Technical Analysis –

Learning chart patterns might be the fastest way to making consistent money in the stock market. For centuries, the market has displayed the same characteristics, over and over again. After all, it’s all about the buying and selling, supply and demand. Human emotions plotted on a graph in ticks and candles and lines and bars.

To that end, the more you learn about these repeatable patterns, the more insight you’ll have. It’s a lot like learning a new language. At first glance, it all seems like gibberish. It’s the patterns that give it meaning. For example, “love” may sound different in another language, but it means just the same.

So it is in the market. Learn the patterns of accumulation (buying), distribution (selling), and stalemate (sideways action), and you’ll be well on your way to exploiting opportunities.

In this guide to chart patterns, we’ll outline for you the most important patterns in the market: From candlestick patterns to bear traps, triangle patterns to double bottoms, we’ll cover it all.

Candlestick Patterns

What is a Candlestick?

Very simply, a candlestick is a plot of price over time. This can be any time frame. For example, a one minute candle is a plot of every traded price of a stock or asset during that one minute interval. Likewise, a 5 minute candlestick is a plot of all the prices that stock traded in 5 minutes worth of time.

This is all very basic information until you realize that candlesticks are telling a story of buyers and sellers during that timeframe.

The formation of a candlestick pattern — The formation of a candlestick

How to Read Candlestick Patterns in Trading

The value of candlesticks, which have been around for centuries, is in the story they tell. As you can see from the image above, a single candlestick shows the open, high, low, and close of the price action during that time interval.

To the naked eye, this might seem inconsequential. However, to the trained candlestick chart reader, all of that information is very, very useful in decision making. Here’s why.

Imagine a stock opens at $1 on a 1-minute candle but gets hit with a lot of selling pressure during the first quarter of the time interval. During the first 15 seconds, it trades below the opening price. This forms the lower wick of the candle.

Then, for the next 30 seconds, demand enters and the price of the stock moves higher to $1.50. It is safe to assume that bulls were able to overcome sellers during that time.

However, with 15 seconds remaining in the formation of the candle, selling pressure returns. This pushes the price of the stock back to $1.25, and forms the upper wick of the candle. Perhaps bulls took profits and bears re-entered the scene.

What is left is an indecision candle, which we’ll talk about later. It is a chart pattern that occurs over and over again.

Many implications can be had about this type of candle. It tells you that neither bears nor bulls are in full control. Regardless of the type of candle or implication, the point is that every candle has a story to tell. It’s also important that these chart patterns repeat, over and over again. It reveals a struggle between both forces in the market and where the stock could be headed next.

After all, it is the “hard right edge” of the chart we are always looking to anticipate. Chart patterns help us with this.

Types of Candlestick Patterns

Generally speaking there are only three broad categories of candlestick patterns: bullish, bearish, or indecision patterns. Most of these patterns require the formation of more than one candlestick to create a pattern — and there are many such patterns.

In fact, entire books have been written about all the types of candlestick patterns you can see in the market. And while they are very informative and can add value to your trading decisions, the average trader may find the myriad of patterns daunting. For that reason, most educators try to condense the types of candlestick patterns into the most popular ones.

Here are a few examples of the most popular bullish and bearish candlestick pattern combinations that you might see. Perhaps you are already familiar with a few of them?

Types of candlestick chart patterns — Types of candlestick patterns

Let’s dig a little deeper now into what constitutes a bullish or bearish candlestick pattern.

Bullish Candlestick Chart Patterns

A bullish candlestick pattern is one that implies a bullish character — simple enough, right? This could be a reversal of a downtrend, or a continuation in an uptrend.

For a single candlestick, however, we assume it is a bullish candlestick when it “closes green”. What you’re looking for is a candle that closes higher than it opens, essentially. The example we gave above is similar.

Here’s what a bullish candlestick might look like:

Although this could be considered an indecision candle, the overall nature of the candle leans to the bullish side. It closed higher than it opened. There are plenty of other types of bullish candlesticks more bullish than this one.

For example, a marubozu candle occurs when price opens at the lows (no/small wick) and closes at the highs (no/small wick). We usually consider these very bullish candlesticks in that bulls were in control during the entire time interval.

Notice how strong the green, bullish reversal candle is on this chart. It was enough to overcome the entire red candle preceding it — and the wicks are super tiny. This tells us demand was strong during the formation of the candle.

Bullish reversal candlestick chart pattern — Bullish reversal candles

For more examples like this one on bullish candlestick patterns, check out our guide to the 6 best bullish candlestick patterns.

Bearish Candlestick Chart Patterns

Contrary to bullish candlesticks, bearish candlestick patterns are just what you would assume. They reveal that bears were in control during the time interval that the candle pattern was formed. Likewise, they may represent a reversal pattern after a strong uptrend, or a continuation pattern during a downtrend.

For bearish candlesticks, we assume the price opens higher than it closes. In other words, bears took control at some point after the open of the candle and pushed price lower as the candle formed.

Here’s an example of what this might look like:

Beyond just candlesticks, there are many bearish candlestick combination patterns. These create a series of candles which produce a bearish “event,” per se. They could be parabolic reversals, tweezer tops, abandoned babies, evening stars, or other unique patterns.

Evening star bearish candlestick pattern

Just like this example above, we discuss 8 of the most reliable bearish candlestick patterns in this tutorial.

Shooting Star Candlestick Chart Patterns

Continuing with some of the more popular candlestick chart patterns, let’s look at the shooting star candlestick pattern.

For good reason, most traders assume this is a bearish candlestick pattern. When taken in the context of an uptrend, the presence of a shooting star often signals a reversal. Many contrarian traders love to see these at the top of a parabolic run.

Shooting star candlestick chart patterns

As price increases, what you want to see is a large volume candle that starts low, goes up, and then comes back down to where it started. It leaves a nice long topping tail. This tells us that gravity, just like with a real shooting star, is pulling the price of the stock back to earth.

Traders look for these so that they can then take a short position and risk off the high of the candle, assuming it won’t go any higher.

Here’s an example of what that trade might look like:

Shooting star candlestick pattern trading example — Shooting start candlestick pattern trading example

Just as you’d expect, the shooting star occurs at the end of an uptrend, giving you an opportunity to short the stock, expecting a reversal. After the shooting star candle is formed, you initiate a short position on the break lower, risking to the high of the shooting star candle.

We discuss how to trade this setup more in depth in this tutorial.

Hammer Candlestick Patterns

Hammer candlestick patterns are somewhat similar to shooting stars in that they often signal reversals. In fact, they can be bullish or bearish depending on the context.

Hammer candlestick chart patterns — Hammer candlestick patterns

As you can see, a hammer candlestick pattern often signals a reversal of a downtrend, much like a shooting star does on the opposite end of a trend. Both hammers and shooting star candles look the same, don’t they?

In the Hammer candlestick pattern example, we have sellers capitulating into stronger hands who buy up their shares. This leaves a long bottoming wick, and signals a reversal. To take this trade, you simply buy the breakout above the hammer candle after it is formed, risking to the low of the wick.

Inverted hammer patterns can also signal reversal in a downtrend. It simply means that sellers were not able to continue pushing the stock price lower. Once they realize this, they give up and begin covering their positions, pushing the price higher.

For more on how to trade hammer candlestick patterns, check out this guide.

Doji Candlestick Patterns

Doji candlesticks are often referred to as indecision candles. They can show up red or green on a chart, but aren’t exactly considered bullish or bearish. They typically indicate a stalemate between both forces.

Like the example above, what you typically find in a doji candlestick is a very narrow body with wicks on either end. Similar to what we discussed above, this informs the chart reader that both bears and bulls created a tug-of-war while this candle was forming, and neither really won, despite the candle closing green or red.

However, if you spot the doji candlestick pattern in certain contexts, it might signal a reversal. We discuss this in our tutorial on dojis. Here are a few examples of where you might see doji candlesticks, and how they differ from the large marubozo style of candlestick patterns:

Comparably, doji candles are narrow-bodied with long wicks. Ideally, you’ll want to wait until the next candle forms after a doji to make a decision as to who has the upper hand – bull or bears. This will keep you safe in your trading decisions.

Here is an example of a gravestone doji reversal pattern:

Gravestone doji reversal chart pattern — Gravestone doji reversal

Candlestick Patterns Cheat Sheet

In order to keep from getting overwhelmed, we created a cheat sheet for you of the most popular candlestick patterns. Ideally, you’ll keep this handy while you’re trading in order to train your chart eye.

Over time, you should expect to recognize these patterns instead of having to refer back to the candlestick pattern cheat sheet. As you see a stock becoming more and more extended, it will become second nature to you to start spotting these patterns.

