pips

Total Profit from the run – 1542 pips

191
GBPUSD D1 – Descending Flag & Pennant – Dec 2015

December 2015 – Descending Flag forming

Entry – Sell 1.4805, ISL – 1.4943, TR – 138 pips, RRR – 2.19:1

Entry triggered

Day 6 – TSL surpassed ISL and now controls

192
Descending Flag Target 1 achieved 10 days

11 days – Descending Pennant forming

193
Descending Pennant considerations

TSL surpassed entry, protecting All capital and some profit.

A full position can be taken on the Pennant within normal Risk Management Rules

Descending Pennant Target 1 – 1.3912

Entry – Sell 1.4455, ISL – 1.4647, TR – 192 pips, RRR – 2.78:1

Entry triggered

TSL Surpassed ISL, now in control

194
Reversal Bar concerning, Tighten stop into price

Now we see if we are correct…………

195
Apparently so…..

Descending Flag profit – 493 pips

Descending Pennant profit – 143 pips

Total Profit for run – 636 pips

196
NZDCHF D1 – Symmetrical Triangle & Descending Flag

July 2018

Symmetrical Triangle forming

This penetration and close back inside the formation is common in the development of Symmetrical
Triangles. Merely redraw the triangle and recalculate your entry and stop values

197
Re drawn Triangle

And here we go again

198
Redrawn again

An important point with Symmetrical Triangles – they can legitimately break in either direction. In
addition, there is a high probability that an additional pattern will form extending the targets in the
breakout direction.

You really need to have 2 sets of calcs with them – both long and short.

Pattern target 0.6622

Entry – Sell 0.6702, ISL – 0.6815, TR – 113 pips, RRR – 0.71:1

199
Price broke down, and over the next few days, immediately formed a Descending Flag. An
interesting development as the Triangle and flag targets will be reasonably close together in this
case.

TSL has surpassed the ISL from the triangle order and reduced Trade Risk, so it is possible to conform
to Risk Management and take a 2nd position with the Flag by taking a partial position.

200
Price drove down hard and achieved target 1 for each of the patterns.

TSL has surpassed both entry values so both trades are now risk free

201
10 days – Target 2 for Symmetrical Triangle achieved

Price action is weakening, though the downward bias is encouraging, may just be a consolidation

Strong Engulfing bar signals probable directional change, tighten stop into price action

202
Directional change confirmed

Both positions exited at 0.6577

Profit:

Symmetrical Triangle – 125 pips

Descending Triangle - 98 pips

Total Profit - 223 pips

203
NZDJPY D1 – 3 Descending Flags – March 2017

March 2017

Descending Flag formed and confirmed

Target 1 - 78.18

Entry - Sell 80.44, ISL 81.60, TR – 116 pips, RRR 1.95:1

Day 3, TSL surpassed ISL and is now in control

204
Price has gone sideways in an unconvincing consolidation. The descending flag formed immediately
after the downward Engulfing bar is positive.

TSL has surpassed the original Descending Flag entry – trade is risk free.

2nd Descending Flag Target 1 – 74.62

Entry – Sell 78.74, ISL – 79.57, TR – 87 pips, RRR 4.73:1

205
Descending Flag 1 – Target 1 achieved

TSL surpassed ISL from 2nd Flag now controls

206
Potential Descending Flag forming

The reversal and the upward bias of the next 2 bars is concerning, however, Range of movement has
decreased from the bars coming into the formation. The volume has decreased and the last bar
being an engulfing downward bar are encouraging.

Descending Flag 3 target 1 – 72.05

Entry – Sell 77.57, ISL 78.41, TR – 84 pips, RRR6.57:1

207
An issue here with Risk Management is that the TSL has yet to surpass the entry from the previous
Descending Flag, and there is still some exposure within that position. While a complete size order is
not advisable, a partial that is a high percentage of a complete order is within Risk Management
criteria.

TSL has surpassed the ISL for 3rd Flag

TSL Has surpassed the Entry for 3rd Descending Flag, all risk is off the table.

The last bar being an engulfing bar is a concern.

