Trade Chart Patterns Like The Pros

"Don't read this book - MAKE MONEY WITH IT! Trade Chart Patterns Like The Pros by Suri Dud-della is one of those rare opportunities to build a base of knowledge that can take you further each time you trade. Suri has laid out an indispensable tome on trading chart patterns based upon his real-life experiences in a format that will work well for the spectrum cf investors - from novice to expert. Trade Chart Patterns Like The Pros stays focused and does not overwhelm you with mathematical statistics and technical jargon that will surety turn you off."

"... Suri's "trader-sense" perspective helps you identify a pattern and apply the relevant techniques to enter, manage and exit the trade. Each of his 65 patterns includes a brief synopsis written in plain English and an actual chart to reinforce the concept, not a conveniently drawn perfect example that never occurs in real life. Suri explains the setup and then provides the entry point triggers as well as an exit strategy with targets for profitable trades and stops to minimize any losses."

"...Suri's practical approach will give you insights that will make it harder to lose. Great investing books never sit on the bookshelf - they stay at your side as a trading partner and I can think of no better trader to have at my side than Suri Duddella. Trade Chart Patterns Like The Pros is destined to become one of those rare TA books that you spend less time reading and more time using to MAKE MONEY."

— Michael Steinhardt, HEDGE folios founder

"..Anyone who has had the privilege of trading alongside him will tell you that Suri's trading skills are second to none. He is consistent and disciplined, but what sets Suri apart is his ability to find and exploit regular market patterns.

This book shares Suri's techniques in detail. For the past two years, I have watched the book develop from a concept info a finished product. The results have exceeded even my high expectations, and I will certainly keep a dog-eared copy within arm's reach of my own trading turret. This book answers the "how" question. It reveals actual techniques that top traders actually can and do use, in a format that lets you use them yourself.

Beginning and experienced traders alike will benefit from this book. Applying these techniques can help the rest of us improve our trading too. "

— Joshua Silverman

www.suriNotes.com

Copyright by Suri Duddella 2007

Legal Notices and Disclaimer: Trade Chart Patterns Like The Pros - 2007 ALL RIGHTS RESERVED

No part of this book may be reproduced or transmitted without the express written consent of the author and the publisher.

This book relies on sources and information reasonably believed to be accurate, but neither the author nor publisher guarantees accuracy or completeness.

Trading is risky. You are 100% responsible for your own trading. The author, Suri Duddella, specifically disclaims any and all express and implied warranties. Your trades may entail substantial loss. Nothing in this book should be construed as a recommendation to buy or sell any security or other instrument, or a determination that any trade is suitable for you.

The examples in this book could be considered hypothetical trades. The CFTC warns that:

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

ISBN 978-1-60402-721-1

COPYRIGHT © 2007 - Suri Duddella

Charts are created with TradeStation Software from TradeStation Securities. Printed in the United States of America

X070806.3

ACKNOWLEDGMENTS

It has been many years since I first thought of writing this book. Sometimes I was discouraged about finding the time necessary to write such a book. Sometimes a clear concept or design for the book was mentally unavailable. With encouragement and support from some of my friends, I finally gained the courage, time, motivation and focus to begin the project. Below are the friends who encouraged me to write this book and who have significantly influenced my ideas and concepts. My sincere thanks to them all. Without their help, this book would not have been possible.

Dan ("Dr") Doss Josh Silverman Michael Steinhardt Suneeta Bindal Mark Whiting Mark Booher Michael Taylor TradeStation Securities

Special thanks to my editor, John LoCastro from word-design.org for editing and re-writing this book.

Also, I sincerely thank Scott Carney ofharmonictrader.com and Michael Jardine of enthios.com who have graciously given me permission to use a portion of their work on Harmonic patterns and Market Structures in this book.