Feel free to save this for your own trading purposes:

Candlestick Pattern Quick Reference Guide — Candlestick pattern cheat sheet

We’ve broken the most popular patterns into bullish and bearish candlestick patterns in this cheat sheet. We recommend taking the following approach to learning these:

Pick a side (bullish or bearish)
Focus on 2-3 candlestick patterns for 2-3 months
Identify all the examples you can find of those patterns
Document what makes the pattern work or fail
Create a list of criteria you can use to stay disciplined as you trade the setups

Triangle Patterns

What is a Triangle Pattern?

Triangle patterns are a collective of candles that form a general chart pattern over time in the formation of a triangle. They can be ascending triangles, descending triangles, or symmetrical triangles.

For all intents and purposes, the simple way to spot one of these is to draw a trend line across the top and bottom of the most recent price action of the stock in play. If you find that stock coiling into an apex, it is likely forming a triangle pattern.

These can be called by different names. Some like to call them pennants, others like to call them wedges. Aside from maybe a few nuances here or there, they are all basically the same — chart patterns that resembles a triangle.

Triangle chart patterns — Triangle patterns

How to Read a Triangle Chart Pattern

Triangle patterns begin with broader price range and volatility. Over a period of time, they contract into an apex on lower volatility and narrowing price range. This is accompanied with a series of higher tops and higher bottoms, or lower tops and lower bottoms or a symmetrical sideways pennant of lower highs and higher lows. Some variances to this can occur, like a flat base or flat top.

Regardless of the formation specifics, the goal as a trader is to determine the path of least resistance once the stock leaves the formation. Along those lines, we typically see ascending triangles resolve downwardly; descending triangles usually resolve upwardly.

Volume and price action are also key in how to read a triangle pattern. Every chart pattern should tell you a story, much like candlestick patterns. Are bulls absorbing downward pressure in a descending triangle? Or, are bears selling to the bulls in an ascending triangle?

Each pattern will show you, if you look intently enough, the path of last resistance on the horizon. Once you spot it, the triangle pattern gives you a great risk to reward setup for your trade plan.

Let’s look at each type of triangle pattern a bit more in depth.

Descending Triangle Patterns

The descending triangle pattern is one of the most recognizable chart patterns in trading. It usually forms as a reversal at the end of a down trend or as a continuation pattern in an uptrend. It offers a chance for bulls to reload after profit taking in a stock.

Often labeled a descending wedge, it is important to note that the stock can resolve in either direction, up or down. For that reason, it’s always best to respect your stops. However, it is generally assumed to be a bullish pattern.

In our tutorial on descending triangles, we teach you a handful of ways to trade this pattern. One of the most popular is the breakout strategy. In this strategy, you wait for the stock to put in a series of volatility contractions, then buy on the breakout of the upper trend line.

Descending triangle pattern breakdown — Descending triangle breakdown

As shown in the example above, you’ll want to measure the broadest part of the triangle, and then set that as your target distance once you overlay from the point of breakout. Your stop would be below the most recent low of the pattern.

Ascending Triangle Pattern

Ascending triangle patterns can also resolve in either direction. Just like it’s descending counterpart, you always want to respect your stops if you are wrong on the trade. However, ascending triangle patterns are generally accepted as a bearish pattern.

Ideally, what you will want to see is a series of higher lows forming in the stock. In order to take a bearish stance, we recommend looking for elevated selling pressure as the stock makes new highs in the formation.

Once the stock reaches its apex and selling has done its job, look for a breakdown entry through a signal line or lower trend line.

In the example above, notice how as the stock advances, selling pressure prevents it from putting in a new high. It’s akin to “walking the plank.” The end result is inevitable, it just takes a little time to get to the end of the plank.

For entries, take your position on the breakdown, risking the highs. Targets can be set at the lows of the structure, or by measuring the broad part of the triangle and applying it to your breakout point.

Symmetrical Triangle Patterns

Symmetrical triangle patterns are a lot like pennants. As the structure forms, you expect to see higher lows and lower highs. This contracts into an apex formation. However, unlike the ascending or descending triangles, it may be a bit harder to predict the direction of least resistance at first. Sometimes they can seem a bit 50/50 in nature.

Similar to the volatility contraction pattern we discuss in our best small account strategy, it can lead to big gains under the right circumstances. Here are a few chart examples of what to look for in a symmetrical triangle pattern.

In this example we have a false breakdown. As you can see, it is sometimes difficult to judge such a tight pattern. However, as the pattern evolved and reclaimed, you could flip your bias and risk off the most recent low for a long trade.

Here’s an example of managing your risk and setting your targets for the symmetrical triangle pattern:

Symmetrical triangle chart pattern breakout — Symmetrical triangle pattern breakout

In this example we measure the widest part of the triangle and apply it to our breakout in order to set our 1st target zone.

For more advanced early entry techniques, take a look at our explanation of VDU and Pocket Pivots for this strategy.

The Double Bottom Pattern aka the W Pattern

Trading the W pattern, or the double bottom, can be very lucrative and give you a definable area to risk off of. It is one of the more highly recognizable chart patterns in stock trading. After all, who doesn’t know what a “W” looks like?

What is a W Pattern / Double Bottom?

The W pattern is a consolidation pattern where a stock essentially retests a support area twice. Hence the “double bottom” name associate with the pattern. Usually you’ll find this pattern as a pause in an uptrend, or as a bottoming pattern in a downtrend.

The double bottom signals to potential traders that the stock is having a hard time making new lows. As a result, long-biased traders may take advantage of the opportunity by buying the stock and risking off the support of the “W”.

It’s also fair to mention that if you are familiar with the double top pattern, this is essentially the mirror image of that strategy. We discuss this strategy in depth in our tutorial here.

How to Read a W Pattern / Double Bottom Chart Pattern

There are many different schools of thought on how to read a double bottom, but we think it best not to overthink it. Some educators like to see the second dip of the “W” slightly undercut the first dip. Others may not require this. At the end of the day, what you’re looking for is a support area to form, whether the second dip is lower or not.

Ideally, you want to see volume peak as the W pattern bases along the two “troughs” of the pattern. What this tells us is that weak hands are selling here, while stronger hands are absorbing their shares and supporting the stock. This will likely lead to higher volume along the lows.

As the second trough of the double bottom forms, it should immediately be on your radar. You might also look for longer term support from any prior high volume bars from prior high volume days. These are often footprints of larger position holders who may decide to support their position here. We discuss this in a recent podcast episode on the Simcast regarding vwap boulevard.

Trading the Bullish W Pattern / Double Bottom Chart Pattern

For obvious reasons, the double bottom is considered a bullish chart pattern. There are never 100% certainties in the markets, however. And that is why it is always best to implement stops, and respect them!

Let’s look at an example of where you could enter a bullish double bottom pattern in this chart of PLTR recently.

Notice how the stock has a sharp pullback into the 12:00pm hour. Like we mentioned above, we want to see volume increase as the stock pulls back into the first trough of the W pattern. This example didn’t let us down. We got a nice long bottoming wick and elevated volume in the first trough of the “W”.

Then, as the stock forms the second trough, we get a slight increase in volume again along the lows. Only this time, less selling pressure enters the market than the first time. As supply dries up, we see the stock rocket away from this demand zone. The second pullback was a classic retest of the support in the first trough.

Our first entry could be on the diagonal trend line drawn across the top of the bullish double bottom pattern.

Applying stop out and target areas to double bottom patterns

Once you enter the stock, make sure your trade plan includes a proper stop. In this case, we put our stop below the most recent W pattern trough. Then, we measure the depth of the W and apply that to our breakout entry to get a potential target.

In this example we reached our target of $12. A $0.30 correction gave us a $0.30 profit, with only $0.13 risk from our entry. Not bad!

Bearish W Chart Pattern / Double Bottom

There really isn’t a “bearish” double bottom, per se. There is only a failed doubled bottom. Unless, of course, you want to play the bearish counterpart to the double bottom pattern, which is the double top.

Failed double bottoms typically look like bear flags. The W turns into an “M”, in other words, and kind of looks like this:

On the other hand, if you’re looking for a topping pattern, the double top is a great strategy to add to your arsenal. Much like the double bottom, a bearish double topping pattern fails after a retest of the highs. Ideally, you’ll take the trade short on the break of the signal line, setting your stop at the high of top #2.

Double topping pattern — Double topping chart pattern

This is another example from PLTR. As the stock runs up, it is clear that selling pressure is present given the amount of wicks on the candles. After the first sign of weakness, PLTR makes a failed attempt to set new highs in Top 2. This traps breakout buyers and then the bid is pulled. The path of least resistance is obviously downward from then on.

Like our double bottom pattern, we would initiate a position on the break of the red signal line, set our stop at the highs, and measure the move for a potential target zone.

More can be found on this setup in our W pattern guide found here.

Golden Cross Chart Patterns

The golden cross is a bit unlike some of the chart patterns we’ve already mentioned in that it requires two moving averages. In fact, you could almost trade without candles using this chart pattern, though we don’t recommend doing that.

What is a Golden Cross Stock Pattern?