208
Price Action is weakening, potential reversal, tighten stop in closer to price action

Stop closed into 76.65

209
Stop tagged, all positions exited at 76.65

Price did continue upwards

Profit

Descending Flag 1 – 379 pips

Descending Flag 2 – 109 pips

Descending Flag 3 - 92 pips

Total - 580 pips

210
Trend Change Patterns –
Double Top / Bottom,
Head & Shoulders /
Inverted Head &
Shoulders

211
AUDCAD D1 – Double Top

Uptrend, peaked, pulled back and reversed. New high near previous high and reversal again –
Potential Double Top.

Trading the neckline is difficult because the price frequently whipsaws around the neckline, the
Trend break is a much more reliable trade to take here.

The advantage of the Double Top is that it gives you a large target, which has a higher probability of
being reached than previous resistance / support levels have of impeding the price run. This
provides a much larger and more reliable RRR, than just the TL break alone.

212
To define the target distance, draw a vertical line from the low which forms the neckline back to a
line drawn across the 2 highs of the Double Top. In this case 193 pips – Target 1 – 0.9545.

Trade Risk on the RSL Break 91 pips with a RRR – 2.19:1.

Trend Break entered. We can clearly see the Whipsawing around the neckline prior to continuing
downward. Target 1 achieved, lets ride this out and see how far we go.

Now that we have a clear downtrend in place, we are running the TSL slightly above the FRL.

213
Price is continuing nicely

Price action reached target 3, rallied and took us out at 0.9334.

Total Profit – 414 pips

214
AUDCHF D1 – Double Top

AUDCHF, Watching price work with the Rising Support Line, knowing that a trend break here will
confirm a Double Top.

RSL break Order placed

Double Top Target 1 - 1.0069. TR - 95 pips RRR – 1.88:1

215
Entry Triggered

Target 1 achieved – 7 days

216
Target 3 achieved 15 days – 453 pips open profit

Position Stopped out 0.9833

415 pips profit RRR at exit 4.37:1

217
AUDNZD D1 – Inverted H&S

Head & Shoulders and Inverted Head & Shoulders all start from a trend, Rising or Falling. Nothing
developing yet except a possible direction change.

A false break of the trend line is common followed by strong reversal.

218
It is also common for the drive into what will become the head to be faster than the run into what
will become the shoulder.

Price will fall and reverse, then reverse again. Price will retrace further than lows in this last run up.
It is important here to remember that the right shoulder is an Exhaustion Rally – and therefore
needs to be smaller in range than the left shoulder.

The neckline is applied across the 2 High Points

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A close at or past the neckline is a confirmation of the pattern, and it is from here we can apply the
target definitions.

Draw a vertical line from the extremity of the head, through the neckline. This junction is what
determines the Target distance. This distance is then applied to the point of breakout to show what
value the target is

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Trading the neckline can be difficult, as price frequently whipsaws around the neckline and the SL
needs to be quite wide to allow for this. Trading the Trendline is a much safer option, in this case
they are similar values – but this Is not common.

Trendline break (similar to neckline value) is close to the right neckline. A significant penetration of
the TL should surpass the previous high, also confirming the uptrend. Inv H&S confirmed, RRR –
2.72:1

Price triggered the entry, rose quite well, but we go taken out early with a trailing Stop which turned
out to be too close to price.

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Closed out in profit 191 pips

Price continued to target – but we got stopped out too early.

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EURAUD D1 – Double Top with Descending Flag

Trend change forming, in confirmed, downside will confirm the Double Top - Target 1 - 1.5395

TR – 98 pips, RRR 4.85:1

Price triggered the Entry from the trend change, then formed a Descending Flag.

TR – 124 pips, RRR – 3.62:1

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Rising Support Break, confirmed. Descending flag if confirmed will breach the DT neckline, Target 1
for the DT is strong.

Flag broke. Flag target reached 7 days, Double Top Target achieved 13 days

Flag Target 2 achieved. Range of Bars increasing, Volatility up prepare for reversal – tighten stop in
close

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Exited at 1.5464.