TABLE OF CONTENTS

CHAPTER 1: CHART TYPES

...1

1.1. Basic Charts, 1

1.2. Candlestick Charts, 5

1.3. Three Line Price Break Charts (3LPB), 9

CHAPTER 2: BAR GROUPS

,13

2.1. Market Structures, 13

2.2. Three Bar Groups, 19

2.3. Matching Highs/Lows, 23

2.4. n-Bar Rallies/Declines, 27

2.5. 7-Day Narrow Range & Inside Day, 31

2.6. 7-Day Wide Range & Outside Day, 35

CHAPTER 3: PIVOTS

39

3.1. Floor Pivots, 39

3.2. Globex (Overnight) Pivots, 43

3.3. Opening Range Pivots, 47

3.4. FibZone Pivots, 51

CHAPTER 4: FIBONACCI

...55

4.1. Fibonacci Trading, 55

4.2. Symmetry Patterns, 61

4.3. Market Fractals, 65

CHAPTER 5: HARMONIC PATTERNS

69

5.1. ABC Patterns, 69

5.2. Gartley Pattern, 73

5.3. Bat Pattern, 79

5.4. Butterfly Pattern, 83

5.5. Crab Pattern, 87

CHAPTER 6: GEOMETRIC PATTERNS

6.2. Rectangle Pattern, 99

6.4. Wedge Patterns, 109

6.5. Diamond Pattern, 115

CHAPTER 7: CHANNELS

...119

7.1. Rectangle Channels, 119

7.2. Donchian Channel, 123

7.3. Broadening Pattern (Megaphone), 127

7.4. Linear Regression Channel, 133

7.5. Andrew's Pitchfork, 137

CHAPTER 8: BANDS

.141

8.1. Bollinger Bands, 141

8.2. Keltner Bands, 145

8.3. Fibonacci Bands, 149

CHAPTER 9: ZIGZAG 153

9.1. ZigZag Patterns, 153

9.2. Elliott Wave, 157

9.3. Crown Pattern, 161

CHAPTER 10: PRICE-ACTION 165

10.1. Cup and Handle Pattern, 165

10.2. Head and Shoulders Pattern, 169

10.3. Parabolic Arc Pattern, 175

10.4. Three Hills and A Mountain Pattern, 179

10.5. Three Valleys and A River Pattern, 183

10.6. Spike and Ledge Pattern, 187

CHAPTER 11: TOPS AND BOTTOMS 191

11.1. Adam-Eve Patterns, 191

11.2. Trader Vic's 2B Patterns, 195

11.3. Trader Vic's 1-2-3 Patterns, 201

11.4. Pipe Pattern, 205

11.5. M and W Patterns, 209

11.6. Round Top Pattern, 213

11.7. Round Bottom Pattern, 217

11.8. V-Top Pattern, 221

11.9. V-Bottom Pattern, 225

11.10. Double Top Pattern, 229

11.11. Double Bottom Pattern, 233

11.12. Triple Top Pattern, 237

11.13. Triple Bottom Pattern, 241

CHAPTER 12: EXOTIC PATTERNS 245

12.1. Dragon Pattern, 245

12.2. Sea Horse Pattern, 251

12.3. Scallops Pattern, 255

CHAPTER 13: EVENT PATTERNS 259

13.2. Dead Cat Bounce, 265

13.3. Island Reversal Pattern, 269

APPENDIX 273

Definitions, 274 Bibliography, 275 About the Author, 276

FOREWORD by Joshua Silverman

There is a famous basketball court in New York City called Rucker Park. Legend has it that the amateurs who played there were so good, they could take on the pros. There were no shoe contracts or television cameras, but fans sitting on those worn bleachers could see some of the best pure basketball anywhere.

If there were a Rucker Park for trading, Suri Duddella would hold court there. He may not be a regular guest on CNBC or run a billion dollar hedge fund, but anyone who has had the privilege of trading alongside him will tell you that Suri's trading skills are second to none. He is consistent and disciplined, but what sets Suri apart is his ability to find and exploit regular market patterns.

Traders at that level rarely let readers have more than a peek behind the curtain, This book shares Suri's techniques in detail. For the past two years, I have watched the book develop from a concept into a finished product. The results have exceeded even my high expectations, and I will certainly keep a dog-eared copy within arm's reach of my own trading turret.

Plenty of books will tell you what a flag or diamond or Gartley pattern is. Many will tell you whether the patterns are bullish or bearish. But that's where the detail stops. Because most of these books are written by professional authors, not traders, they cannot provide any guidance on exactly how to trade these patterns. This book answers the 'how' question. It reveals actual techniques that top traders actually can and do use, in a format that lets you use them yourself.