A golden cross occurs when a stock’s faster moving average crosses a slower moving average to the upside. For this reason, golden cross stocks are usually found after they have been in a correction for a while. There is also a very specific set of moving averages involved in this strategy.

The golden cross occurs when the 50 period moving average crosses above the 200 period moving average. This is typically seen on a daily chart, but it can also be found on smaller time frames like the hourly, 30-minute, or even intraday 1, 2, or 5 minute charts.

It signals to trend followers that the current correction in a stock or the market could begin a new uptrend.

How to Read the Golden Cross in Stock Trading?

In order for a golden cross to occur, the 50ma must — obviously — be trading below the 200 moving average. To that end, you expect to see this happening in the context of a downtrend. Price is trading lower than it was 200 days ago. And along those lines, the faster 50ma will be below that longer time frame average.

When the cross occurs, it signals to investors that momentum could be shifting. Couple this with other chart patterns like the double bottom we mention above, and you may find even more confirmation for your strategy.

Ideally, you’d like to see the speed of upward movement on the shorter time frame overtaking the longer time frame’s rate of change. When this occurs, it may be time to buy.

That being said, there are three stages of a golden cross that you should understand.

Three Stages of a Golden Cross Stock

Stage 1

In stage 1 of a golden cross, we have a downtrend. On a chart, you’ll want to see your 200 moving average trending clearly downward, along with the 50 moving average. However, the 200 moving average needs to be above the 50ma on the chart.

Here is an example with AMC. AMC was in a clear downtrend before all the hype about the squeeze occurred in 2020/2021. Before the cross occurs, we would consider this stage 1. In Wyckoff methodology, the down trend is losing steam during this stage, and preparing for a potential reversal of trend.

AMC 200 and 50 moving average stage 1 golden cross

As you can see, we have the 200 simple moving average in black trading above the red 50 simple moving average. However, if you pay close attention to the chart, you’ll notice that AMC began to slow it’s downward progression and tested a “cross” before the real golden cross occurred in early 2021. This is stage 1 of a golden cross stock.

Stage 2

This is the crossover stage. Once a stock recovers from the downtrend, puts in a consolidation and gives institutions time to accumulate shares, it is time to mark the price of the stock up again! As part of this process, the trending 50 and 200ma will eventually cross as the new uptrend begins.

Here are those stages again using AMC as our chart pattern:

The three stages of the golden cross chart pattern — The three stages of the golden cross

Notice that AMC rockets higher in price before the golden cross occurs. This send the faster moving 50ma closer and closer to the 200ma.

In our circled annotation on the chart, you would have actually got a very nice buyable pullback if purchasing based upon this strategy. The launch was enough to make the cross, and the pullback gave you a great entry. Once the stock made a golden cross, it really never looked back before launching yet again in June of 2021.

Stage 3

Stage 3 is the new uptrend phase of the golden cross stock pattern. Once the 50 moving average is trending above the 200 moving average, you expect it to remain that way for some time. Take for instance this example of a golden cross in TSLA:

Golden Cross chart pattern Example — TSLA Golden Cross Example

TSLA’s golden cross in 2019 lasted until July of 2021 and resulted in an over 1000% increase in price by the time the 50ma crossed back below the 200ma. That’s a massive gain! Obviously, this won’t happen all the time, but it goes to show that a solid trending environment with a strong stock can create a really lucrative golden cross pattern.

That being said, the golden cross strategy lasts only as long as the 50ma crosses above and stays above the 200ma. For this reason, you may get false signals in the early stages of the new uptrend, or along the way depending on how strong the uptrend is.

Golden Cross Cheat Sheet Signals

Although the golden cross pattern is pretty straight forward, here are a few examples for you to use as a cheat sheet when trading.

You need to know that the opposite pattern of the golden cross is the death cross. In an uptrend, the 50 moving average crossing below the 200 moving average is a signal to longer term traders that the trend might be changing in the opposite (bearish) direction. It becomes your sell signal.

Here is an example of using this strategy to complete your golden cross trade:

Although you wouldn’t have timed the top of CMG in this example, it is clear that you would have gotten the “meat of the move” from the original buy signal. Hopefully it is clear that a solid trending environment works best for this chart pattern.

There are some caveats and other ways to manage your position, like trendline breaks, or selling at prior resistance levels. However, if you want to stay true to the trend following strategy, you’ll buy on the golden cross and sell on the death cross.

For more information on trading this strategy, be sure to read our in-depth post on golden crosses.

Bear Trap Chart Patterns

Bear traps may conjure images of famous fur trappers and mountain men like James Beckwourth or Jedidiah Smith, but these men weren’t as deadly to brokerage accounts as bear trap chart patterns are.

What is a Bear Trap in Trading?

As a short seller, the market presents a peculiar risk. Your losses are much more magnified and exponential on the short side. This creates a vulnerability in certain situations that bulls can take advantage of.

Think of it this way. If you buy a stock at $10 and it goes to $0, you’ve lost your entire investment. However, if you short a stock at $10, what if it goes to $30? Not only have you lost your original investment, you’re now in debt. This little aspect of short selling can often create trigger happy short sellers who are willing to cry uncle when their positions go against them.

On that token, when heavy pocketed bulls know that shorts are digging into a position, they may support the stock in an effort to “squeeze” the shorts above their high water mark. Once this happens, short covering can fuel a stock price higher, giving bulls the liquidity they need to sell their positions.

But, first, the bear trap must be set.

How to Read a Bear Trap Flag Pattern

There are a lot of reasons behind what causes a chart pattern, but a bear trap is pretty simple. The reason is to trap short sellers. And like any other chart pattern, it takes a lot of pattern recognition to spot this setup.

Here are a few things you want to look for in order to read a bear trap flag pattern:

The setup should look like it is about to break down. Ideally, you’ll want a nice run up — perhaps even parabolic in nature. The flag should then look like one of the triangle patterns we mentioned before.
As the stock slowly bounces and contracts into the flag, you want to see the break down. This sets the hook for bears. Like the symmetrical triangle pattern, you want bears chasing the stock down.
Absorption or soaking action. Now that bears feel like they are firmly in control, you want to see the stock stall. Ideally, this will occur after a high volume kill candle and near or below a prior support level.
Reclaim and rally. After the kill candle, if the stock isn’t dead, you better watch out. This is usually where the carnage begins for bears who were confident that the stock was dead.

Bear Trap Cheat Sheet Examples

Now that you know what to look for, let’s visualize this with some real-world examples of bear traps in trading.

Example 1

The first example is a failed breakdown of stock SOLY. This stock was a lower float, lower priced stock that had run up considerably intraday. After chopping around on heavy volume mid day, we saw a huge kill candle form. This was an ideal 1-3pm Bloodbath setup, but as you can see, the stock selling pressure was absorbed.

SOLY Bear Trap chart pattern example — SOLY Bear Trap

As SOLY began trading lower than the 11-1:30pm trading range, it retested the underside of that key level. From that point, the stock reclaimed the trading range and never looked back. In other words, bulls saved the stock and trapped the bears. The rest of the day, bears did their best to mitigate their losses by covering and fueling the stock price higher.

To trade this, you want to set a trendline at the lows of the trading range that broke down. IF the stock reclaims 50% of the kill candle, take your long position and risk to the most recent lows.

Example 2

In this example, we’ll point out a popular personality on Twitter who goes by AllDayFaders. He’s recognized the traps often over the years and explains them well in this thread:

$AMC update on the "you gon learn today" setup. Do u think shorts learned or nah? pic.twitter.com/2CY8FzEHhx
— AllDayFaders (@team3dstocks) May 27, 2021

As you can see, it is better to wait for the failed retest if you’re a short biased trader.

Example 3

Often times, if you can combine multiple strategies, it will help your odds of success.

In this 30m chart of Google, we see a bear trap combined with a hammer candlestick pattern. This gives us clear evidence of an impending reversal after a failed breakdown.

Bear Trap and Price Action Trading — Google bear trap and hammer candle

Not only do we get a hammer candle reversal, but it comes on the heels of a descending triangle pattern as well. What better way to combine as many chart patterns as possible in order to create your trade thesis. And that’s exactly what you should be doing. Combining chart patterns and elements of trading together only increases your chances of success.

If you’d like to learn more about the bear trap stocks pattern, please visit our detailed tutorial here.

Chart Patterns Summary and Cheat Sheet

As you can see, there are many different types of chart patterns in the stock market. We recommend taking your time while educating yourself with many of the resources we’ve listed here. Keep in mind that successful trading is a marathon, not a sprint.

Not all chart patterns will work for you. For that reason, we always preach risk management. Learn to be wrong when the market doesn’t go your way. It will save you the headache and heartache of big drawdowns in your account.

For more information on chart patterns, check out many of the resources here at TradingSim.com. Also, be sure to sign up for our 7-day free trial and practice these chart patterns in the simulator with no risk! We’ll leave you with this chart patterns cheat sheet of many of the more popular chart patterns.

