Common Trading Patterns

Simple Pullback

1. The Simple Pullback: The pullback is a trade intended to enter a trending market. Pullbacks may occur at the beginning of a trend, in the middle, or at the end. Pullbacks seek to capitalize on the fundamental nature of trends: the alternation of with-trend legs with counter-trend pullbacks.

Complex Pullback

2. The Complex Pullback: Simple pullbacks have one counter-trend leg. Complex pullbacks have two or more counter-trend legs, and can be thought of like this: A trending market turns into a pullback. The pullback makes an effort to resume the original trend, and that effort fails. The market then rolls over into another pullback leg, and a second (or further) attempt to resume the trend succeeds. Complex pullbacks present challenges and risks to trend traders, because traders are often stopped out when the first attempt to resume the trend fails, but powerful trend moves can develop from these structures.

Failure Test

3. The Failure Test: The failure test (also called a bull or bear trap, spring or upthrust, or a 2B trade) occurs when a market attempts to move past a previous pivot point, trades beyond (“tests”) that point, but quickly reverses. This trade capitalizes on the tendency of markets to seek volume, and to attempt to trigger stop orders, and also on the possible capitulation of traders playing for continuation past the previous level. A failure test is a type of failed breakout, and is a counter-trend pattern that offers a precise entry point with clearly defined risk levels.

Anti

4. The Anti: The Anti is essentially the first pullback following a trend change. The ideal sequence is an established trend shows signs of potential failure (climax, overextension, etc.), and then experiences the first, sharp counter-trend shock. The Anti then occurs on the first pullback following that large shock, and may be the first pullback in a new trend. There are ways to trade this pattern in ranges, or around other structural points. As with all trades, risk management and a disciplined approach to profit taking are essential.

Breakout Trade

5. Breakouts: Breakouts are trades that look to enter a market when they beyond a previously defined support and resistance point. Though these trades can represent meaningful opportunities, they also bring risk and volatility to the trading book and depend on proper management for much of their edge.