Beginning and experienced traders alike will benefit from this book. The biggest beneficiary, though, is probably Suri Duddella himself. Writing this book has forced him to define and hone his techniques. I have watched him bring his trading game to the next level. He is too modest to admit it, but even if this book doesn't sell a single copy, it has already been a huge success for him. Applying these techniques can help the rest of us improve our trading too.

Joshua Silverman Chicago, IL

REVIEW by Michael Steinhardt

Don't read this book - MAKE MONEY WITH IT! There are hundreds of Technical Analysis books and only a handful will ever help you make enough successful trades to recover the purchase price. Trade Chart Patterns Like The Pros by Suri Duddella is one of those rare opportunities to build a base of knowledge that can take you further each time you trade.

Like the Chinese proverb that says, "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime." Suri has laid out an indispensable tome on trading chart patterns based upon his real-life experiences in a format that will work well for the spectrum of investors - from novice to expert. Unlike the 'encyclopedias' you can find on this unbelievably deep and complex subject, Trade Chart Patterns Like The Pros stays focused and does not overwhelm you with mathematical statistics and technical jargon that will surely turn you off.

Instead, Suri's 'trader-sense' perspective helps you identify a pattern and apply the relevant techniques to enter, manage and exit the trade. Each of his 65 patterns includes a brief synopsis written in plain English and an actual chart to reinforce the concept, not a conveniently drawn perfect example that never occurs in real life. This book provides a universal resource for 65 of the most common scenarios that you will run into regardless of your investing time frame (intraday to weeks at a time) and your preferred financial instrument. It's not enough to recognize a pattern; you need to understand the key elements of the trade and how to make it work for 'long' and 'short' positions. Suri explains the setup and then provides the entry point triggers as well as an exit strategy with targets for profitable trades and stops to minimize any losses.

What I can promise you is that Suri's practical approach will give you insights that will make it harder to lose. Great investing books never sit on the bookshelf - they stay at your side as a trading partner and I can think of no better trader to have at my side than Suri Duddella. Trade Chart Patterns Like The Pros is destined to become one of those rare TA books that you spend less time reading and more time using to MAKE MONEY.

Michael Steinhardt, HEDGEfolios founder

INTRODUCTION

INTRODUCTION

I have been a mathematician all my life and I am drawn to the application of mathematics in my studies and work. I studied engineering and computers, and eventually found myself involved in the financial markets. The markets offer me a never-ending challenge and the combined application of my true passions-mathematics, logic, computers and money.

When I began focusing on the financial markets in 1995, my first inclination was to study the price movements of the stocks, which in turn led me to study technical analysis. I attended every major market conference and studied many books on the markets. I was fortunate to meet some of the best market 'gurus' and learn the market ropes from them. This was the turning point for me and I decided to pursue trading as my career. Since then—for the past 12 years—I have been studying the financial markets and trading full-time rather successfully. I have made many mistakes—and still do to this day—and I am committed to learn from them. I have had the opportunity to present my trading methods to numerous conferences and have written many articles in various trade magazines. I found my niche to be Pattern Trading.

Many brilliant books have been written on Market Theories, Market Geometry and Pattern Trading. From these books I found what I consider the best strategies, trading techniques and the most reliable chart patterns. Some of the chart pattern techniques have a very high success rate. I have been trading them, and collecting and documenting the results since 1998.1 considered writing a detailed reference book for my own trading and in 2005,1 began to document these ideas and compile them in a book.

The best part of collecting ideas and writing about these patterns has been that it has significantly improved my own understanding of the inner workings of the markets, and in many ways has greatly improving my own trading techniques. Here is my book, Trade Chart Patterns Like The Pros. It provides specific and practical trading techniques and how I trade them. Each pattern is written from the perspective of the trader. Many of the techniques are my own observations and my own trading methods. Not every chart pattern will be suitable for every trader (e.g., counter trend trading, V-bottoms and V-tops may not be for you). In addition, some charts may be too elusive (e.g., diamonds) or too exotic (e.g., sea horse or dragon). Gartley and Butterfly may be too complex._

Regardless of what patterns you are interested in trading, you must master their details before trading them. Patterns must be studied thoroughly in various markets, time-frames and in all conditions. I have spent almost twelve years studying them thoroughly and they still fascinate me. I believe a few patterns are fully reliable and can be traded every time by themselves without the need of support from other indicators or confirming conditions. Other patterns need confirmation and may be less reliable traded independently. Knowing when to trade is a very important aspect of trading education and could be the 'key' to any trader's success. I constantly remind myself that technical analysis is only tool and pattern recognition is only part of the market analysis. Trading success comes from key areas like analysis, trading discipline, execution and money management skills. I will focus on Pattern Analysis and Trading in this book.