The Head and shoulders pattern is a reversal trading strategy, which can develop at the end of bullish or bearish trends. It is often referred to as an inverted head and shoulders pattern in downtrends, or simply the head and shoulders stock pattern in uptrends. In theory, they foretell the slowing momentum in either direction as the stock is unable to put in further highs or lows.

Traders like to trade head and shoulders patterns as the price targets are very predictable and the formation has an overall high success rate.

What do Head and Shoulders Chart Patterns Look Like?

The head and shoulders chart formation consists of three peaks, which develops after a strong bullish trend. The first and last peak are approximately the same height and are classified as the shoulders.

The second peak is the highest of the three and is classified as the head of the pattern.

Head and shoulders charts represent the transfer of power from the bulls to the bears in a topping pattern. In essence, it is a distribution pattern. Bulls who were buying the breakout (head), provided the liquidity for larger players to sell into, thus bringing the stock back down.

Please see the below illustration of a head and shoulders pattern top:

head and shoulders topping pattern — Head and Shoulders Top

What Do Inverse Head and Shoulders Chart Patterns Look Like?

Conversely, the inverted head and shoulders pattern is the head and shoulders bottom.

Instead of peaks, there are troughs. This reversal pattern develops after an extensive bearish trend and represents the transfer of control from bears to the bulls. Like the topping pattern, here bulls are using the breakdown as an opportunity to go long at lower prices. It could also give longer term bears the liquidity to cover their positions.

Below is an illustration of a head and shoulders bottom:

This is an outline of the inverse head and shoulders pattern. As you see, it is the mirror image of the head and shoulders topping pattern.

Identifying the Neckline in a Head and Shoulders Pattern

Every technical chart pattern has a trigger line, which provides confirmation for entering or exiting a trade.

For the head and shoulders pattern, the trade signal is called the neckline.

When you think about it, this name makes sense, because the neckline is directly beneath the head and shoulders. Get it?

When we identify the pattern on the chart, the first thing we should do is to draw the neckline.

So, how do we draw the neckline?

The proper way to set up your neckline is to connect the two peaks or troughs (depending on if it’s a top or bottom). Here’s an example with $CEI:

$CEI head and shoulders pattner example — $CEI head and shoulders pattern example

Please note the neckline isn’t always flat. If the peak or trough values are slightly different, then the neckline could have a slope.

We’ve tried to give you two examples of an early entry “Neckline A” and a later “Neckline B”. Both would work. It will depend on you and your style to outcome test head and shoulders chart patterns for the best entry.

What do Head and Shoulders Stock Patterns Foretell?

To determine the size of the formation, you should first set up the neckline as we just discussed.

Then, you take the mid-point of the neckline and draw a vertical line connecting the mid-point of the neckline to the top of the head. The distance between the neckline mid-point and the head is the distance we expect the stock to run after breaking through the neckline.

Please note, measuring price targets for head and shoulders and inverted head and shoulders will mirror each other. Again, the only difference is the formations are inverted.

How to Trade a Head and Shoulders Chart

When should you open a position?

When you identify the formation, you should start looking for the signal you need in order to enter the market. This signal is the moment when the price breaks through the neckline, for all intents and purposes.

When the neckline is broken, you should open a short position for head and shoulders tops and a long position for head and shoulders bottoms.

Granted, this is the old-school way to trade the pattern. Educators like Gil Morales teaches you to short into the pops on the right shoulder. He likes to find weaknesses into the overhead moving averages for good risk/reward.

If interested, he has a great book on short selling called Short-Selling with the O’Neil Disciples: Turn to the Dark Side of Trading.

Where should you place stop-loss orders?

This is a tricky question as traders’ opinions are pretty controversial regarding stop loss placement for the pattern.

Some traders claim that the stop loss should be loose and placed just above the head of the pattern.

A more conservative approach used by traders is to place the stop loss beyond the shoulder peak/trough.

We prefer placing the stop loss above the shoulder, as placing the stop above the head provides a 1:1 risk reward ratio. This isn’t very favorable odds.

When should you collect profits – Reverse Head and Shoulders Pattern Example 1

Again, the rule of thumb for this pattern is to determine the price target based on the depth of the pattern.

If this sounds confusing to you, have a look at the image below:

Price Target for Head and shoulders pattern — Price Target

This is a classic inverted head and shoulders scenario. This is the 30-minute chart of Apple. First, we have a bearish market followed by the creation of an inverted head and shoulders formation.

You can see the neckline – the brown line. Once the neckline is broken to the upside, we were able to set our price target based on the depth of the neckline to the trough of the head, which is represented with the black arrow.

After we establish our long position, we place our stop loss below the last shoulder as shown in the image.

After 24 hours, our minimum target is reached and we exit the position after the first bearish candle circled in green.

This inverted head and shoulders formation brings us a profit of $2.20 per share with the Apple equity.

While we exited this position near the target, you should not exit your position if the price continues to move in your favor.

Reverse Head and Shoulders Target Example 2

Having fun? Let’s go through another example.

Reverse head and shoulders Price target example 2 — Price Target

This is the 30-minute chart of Facebook.

After a strong downtrend, an reverse head and shoulders pattern develops. Again, we identify the neckline by drawing a brown line across the shoulders.

We open a long position with the first candle that closes above the brown neckline. Meanwhile, we establish our minimum target, which is illustrated with the black arrow.

After a few days, the price reaches our minimum target, but we stay with our long position until our bearish signal develops. For more information on bearish candlestick patterns as entry and exit signals, visit our guide to candlesticks.

A few hours later, a hanging man develops and we close our long position. From this long position, we were able to generate profits of ~ $4.00 per share.

When does the Head and Shoulders Pattern Fail

Although head and shoulders are considered one of the most reliable chart patterns for equity trading, like any other chart technique – it can fail.

Sometimes, we will receive our confirmation signal and the price does not reach our minimum target.

In other cases, the price will confirm the formation by breaking the neckline, and we will see absolutely no movement in our favor. These cases are not rare at all.

head and shoulders pattern failure — Pattern Failure

This is the 60-minute chart of Toronto-Dominion Bank. After a steady downtrend, an inverted head and shoulders formation develops.

We establish the neckline, price target, and stop loss, which are best practices for identifying the formation.

Unfortunately, after opening a long position, TD Bank begins to retreat below the neckline and ultimately trips our stop-loss order.

From this position, we accumulated a loss of ~52 cents ($0.52) per share. Although all the symptoms of an effective pattern are there, things didn’t work out.

This is why it is important to respect your stops!

Day Trading Head and Shoulders Tops

The first thing to consider when day trading this pattern is that it requires time. Unless you are on sub-minute charts or tick charts, you will likely need two days worth of bars or an early afternoon set up for the formation to fully develop.

Like any other trading setup, you will need more than just the chart pattern to be a success. Some of these items include proper money management and a firm understanding of risk on each trade.

Back to an intraday example, check out this head and shoulders chart of RPM.

Intraday Top on RPM — Intraday Chart Example

You can see the setup is the same as all the other charts previously discussed, even though the chart is on a 5-minute time frame.

The key point, again, is that you will need to let the trade setup. It’s not like an opening range breakout with 4 or 6 candles after a major gap. It takes time.

This pattern requires you to let the trade come to you, which takes extreme patience. The positive is that the reward from the trade is significant because the “cause” built up before the move creates a large “effect,” typically. There are many traders on both sides of the trade placing real money on the line.

The key is, after the break of the neckline, managing the trade properly. This means placing your stop above the recent peak or trough point. Also, it means adding to the position as it goes in your favor, all while managing a core position.

Key Summary Points on Head and Shoulders Chart Patterns

Head and shoulders tops and bottoms are reversal chart patterns.
It is one of the most reliable technical formations.
Inverted head and shoulders can reverse a bearish trend to bullish.
You will need to identify the formation, neckline, and stop loss levels.
Open a position when the price breaks through the neckline.
Advanced/Early entries can be taken on pops into the moving averages on the right shoulder
Place a stop loss order on the edge of the last shoulder.
The price target for the formation is equal to the depth of the neckline to the head of the formation.
When the price target is met, stay with the position until a contrary signal develops.
The pattern can fail, so don’t get too sure of yourself.
Use a global news source to understand the financial impacts outside of your market which can impact the trade.

How Can TradingSim Help

As with any strategy, we never recommend putting your money to work without testing the setup first. Ideally, you’ll want a set of as many simulated trades as possible in order to know your probability for success.

In other words, don’t take our word for it. Jump in the sim, scan for reversals both long and short, and track them in the analytics page. This way, you’ll know ahead of time what your realistic outcome expectancy can be.

Along the way, be sure to study which areas provide the best points of entry for your specific head and shoulders pattern strategy.

Here’s to good fills!

Rising and falling wedges are a technical chart pattern used to predict trend continuations and trend reversals. In many cases, when the market is trending, a wedge pattern will develop on the chart. This wedge could be either a rising wedge pattern or falling wedge pattern. The can either appear as a bullish wedge or bearish wedge depending on the context. Thus, a wedge on the chart could have continuation or reversal characteristics depending on the trend direction and wedge type.

