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Use Pattern Recognition to Perfect Your Trades

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Every day when I turn on the computer, one of the first things I do is go through my stock charts. I like it more than a kid likes ice cream.

The world is full of potential as I view the various setups and consider how I’m going to approach a trade.

I use technical analysis – the study of stock charts – to make sense of all the price data that bombards traders and analysts every second of the trading day.

Analysts can make technical analysis incredibly complicated, and they often do. There are endless ways of analyzing price data.

But the truth is, I don’t use 90% of it. What I find most useful when analyzing stock charts is pattern recognition.

Today, I’ll review three of the patterns that I use regularly in my VIP Trading Research Service Technical Pattern Profits to help generate profits no matter which direction the market – or individual stocks I’m trading – is headed.

The “World Record Pattern”

The first is the World Record Pattern, or the bull flag pattern.

It starts with a sharp move higher (the flagpole), and then it consolidates for a short period. Once it breaks out of that consolidation, it typically moves higher by the same distance as the flagpole.

Here’s a chart of Tesla (Nasdaq: TSLA). In early July 2020, the stock jumped from about $216 to $285 in a matter of days (the flagpole). It took a breather for a few days, forming the flag, and then continued higher. The flagpole was $69 high ($285 – $216).

Bull Flag

To figure out a price target, you take the distance of the flagpole and add it to the breakout point. In this case, we’d expect the stock to reach $354 ($285 + $69). The day after Tesla broke out, it reached $359. The stock continued the rally, reaching $500 in late August.

Without a doubt, the breakout of the World Record Pattern is one of the clearest indicators of when a trader should buy…

But what about selling?

“Old Reliable”

Old Reliable, or the head and shoulders pattern, is bearish. It’s valuable for taking the emotion out of the decision to sell.

Old Reliable has been ranked the most consistent chart pattern – and for good reason. This chart pattern is 83% accurate in predicting a stock’s downward slide.

It gives you a clear warning sign before your stock begins its dive…

The head and shoulders pattern features three high points. The second, or the head, is the highest. The third, or the right shoulder, occurs on lower volume. Failure to hit a higher point than the head on lower volume suggests that buying interest is drying up.

If you draw a line from the bottom of the left shoulder to the bottom of the right shoulder, that is called the neckline. Once the stock breaks the neckline, it usually slides lower. That means it’s time to sell.

Here’s this pattern in action on Peloton‘s (Nasdaq: PTON) stock chart…

Head and Shoulders

“Power Channels”

To understand Power Channels, or ascending channels, it’s important to understand resistance and support lines.

These are terms that traders use to describe price levels that act as barriers, preventing the price of the stock from moving outside of a specific trading range or channel.

The resistance line is generally the price that the stock won’t push above. The support line is the floor of the trading range. It’s the price where traders feel the stock is too cheap, so they start buying again.

Here’s an example with Toyota Motor Corp. (NYSE: TM)…

On February 2, 2021, I sent a notice to my subscribers saying, “Toyota is at the bottom of its channel and is oversold. Buy TM at market for $145 or lower.” And then I recommended an option play to go with it.

In short, Toyota’s share price bounced off its support line, signaling to me that it was time to buy, and I let my Technical Pattern Profits subscribers know.

Ascending Channel, Toyota Motor's stock price bounces off support line

Just 10 days after I recommended it, the stock jumped 13%. It even broke through the resistance line.

Ascending Channel, Toyota Motor's stock price breaks through resistance line

The options blasted even higher. In fact, Technical Pattern Profits subscribers had a chance to land a 442.86% gain in just 10 days on the Toyota options.

Do you see now? Technical analysis isn’t so hard when you know what patterns to look for and can recognize them when they pop up on a trading screen.

They’ll help remove the emotion from investing and allow you to profit regardless of where the market – or a stock – is headed.

Do you have a favorite chart pattern or another pattern you’d like to hear about? Let me hear your thoughts in the comments section.

Good investing,

Marc

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