Profit from Trend Break – 407 pips

Profit from Flag Break - 381 pips

Total Profit for run - 788 pips

225
GBPAUD D1 – Double Top – January 2016

January 2016

Pattern formed. Rising Support Entry, Target 1 from the DT gives RRR 3.49:1- whereas normal
previous support levels would not give sufficient RRR to take the position

Entry – Sell 2.0519, ISL -2.0758, TR – 239 pips, RRR – 3.49:1

Entry triggered

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TSL surpassed the ISL and is now controlling the risk and profit management

Target 1 Achieved 21 days

Target 2 achieved 26 days

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Target 3 achieved 45 days

Weakening Price Action with Spike reversal bar – close the Stop into price action

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Price seems to have flattened off. A higher high is a probable prelude to Uptrend after a downtrend
this long. Close Stop into price action

Price exited at 1.8410

Profit on Downtrend – 2109 pips

229
GBPCHF D1 – Double Top & Descending Pennant

December 2015

Price Turning, Potential RSL Break followed by Potential Double Top

Target 1 - 1.5007, Entry – Sell 1.5376, ISL – 1.5509, TR – 135 pips, RRR – 2.73:1

Entry Triggered, Target 1 achieved 2 days

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Descending Pennant formed and confirmed

Entry – Sell 1.4727, ISL – 1.4979, TR – 252 pips, RRR – 2.14 : 1

Pennant Entered, DT Target 2 achieved

739 pips open profit on RSL Break

90 pips open Profit on Descending Pennant Break

TSL is too wide, close it in

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Target 3 on DT achieved

923 pips open profit on RSL Break

274 pips open profit on Descending Pennant Break

Target 1 from Descending Pennant achieved

Reversal bar appeared, close Stop in

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Reversal confirmed, close stop in again

New Stop

233
Stop triggered – Position exited 1.4390

Profit on RSL Break – 986 pips

Profit on DPenn - 337 pips

Total Profit on the down run – 1323 pips

234
GBPJPY D1 – 2 RSL Breaks – Potential Double Top

July 2017

RSL Break forming.

Entry -Sell 146.07, ISL – 147.62, TR – 155 pips, RRR – 2.08:1

Entry occurred, TSL surpassed ISL

Price has reached the longer term Rising Support Line, prepare for 2nd entry

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Entry – Sell 144.84, ISL – 146.09, TR – 125 pips, RRR 1.6:1

RSL Break 2 entered. TSL surpassed ISL

Double Top Target 1 achieved 16 days

236
Double Top Target 2 achieved 23 days

Price has reached a significant support level and price action is weakening, close stop into price
action

Potential 2 Bar reversal appearing, close price into price action

237
Price gapped over our stop level and exited the positions at 141.42

Profit from RSL 1 – 502 pips

Profit from RSL 2 – 379 pips

Total Profit from positions – 881 pips

238
NZDCAD D1 – Inv H&S - FRL & Patterns – Oct 2018

Sept 2018

Price Action is falling harshly aware from the FRL.

Price has come back to the FRL – looking good for a FRL break.

239
Entry – Buy 0.8629, ISL – 0.8431, TR – 172 pips

Entry occurred

Price has progressed, formed a new low, and is heading up again.

We now have a Potential Inverted Head & Shoulders

240
If the Price continues upward and closes above the neckline, the Pattern is confirmed and then the
Target levels will apply to price action.

It is interesting to note that the Price Action coming into the Potential Head has a steeper run from
the Trend line than the Trend running into the Pattern – this is typical of H&S formation.

If H&S confirmed – Target 1 - 0.8996, Target 2 – 0.9355

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Price has formed an Ascending Pennant – Target 1 – 0.8724, Target 2 – 0.8889

If the Ascending Pennant confirms, the Inv H&S will also be confirmed and those Targets will also
apply.