In this post, we’ll uncover a few of the simplest ways to spot these patterns. Likewise, will give you the best way to predict the breakout and trade them.

What do rising wedge and falling wedge patterns look like?

Although many newbie traders confuse wedges with triangles, rising and falling wedge patterns are easily distinguishable from other chart patterns. They are also known as a descending wedge pattern and ascending wedge pattern.

Rising Wedge – Ascending Wedge

The rising wedge pattern develops when price records higher tops and even higher bottoms. Therefore, the wedge is like an ascending corridor where the walls are narrowing until the lines finally connect at an apex.

The below image illustrates the rising wedge pattern formation:

Rising Wedge Pattern aka Ascending Wedge

Note that the rising wedge pattern formation only signifies the potential for a bearish move. Depending on the previous market direction, this “bearish wedge” could be either a trend continuation or a reversal. In other words, during an ascending wedge pattern, price is likely to break through the figure’s lower level.

A Bearish Wedge Pattern

Ideally, you’ll want to see volume entering the market at the highs of the ascending bearish wedge. This is a good indication that supply is entering as the stock makes new highs. A good way to read this price action is to ask yourself if the effort to make new highs matches the result.

Along those lines, if you see the stock struggling on elevated volume, it could be a good indication of distribution.

Falling Wedge – Descending Wedge

A falling wedge pattern is an exact mirror image of the rising wedge. As a descending wedge pattern, it develops on the chart when there are lower bottoms and even lower tops:

As you can see, the bottoms are decreasing, but the tops are decreasing at a faster pace.

Opposite to rising wedge patterns, falling wedge patterns are typically a bullish wedge, which implies the price is likely to break through the upper line of the formation. Much like our discussion above on ascending wedges, this descending wedge pattern should display the inverse characteristics of volume and price action.

Bullish Wedge Pattern

As a bullish descending wedge pattern, you should notice that volume is increasing as the stock puts in new lows. As this “effort” to push the stock downward increases along the lows, you’ll notice that the result of the price action is diminishing. This is likely due to accumulation efforts.

For this reason, it is commonly known as a bullish wedge if the reaction is to the upside as a breakout, aka a falling wedge breakout.

Predicting the breakout direction of the rising wedge and falling wedge patterns

Let’s be clear once again: rising and falling wedge patterns could result in a continuation or reversal. It all depends on the direction of the primary trend, and the context of the volume and price action.

You may be thinking, “But how is it possible for a pattern to have two very different outcomes?”

The answer to this question lies within the events leading up to the formation of the wedge.

Wedge Stock Pattern – Trend Continuation

During a trend continuation, the wedge pattern plays the role of a correction on the chart. For example, imagine you have a bullish trend and suddenly a falling wedge pattern develops on the chart. In this case, the descending wedge represents a correction. Thus, we expect a price breakout from the wedge to the upside.

The same applies for rising wedge patterns. The difference is that rising wedge patterns should appear in the context of a bearish trend in order to signal a trend continuation. Ultimately, the price action will break to the downside.

Wedge Chart Pattern Trend Continuation Example

Take a quick look at the image below, which shows how ascending and descending wedges behave during a bullish market:

Rising and falling wedge continuation patterns

As you can see from this 10-minute chart of GM, it is in a strong uptrend, which is tested a total of 9-times 9 (the blue line).

There are two falling and two rising wedge patterns on the chart.

As previously stated, during an uptrend, falling wedge patterns can indicate a potential increase, while rising wedge patterns can signal a potential decrease. Notice that the two falling wedge patterns on the image develop after a price increase and they play the role of trend correction.

Conversely, the two ascending wedge patterns develop after a price increase as well. For this reason, they represent the exhaustion of the previous bullish move. After the two increases, the tops of the two rising wedge patterns look like a trend slowdown. Hence, they are bearish wedge patterns in the short-term context.

Conversely, during a downtrend, we have the exact same scenario – price is likely to increase after a falling wedge pattern and price is likely to decrease after a rising wedge pattern. However, since the equity is moving downwards, our rising wedge pattern implies trend continuation and the falling wedge pattern – trend reversal. This is when the two types of wedges switch their roles. Yet, their behavior and potential remains the same.

Here is an example for your consideration:

Trend Reversal

In different cases, wedge patterns play the role of a trend reversal pattern. In order to identify a trend reversal, you will want to look for trends that are experiencing a slowdown in the primary trend. This slowdown can often terminate with the development of a wedge pattern.

Remember our discussion earlier? The best way to think about this is by imagining effort versus result. Before a trend changes, the effort to push the stock any higher or lower becomes thwarted. Thus, you have a series of higher highs in an ascending wedge, but those highs are waning.

In other words, effort may be increasing, but the result is diminishing. This is typical of a reversal pattern.

Trend Reversal Chart Example

Bullish Wedge and Bearish Wedge Trend Reversal Pattern — Wedge Trend Reversal Pattern

Above is a daily chart of Google and a 10-minute chart of Facebook showing the exact trigger for entering a position.

Note in these cases, the falling and the rising wedge patterns have a reversal characteristic. This is because in both cases the formations are in the direction of the trend, representing moves on their last leg.

How to trade ascending and descending wedge patterns?

Every wedge strategy has a signal line. Depending on the wedge type, the signal line is either the upper or the lower line of the pattern.

For example, if you have a rising wedge, the signal line is the lower level, which connects the bottoms of the wedge. If you have a falling wedge, the signal line is the upper level, which connects the formation’s tops.

The wedge strategy is simply this: When you see a break in the signal line, you should enter the market in the direction of the break.

For example, when you have an ascending wedge, the signal line is the lower level of the figure. When you see the price of the equity breaking the wedge’s lower level, you should go short. At the same time, when you get a descending wedge, you should enter the market whenever the price breaks the upper level of the formation.

Wedge Strategy – Where should you place your stop loss?

When trading a wedge, stop loss orders should be placed right above a rising wedge, or below a falling wedge. You do not want to make your stops too tightly as the price action will often violate one of the trend lines before rebounding swiftly. Instead, you’ll want to see a real break of significance to know you need to exit your position.

Wedge Strategy – When should you take profits?

The potential price target of a wedge is equal to its size.

This means that if we have a rising wedge, we expect the market to drop an amount equal to the formation’s size. If we have a falling wedge, the equity is expected to increase with the size of the formation.

Below you will see an image showing how to trade a rising and a falling wedge:

This is the 5-minute chart of JP Morgan. There are two wedges on the chart – a red ascending wedge and a blue descending wedge. We enter these wedges with a short and a long position respectively.

The overall JPM movement is bullish and the two wedges show a price cycle during a bullish trend:

Price bounces from a trend
Price starts hesitating and closes a rising wedge
The wedge is broken and the price decreases into a falling wedge
Price touches the trend and the falling wedge is broken in a bullish direction
New bullish movement appears

The blue arrows next to the wedges show the size of each edge and the potential of each position. The green areas on the chart show the move we catch with our positions. The red areas show the amount we are willing to cover with our stop loss order.

In both cases, we enter the market after the wedges break through their respective trend lines.

These two positions would have generated a total profit of 80 cents per share by JPM.

How to practice rising and falling wedge patterns

The best place to practice any strategy is in a market simulator. We suggest flipping through as many charts of the more liquid names in the market. Get out your trend line tools and see how many rising and falling wedges you can spot. Draw them, and then make note of the price action on the breakout or breakdown, identifying what made them a bearish wedge or a bullish wedge.

While you do this, analyze the bigger picture context. For example, is the stock in an uptrend or downtrend? What do higher time frames like the 15m, 1hour, or daily chart look like? Also, what does volume look like during the pattern?

Many times, you may find that volume recedes during bearish continuation wedges, while it may increase in bearish reversal wedges.

Over time, you should develop a large subset of simulated trades to know your probabilities and criteria for success before you put real money to work.

We hope this helps, and here’s a quick summary in parting:

Wedges are technical analysis chart patterns.
Wedge patterns could be rising and falling.
Rising wedge patterns usually imply an impending decrease in price.
Falling wedge patterns usually imply an impending increase in price.
Wedges could be trend confirming or trend reversing depending on the previous price movement.
We should enter the market with the break through the signal line of the wedge.
Stop loss orders should be placed above the rising wedge and below the falling wedges.
We should aim for a target of a minimum amount equal to the size of the wedge.
Even if the wedge is successfully completed, we should not close our position if the equity is still trending in our favor.

stick sandwich candlestick patterns banner

Candlestick patterns have been around for centuries. They are very useful in finding reversals and continuation patterns on charts. While we discuss them in detail in other posts, in this post we will focus on the stick sandwich pattern.

Stick Sandwich Definition

The stick sandwich candlestick pattern can occur in both bull and bear markets or intraday. The pattern consists of three candlesticks, where one candlestick has an opposite colored candlestick on both sides. The closing prices of the two candlesticks that surround the opposite colored candlestick must be same.

Think of it this way: it’s like an engulfing candle that gets reversed yet again.

Bearish Stick Sandwich Charting Example

The bearish stick sandwich is a rare candlestick pattern. Despite its name, it isn’t a bearish pattern. It simply means the bearish engulfing candle gets sandwiched.

The first candlestick in the formation is a long white (green) candlestick that closes near its high. The second candlestick is a black (red) candlestick that gaps down from the previous close and closes below the previous day’s open. The third candlestick is a white (green) candlestick that completely engulfs the second candlestick and has the same closing price as the first candlestick.

Notice how the bearish engulfing candle in the middle is sandwiched on either side by bullish candles, and eventually continues trend upwards. Traders should wait for the low of the third candlestick to be broken prior to taking any short positions.

Bullish Stick Sandwich Charting Example

Like the example above, the bullish stick sandwich is not actually bullish. It is bearish.

The bullish stick sandwich is a rare candlestick pattern. The first candlestick in the formation is a long black (red) candlestick that closes near its low. The second candlestick is a white (green) candlestick that gaps up from the previous close and closes above the previous day’s open. The third candlestick is a black (red) candlestick that completely engulfs the second candlestick and has the same closing price as the first candlestick.

Traders should wait for the high of the third candlestick to be broken in the bullish stick sandwich formation prior to taking any long positions.

Examples of Stick Sandwich Chart Pattern

Let us now review real-life chart examples of the stick sandwich candlestick pattern. Again, the stick sandwich can have a bearish or bullish characteristic.

Bullish Engulfing Stick Sandwich Candlestick Pattern

Bullish stick sandwich pattern — Bullish Engulfing Stick Sandwich Candlestick Pattern

This is the 5-minute chart of AAPL from January of 2022. In the blue circle, you see the bullish candlestick being engulfed by two bearish sticks.

The first candle of the pattern is bearish and closes near its low. Next, a bullish candle develops with a small gap and closes above the first candle of the pattern.

The third candle is bearish and fully engulfs the bullish candle. The last sign of the bullish engulfing stick sandwich is that the third candle closes near the closing price of the first candle. or lower.

After the pattern completes, the price reverses sharply to the downside over the next couple of minutes.

Bearish Engulfing Stick Sandwich Candlestick Pattern

This is the 5-minute chart of TSLA from January 2022.

After a price decrease, TSLA begins to form a bearish engulfiing stick sandwich candlestick pattern.

The first bullish candle closes near its high. Then the second candle is bearish, gaps down from the previous candle, and closes near the bottom of its range.

The third and final candlestick almost engulfs the second candlestick and closes near the closing price of the first candle of the pattern. The final candle launches the reversal, as you can see.

After the confirmation of the pattern, the stock begins an impulsive move higher, resulting in a $30 increase.

How to Manage Risk when Trading the Stick Sandwich Pattern

Now that you can recognize the stick sandwich candlestick pattern on the chart, let us now cover a few methods for how to manage risks when trading the pattern.

How Much Should You Risk?

There is a common saying that equity traders should not risk more than 2 to 3% of their capital in a single trade We believe this is a wise approach to risk management.

Now, if we use the premise of a maximum drawdown per trade of 1% with a success rate of 20%, what would be the results?

Imagine you have a bankroll of $10,000 and instead of risking 3%, you only risk 1% of your capital per day trade; this means that a single trade could result in a maximum loss of $100.
You use a trading strategy, which gives you a 20% success rate, which is 1:5 ratio.
At the same time, your strategy gives you a 6:1 risk-to-return ratio, or a 6% price target per trade.

Some of you will instantly say “Hey! This system will not work and you will surely lose your bankroll!”

Let us now calculate the results from five consecutive trades using this money management strategy starting with $10,000 in capital.

Your first trade is a loser and results in a $100 loss.
First, you invest $9,900 in an unsuccessful trade. You lose $99.
Next, you invest $9,801 in an unsuccessful trade. You lose $98.01.
Then, you invest $9,702.99 in an unsuccessful trade. You lose $97.02.
Lastly, you invest $9,605.96 in a winning trade. Your trade is a 6% winner resulting in your account shooting back up to $10,182.32.

This is how a strategy with only a 20% success rate can actually turn into a profitable trading system.

Higher Winning Percentages

Granted, it will be difficult for some people to trade like this. That’s a lot of losing to absorb mentally and emotionally. For some, we to constantly feel the money flowing into our account. After 4 or 5 consecutive losers, you might become susceptible to bending your rules to account for the losses.

If you suffer from the need to win frequently, then this approach will not work for you.

Now, shifting gears back to our stick sandwich candlestick pattern. Since it is a three-candle formation, it is considered more reliable than the two or one candlestick patterns.

For this reason, it is likely to give you at least a 50% success rate versus the 20% as illustrated above. You of course will need to test out the strategy to find the right level of risk/reward for you, but the math supports the theory that you can turn a profit.

Where to Place a Stop Loss when trading the Stick Sandwich Reversal Patterns

When you trade stick sandwich candlestick formations, you should always use a stop loss. On that token, with any trading system – you must use a stop loss!

No matter how good you think you are, at some point the market will take you for a ride if you let it.

Back to how to place a stop loss with the stick sandwich formation, you should place the order right below the low of the bearish engulfing candlestick pattern and the high of the bullish engulfing candlestick pattern.

This is the same TSLA chart from the previous example, but this time we have placed a stop loss order below the bearish engulfing stick sandwich candlestick pattern.

The great thing about the stick sandwich pattern is that you can keep a tight stop. This way you can increase your risk to reward ratio on each trade.

Taking Profits when trading the Stick Sandwich Reversal Pattern

The suggested price target for the stick sandwich candlestick pattern is three times the size of the formation.

Once the stock has moved three times the size of the formation, there are two simple tactics you can use to take profits:

Close a portion of the trade (one-third or half). This way if the price starts moving against you, you have booked profits and limited your downside risk. (On a positive note, if the stock continues higher, you can take advantage of the upside without the stress of carrying the entire position.)
Adjust your stop loss order below the low of the candlestick, which hits the price target. Now that you have placed your stop, you can then use a simple moving average or price action to keep you in the trade.

Putting it All Together

Let’s now put it all together to illustrate how to trade the stick sandwich candlestick pattern.

This is the 5-minute chart of TSLA, illustrating a bearish engulfing stick sandwich (highlighted in the blue circle).

The first candlestick in the formation is bullish and closes near its high. The second candlestick opens with a gap and closes below the first candlestick.

The third candlestick is bullish and nearly engulfs the second candle – closing at approximately the same level of the first candlestick.

Everything looks great based on the requirements of the formation and we go long, with a stop loss order right below the low of the pattern.

TSLA starts moving higher as expected and reaches our price target of three times the formation, 25 minutes after opening the trade.

Once reaching our price target, we adjust our stop loss order below the candle that hit the target.

Notice that the price starts to rollover for a time, but our stop loss remains untouched and TSLA is able to rally higher.

However, we see topping action and a hammer reversal pattern, which implies that this might be the end of the trend. For this reason, we adjust our stop below the hammer candle as shown on the image (Stop 3). We can also close out the position as it is the end of day.

Conclusion

The stick sandwich candle pattern is a rare chart occurrence where two candles sandwich another one.
The pattern has a reversal characteristic.
The sandwich pattern is a rare chart occurrence.
When we trade a sandwich candle pattern, we should pursue a minimum profit equal to three times the size of the formation.
A stop loss should be placed below the pattern.
A proper stick sandwich trading strategy should lead to at least a 3:1 return-to-risk ratio.

To practice this, there is no better way than to search for these patterns in the simulator. Also, be sure to check out our tutorial and cheat sheet on candlestick patterns!

In recent months we’ve seen a number of liquidity traps showing up as a result of the “dead cat” bounces from oversold conditions in many stocks. We’ve written fairly extensively on this setup before. So if you haven’t read up on the liquidity trap basics, be sure to do so, along with our explanation of Days to Cover. In this post, we’re going to dive a little deeper and uncover some more advanced entry techniques for liquidity traps.

What are liquidity traps?

We’re not going to spend much time here, because we assume you’ve taken the time to read the articles linked to above. However, as a brief reminder, liquidity traps can a very explosive and profitable strategy when trading lower float, lower priced stocks.

The concept revolves around a large volume day, usually a high-volume gap up. Because these stocks gap so frequently, they become prime targets for short sellers. More often than not, the large gaps end up being what many day traders refer to as a gap and crap scenario.

Usually, these are companies that bleed cash and hire PR firms to pump their stock to retail traders, only to sell more shares into the pump. This dilutes the company, obviously. It happens over and over again in the market. To learn more about it, be sure to watch our recent SimCast episode with Rick Analog.