Entry – Buy 0.8648, ISL – 0.8559, TR – 89 pips, RRR – 3.91:1

Pennant has entered, Inv H&S confirmed – go you good thing

242
Price has progressed and has now formed an Ascending Flag

Price was climbing rapidly, so we have tightened the stop into price action

Ascending Flag Entry – Buy 0.8790, ISL – 0.8688, TR – 102 pips, RRR – 2.02:1

Ascending Triangle entered - We now have 3 Open Positions

Open Profit:

FRL Break 234 pips

Ascending Pennant 195 pips

243
 Ascending Flag 53 pips

Ascending Pennant Target 2 has been achieved – 5 days, Flag Target 1 and Inv H&S Target are both
in sight

2nd Ascending Pennant Forming.

Entry – Buy 0.8953, ISL – 8860, TR – 93 pips, RRR – 4.62

TSL has surpassed all previous ISL´s and all risk has been covered.

244
Ascending Pennant Entered – 4 open positions currently

Spike Reversal a concern, expecting price reversal – tighten Stop into current price action

245
Stop tagged and 4 positions exited - Inv H&S Target 1 achieved as well as various levels from the
other 3 positions

Profit from the 4 Positions: FRL Break 383 pips

Ascending Pennant 344 pips

Ascending Flag 201 pips

Ascending Pennant 39 pips

Total Profit from the run 967 pips

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Conclusion:

Price compressions can be a prelude to a consolidation forming, but a compression

does not mean that there will be a consolidation. It is an alert indicator and no more.

Consolidations generally show a reduction in ROM as well as volume. Retracements

don’t normally show a decrease, they normally sustain or increase either or both.

However, as we saw with the ANZ example, retracements can show a decrease in
one of the range of movement or volume and still be a retracement.

Pattern identification, I believe is a bit like driving a car. When you first start out you
misjudge distances, speed, closing rates and it all seems overwhelming. However
when you have enough experience you develop a feel for these things and your
driving is much more relaxed and precise. I have found with learning pattern
identification. You do develop a feel for it and they do start to jump off the screen at
you and sing “here I am, take me”.

If you are having difficulty in this at the beginning, please persist, as the markets do
change character. It is advisable to learn several strategies which will enable you to
adapt to changing markets and continuously make profits from whatever the market
throws at you.

I do trust this exercise has proven advantageous for the many readers of this
publication, and that it has added some ideas for further testing and development of
techniques.

I also trust that we have assisted in clearing up some of the misconceptions involved
in pattern trading. There are many out there who would keep it “mystical”, and we
trust we have progressed the learning of some of the subscribers in this highly
profitable trading area.

If you have found this text to be of value to you, your trading and your future
prosperity, please direct anyone you feel may also benefit to
https://petervarcoe.com/the-inside-secrets-of-elite-traders-patterns so they also may
invest in their own valid copy, learn and benefit and like you, also be able to take full
advantage of the support service we are offering as a bonus, with your investment in
this book.

Along with each purchased copy of this unique book comes 1 month of free support
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After the 1st month you can take advantage of an investment in ongoing Support,
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of this unique opportunity to stay inside the mind of the author.

247
In the book we have included 52 examples of patterns actually traded since late
2010. We have also assembled, an Addendum to the book, and it contains a further
220 - 240 Pattern trades taken since late 2010 in Forex on both for your study and
increased learning experiences.

The number of trades stands at around 300 at the time of publishing and will be
continually updated as trades appear and are taken advantage of. The updates will
also be available as additions to the Addendum, for those who invest in it now.

This Addendum is available to those who have invested in the book and who wish to
further their learning experience and appreciation of this valuable trading technique,
please go to http://www.petervarcoe.com to take advantage of our limited ¨Product
Launch Offer¨ for this valuable resource.

We would appreciate your feedback regarding the book, the subjects contained
within, or anything covered in this material, please go to http://www.petervarcoe.com
and offer any comments you would like.

I look forward to working with you further in subsequent publications and look
forward to any feedback from subscribers.

Finally I trust you will have a great time exploring these valuable trading patterns,
and may the markets be with you, and in the wise words of the great ¨Master Yoda –
Star Wars¨ -

DO OR DO NOT – THERE IS NO TRY………

Enjoy your Laptop Lifestyle

Peter

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