Often times, one to many gaps that fail trains short sellers, like Pavlov’s dog, to slam the bid on day one. Fast forward a few days, add in a million more retail traders than prior years, and you’ve got a recipe for a fast 2-3 day short squeeze.

Here’s a liquidity trap example:

Notice a few things here. One, you’ve got a big selloff from the prior high volume day noted on the chart. Two, you have another “pump” day. But then, things get interesting.

In day 2 and 3 of the most recent pump, you get diminishing volume characteristics while price remains elevated. By the fourth day, shorts are in hot water as price breaks to a new high there, enough for a move from $2 to $3. That’s a huge move!

It’s the anticipation of the big secondary move that we call a liquidity trap setup. But how can we zoom in and find our best entry? That’s the question we seek to answer in this tutorial.

Advanced Entry Techniques for Liquidity Traps Using the VCP Strategy

Using the example of AACG above, let’s zoom in on a 15 minute chart and see if we can find the Volatility Contraction Pattern. This should allow us to set our risk levels off of “higher lows” in the formation.

AACG advanced VCP entry techniques on 15m chart — AACG advanced VCP techniques on 15m chart

As annotated on the chart, we have the initial run, like a flag pole. Then we have consecutive pullbacks that get tighter and tighter while maintaining key support levels. It’s our job to find an area to risk to in anticipation of a breakout.

The question will be, what happens on the current pullback, the 4th pullback. But let’s not jump the gun. Let’s use more technical analysis to help us time our entry.

Using VWAP Boulevard and Support/Resistance Lines as Advanced Liquidity Trap Entry Techniques

Now that we have some indication of a potential setup. Let’s look more in depth at the key levels on the chart.

One way to do this is using the concept of VWAP Boulevard. We’ve written an ultimate guide on this subject, thanks to the education efforts of @team3dstocks on Twitter. Be sure to check out both links if you aren’t familiar.

Applying vwap boulevard to our 15 minute chart and daily chart, we gain insight as to where the majority of the stake holders are present. This gives us clues as to where the “whales” might be supporting either their long or short positions. It also might represent who becomes the bag holder, and where that line is drawn.

VWAP Boulevard Support Lines on Daily Chart

In TradingSim, we’ve built a vwap boulevard drawing tool that allows you to select a range of candles from dates that you want. Here, we’ve selected only the closest candles to the recent high volume day. The key level for the highest volume day is 1.91.

Just a quick glance at the chart allows you to see that this remained a key support/resistance level in the days to follow. It’s a great way to manage risk over/under.

We’ll leave this drawing up, then head back to the 15 minute chart to see how these levels correspond.

VWAP Boulevard On Lower Time Frames for Advanced Liquidity Trap Entry Analysis

Coming back to the 15m chart of AACG, you’ll notice that we’ve left the key vwap boulevard lines from the daily chart, but have also drawn a second set of vwap boulevard lines based off of the 15 minute bars. This gives a bit of insight into the more granular “control lines” intraday.

Using vwap boulevard lines for advanced entry techniques in liquidity traps

Interestingly enough, the two black lines which represent the closing vwap of the largest volume candles create the channel for AACG’s consolidation. Why is this so cool? It gives you an idea of where to risk for long or short.

If you’re wondering what the other pinkish lines represent, they are vwap boulevard lines also — but not for the most significant volume candles.

So far, we’ve seen that we can use a volatility contraction pattern and vwap boulevard to help us build our advanced entry techniques for liquidity traps. Now, let’s look at the volume and price analysis.

Using Intraday Swings and “VooDoo” as Advanced Entry Techniques for Liquidity Traps

No, we’re not talking about black magic or dark arts here, even though it might seem like it the more you see Volume Dry Up into these patterns. This lack of supply often precedes large moves as shorts begin looking around wondering when their reinforcements are going to arrive.

We’ve written extensively on pocket pivots and vdu (“voodoo”) thanks to Gil Morales’s teachings. They go hand in hand with consolidation patterns like volatility contraction patterns. For that reason, let’s apply them to our AACG chart and see what we can glean for another advanced entry technique in this liquidity trap.

Advanced entry analysis with vdu and pocket pivots

We’ve left the vwap boulevard lines up, zoomed in just a little, drawn a descending diagonal trendline, and thrown in annotations for VDU and Pocket Pivots. Pay close attention to how the fourth day has a quick washout at the open. This then finds support at vwap boulevard yet again.

After the rally, we pull back into the body of those significant rally candles and find support on a higher low. Most importantly, volume diminishes during this pullback. As shorts begin to realize the impending squeeze, it leads to a pocket pivot of demand up and out of the trading range.

We test the upper vwap blvd briefly, then break to new highs.

Advanced Entry

You might be asking, where would I enter the stock long?

Using these advanced entry techniques, you could have entered long as the morning washout reclaimed the lower vwap boulevard level. We’d call this a spring move. Your risk would be set below that wick.

If you missed that entry, you might consider the pullback. We like to time our entries as volume moves from vdu to pocket pivots, risking the most recent vdu lows. In this case, you’d go long around $2.00-$2.05, risking just below $2 or $1.91 depending on your risk personality.

Analyzing Intraday Swings for Advanced Entry

We’d like to touch on one other technique for advanced entry in liquidity traps, and that’s intraday swings. Intraday swings are essentially the prominent trends that form throughout a consolidation in a stock.

Using the 15 minute chart, what we notice, in addition to the higher lows, is that the stock is losing its downward momentum over time. In other words, the slope of each downward swing is less and less. Take a look:

Diminishing intraday swing slope analysis

What this tells us is that the big picture could be bullish in the intermediate timeframe. If each day represents the force of supply, then it’s safe to say that supply is waning into the apex of the consolidation. This is typically bullish.

As traders, it is our job to consider this context as we anticipate and build a thesis behind a trade. It gives us the detail, along with all the other components of the structure that we’ve examined, that bolsters our conviction for the entry.

Conclusion

We hope this has helped you with the broader framework behind choosing a “setup.” Sometimes it’s as simple as seeing a pattern and pushing the buy button. But we think that the more boxes we can check with analysis, the more confident we can be in our trade.

Advanced early entry techniques like these provide opportunities for low risk, and higher reward. With enough backtesting of these strategies in the simulator, you may find your own niche. Breakouts can then become add-on points instead of high risk entries.

As with any strategy, it’s always best to test it in a simulated environment and track your results before putting real money to work

Here’s to good fills!

What was Bill Williams ^[1] thinking when he came up with the name awesome oscillator?

With names floating around as complex and diverse as moving average convergence divergence and slow stochastics, perhaps Bill was attempting to separate himself from the fray. To learn more about the awesome oscillator indicator from its creator, check out Bill’s book ^[2] titled ‘New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities‘.

In this article, we are going to attempt to better understand why Bill felt his indicator should be considered awesome by evaluating the three most common AO trading strategies and a bonus strategy, which you will only find here at Tradingsim.

So, what is the Awesome Oscillator Indicator?

Well by definition, the awesome oscillator is just that, an oscillator. Unlike the slow stochastics, which is range bound from +100 to -100, the awesome oscillator is boundless.

While on the surface one could think the awesome oscillator indicator is comprised of a complicated algorithm developed by a whiz kid from M.I.T., you may be surprised to learn the indicator is a basic calculation of two simple moving averages. That’s right folks, not an EMA or displaced moving average, but yes, a simple moving average.

Awesome Oscillator Indicator Formula

If you have a basic understanding of math, you can sort out the awesome oscillator equation. The formula compares two moving averages, one short-term and one long-term. Comparing two different time periods is pretty common for a number of technical indicators.

The one twist the awesome oscillator adds to the mix, is that the moving averages are calculated using the mid-point of the candlestick instead of the close.

The value of using the mid-point allows the trader to glean into the activity of the day. If there was a ton of volatility, the mid-point will be larger. If you were to use the closing price and there was a major reversal, you would have no way of capturing the volatility that occurred during the day.

The fact Bill saw the need to go with the mid-point, well is a bit awesome.

Fast Period = (Simple Moving Average (Highest Price + Lowest Price)/2, x periods)

Slow Period = (Simple Moving Average (Highest Price + Lowest Price)/2, x periods)

Awesome Oscillator = Fast Period – Slow Period

One point to clarify, while we listed x in the equation, the common values used are 5 periods for the fast and 34 periods for the slow.

Williams stated in his book, “It is, without doubt, the best momentum indicator available in the stock and commodity markets. It is as simple as it is elegant. Basically, it is a 34-bar simple moving average subtracted from a 5-bar simple moving average.” ^[3]

You, however, reserve the right to use whatever periods work for you, hence the x in the above explanation.

Awesome Oscillator on the Chart

Depending on your charting platform, the awesome oscillator indicator can appear in many different formats. Nevertheless, the most common format of the awesome oscillator is a histogram.

The awesome oscillator indicator will fluctuate between positive and negative territory. A positive reading means the fast period is greater than the slow and conversely, a negative is when the fast is less than the slow.

The one item to point out is that the color of the bars printed represent how the awesome oscillator printed for a period. Hence, you can have a green histogram, while the awesome oscillator is below the 0 line.

Basic Awesome Oscillator Trading Strategies

Now that we are all grounded on the awesome oscillator, let’s briefly cover the 4 most common awesome oscillator strategies for day trading.

#1 – Cross Above or Below the Zero Line

If you use this strategy by itself, you will lose money. To trust an indicator blindly without any other confirming analysis is the quickest way to burn through your cash.

Therefore, the strategy, if you want to call it that, calls for a long position when the awesome oscillator goes from negative to positive territory. Conversely, when the awesome oscillator indicator goes from positive to negative territory, a trader should enter a short position.

Without doing a ton of research, you can only imagine the number of false readings you would receive during a choppy market.

Let’s look at a chart example to see the cross of the 0 line in action.

In the above example, there were 7 signals where the awesome oscillator indicator crossed the 0 line. Out of the 7 signals, 2 were able to capture sizable moves.

This 5-minute chart of Twitter illustrates the main issue with this strategy, which is that the market will whipsaw you around like crazy. Choppy markets plus oscillators equal fewer profits and more commissions.

For this reason, we give the cross of the 0 line an F.

#2 – Saucer Strategy

The saucer strategy received its name because it resembles that of a saucer. The setup consists of three histograms for both long and short entries.

Long Setup

Awesome Oscillator is above 0
There are two consecutive red histograms
The second red histogram is shorter than the first
The third histogram is green
A trader buys the fourth candlestick on the open

Short Setup

Awesome Oscillator is below 0
There are two consecutive green histograms
The second green histogram is shorter than the first
The third histogram is red
Trader shorts the fourth candlestick on the open

Without going into too much detail, this sounds like a basic 3 candlestick reversal pattern that continues in the direction of the primary trend.

Explanation:

In the above example, AMGN experienced a saucer setup and a long entry was executed. The stock drifted higher; however, we have noticed from glancing at a number of charts, the buy and sell saucer signals generally come after a little pop. If you trade the saucer strategy, you have to realize you are not buying the weakness, so you may get a high tick or two when day trading.

The saucer strategy is slightly better than the 0 cross, because it requires a specific formation across three histograms. Naturally, this is a tougher setup to locate on the chart.

However, you can find this pattern when day trading literally dozens of times throughout the day.

Although we are attempting to locate a continuation in the trend after a minor breather in the direction of the primary trend, the setup is just too simple. It doesn’t account for trend lines or the larger formation in play.

Due to the number of potential saucer signals and the lack of context to the bigger trend, we give the saucer strategy a D.

#3 – Twin Peaks

Now, this is not the restaurant for all you chicken wing and brew fans out there.

This is a basic strategy, which looks for a double bottom in the awesome oscillator indicator.

Bullish Twin Peaks

The awesome oscillator is below 0
There are two swing lows of the awesome oscillator and the second low is higher than the first
The histogram after the second low is green

Bearish Twin Peaks

The awesome oscillator is above 0
There are two swing highs of the awesome oscillator and the second high is lower than the first
The histogram after the second peak is red

As you have probably already guessed, of the three most common awesome oscillator strategies, we vote this one the highest. The reason being, the twin peaks strategy accounts for the current setup of the stock. The twin peaks are also a contrarian strategy as you are entering short positions when the indicator is above 0 and buying when below 0.

Therefore, the verdict is in and we give the twin peaks strategy a solid C+.

#4 – Bonus Strategy

You will not find this strategy anywhere on the web, so don’t waste your time looking for it.

Going back to the crossing of the 0 line, what if we could refine that a little to allow us to filter out false signals, as well as buy or short prior to the actual cross of the 0 line.

This approach would keep us out of choppy markets and allow us to reap the gains that come before waiting on confirmation from a break of the 0 line.

We’re going to coin the setup as the Awesome Oscillator (AO) Trendline Cross

Long Setup – AO Trendline Cross

Awesome Oscillator has two swing highs above the 0 line
Draw a trendline connecting the two swing highs down through the 0 line
Buy a break of the trendline

As you can see in the above example, by opening a position on the break of the trendline prior to the cross above the 0 line, you are able to eat more of the gains.

The other point to note is that the downward sloping line requires two swing points of the AO oscillator and the second swing point needs to be low enough to create the downward trendline.

Bearish Setup – AO Trendline Cross

Awesome Oscillator has two swing lows below the 0 line
Draw a trendline connecting the two swing lows up through the 0 line
Sell Short a break of the trendline

In this example the cross down through the uptrend line happened at the same time there was a cross of the 0 line by the AO indicator. After the break, the stock quickly went lower heading into the 11 am time frame.

Where Can the Awesome Oscillator Go Wrong?

When testing strategies, we like to go through indicators and find where things fail. Finding the blind spots of an indicator can be just as helpful as displaying these beautiful setups that always work out.

So, to this point, let’s walk through a few examples where the trusted awesome oscillator indicator will have you on the wrong side of the trade.

#1 High Awesome Oscillator Values Beget Higher Price Values

If you are a contrarian trader, a high value in the AO may lead you to want to take a trade in the opposite direction of the primary trend.

It’s natural to see the extremely high reading and then say to yourself, there is no way the stock can go any higher.

This is where things can get really messy for you as a trader. Even if the AO keeps you on the right side of the trade with a high winning percentage, you only need one trade to get away from you and blow up all of your progress for the month.

Papa John's Failed Short — Papa John’s Failed Short

Can you identify the three peaks in the AO indicator? As you can see in the chart, we entered the trade on the open at $50.62.

Any short trader would have had enough reason with the negative news on Papa John’s founder at the time to short the morning pop. In addition, the AO was spiking like crazy and the rally did appear sustainable.

Well, guess what happened – Papa John’s peaked at $55.83 before consolidating. This would have represented a move against us of 10.2%. Now if you are day trading and using a lot of leverage, it goes without saying how much this one trade could hurt your bottom line.

How to prevent yourself from getting caught in this situation? First, a major expansion of the awesome oscillator indicator in one direction can signal a really strong trend. So, do yourself a favor and do not stand in front of the bull.

Secondly, use stops when you are trading. There is no reason you should ever let the market go against you this much.

#2 AO Readings on Low Float Stocks Can Get Tricky

Many of you may trade larger caps rather than low float stocks, because you’re able to scale in with larger size with low volatility plays. However, we know low float movers are a big deal in the day trading community.

So, how does the AO indicator handle low float movers?

Well like most indicators – not well.

Low Float - False Signals — Low Float – False Signals

This is one of those charts that would have you pulling your hair out. It’s like everything that could go wrong with the indicator did, in fact, go wrong!

First, if you shorted the opening spike, similar to our Papa John’s example, this would have caused you serious pain. Next, EGY spikes lower giving the impression the stock was going to fill the gap. Wrong again, as EGY only consolidates leaving you with a short position that goes nowhere.

Lastly, EGY breaks the morning high all the while displaying a divergence with the awesome oscillator and the price action.

In every instance, the indicator is giving off false signals and leaving you on the wrong side of the trade.

Well, it’s not all the fault of the AO indicator.

You as a trader need to be prepared for the harsh reality of trading low float stocks. These securities will move erratically, with volume and in a very short period of time.

In a related article on Stocktwits Blog ^[4], see how day trader Dave Kelly describes trading low float stocks and the level of volatility with these securities.

We’re not saying ditch the AO indicator altogether but be prepared to combine the AO with other indicators. Also, lower your expectations about how accurately the oscillator can create price boundaries which a low float will respect.

Awesome Oscillator and the Futures Markets

Shifting gears to where the awesome oscillator is likely to give you more consistent signals – the futures markets. More specifically the S&P E-mini futures contracts.

The reason the awesome oscillator indicator works so well with the e-Mini is that the security responds to technical patterns and indicators more consistently due to its lower volatility.

Notice how these AO high readings led to minor pullbacks in price. Now, these are not going to make you rich, but you can capitalize on these short-term trends.

There were still a few signals that did not work out, so you will need to keep stops as a part of your trading strategy to make sure your winners are bigger than your losers.

In Summary

So out of the trading strategies detailed in this article, which one works best for your trading style?

You may find that you like the idea of drilling into where the awesome oscillator indicator fails to uncover trading opportunities.

No matter what strategy you lock in on, you will want to make sure you use stops in order to protect your profits. Also, be sure to look at different types of securities to see which one fits you the best.

To recap these types of securities, please see the below list:

low float
low volatility
futures contracts

Here’s to good fills!

External References

Bill Williams. Wikipedia
Williams, Bill. (1998). ‘New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities‘. John Wiley and Sons, Inc.
Williams, Bill. (1998). ‘New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities‘. John Wiley and Sons, Inc., pg. 85
A Conversation About Low Float Stocks and Why Traders Should Understand Them [Blog Post]. Stocktwits.com