WHY THIS BOOK?

There have been many books written on market analysis, technical analysis, trading techniques and various trading methods. Most of these books detail very elaborate concepts, psychology behind the theories, what-if scenarios, statistics and excellent examples. In my view, though, many of these books miss the 'trader perspective' of when and how to trade. Therefore, in this book I will address the trading perspective rather than myriad details of pattern history, random comparisons, unproven or semi-useless statistics, or even some random stories. Most traders are anxious to know what and how to trade, and to know where the entry, the stop or the target is. This book focuses on those points and gives you details of trading every pattern. I have covered about 65 of the most unique, frequent and important patterns that are presented in day-to-day trading. I have provided credits for the original authors of some of those patterns where possible. There may be other patterns which appear frequently which I may have failed to cover. Find some patterns that pique your interest from the 65 patterns presented in this book and master them. You only need one single pattern to be successful.

NO OSCILLATORS OR INDICATORS?

This book is designed to show the patterns independently and provide trading examples of every pattern. Oscillators and momentum-based indicators have not been included. It is important that the reader fully understand just the pattern and its intra-bar relationships, and other indicators may obscure the actual understanding of these patterns. I have studied oscillators and have built excellent strategies to trade with them, but I have had much better success when I rely on solely on patterns. Hence, I have not included any oscillators in this book. I do not mean to say that oscillators and momentum-based indicators do not work—they do work with the right mind-set at the right time. Obviously, I am biased toward chart patterns and truly think they are far more reliable than momentum- or oscillator-based indicators.

WHAT ABOUT STATISTICS?

There are no perfect chart patterns and chart patterns do fail—the key is to know when to trade them and when to avoid them. So, what are the success and failure rates of the patterns? This is very valid question and will be addressed when studying the patterns.

As an engineer and mathematician I understand the power and the importance of statistics very well. To a trader, statistics must be practically useful, but too often they are not. I have seen unproven statistics presentations elsewhere, such as the failure rate waiting for a downside breakout is 32%—but if you don't wait, it is 36%. Or, the average rise is 40%, but most likely it will be 12%. Or, the percentage of high and low price breakouts subject to throwback is 33%. What do these statistics mean to a trader? Having been around the trading world the past 12 years, I know a little bit about what and how traders think. While trading, no trader remembers such statistics and no one trades using such specific statistics. Does the trader's decision change if the throwback rate is 32% instead of 33%? No, he trades what he sees, what he knows and what he has confidence in. His eyes are set on an entry, a stop and targets, and not on some unproven and semi-useless statistics. Hence, I have provided some reliability analysis about a pattern and avoided elaborate statistical analysis in this book.

XVll

BOOK STRUCTURE & FORMAT

Perspective

Most concepts in this book are compelled by a 'trading perspective.' After showing how a pattern has developed, the focus is on what to do next.

Format

Each Pattern section is structured to provide: a brief overview, pattern structure description and pattern trading examples with detailed entry, stop and targets.

Type of Charts

Most charts in this book are presented utilizing bar charts for illustration. I have also chosen to use some candlestick charts. All charts were created in TradeStation.

Time-Frames

Most examples are provided with tick, minute and daily charts. I have used stocks and E-mini futures for the examples and pattern descriptions.

Charting Software

TradeStation Securities

XVlll

Entry Rules

In trending markets, pattern formation confirmations are critical for trading success. In counter-trend trading, there are no clear confirmations other than price trading at some level, divergence, completion of pattern structure, or plain hunch. Most of the reversal patterns need a price confirmation from price reversal zones. An important technique I implement in my trading is to find a reversal bar (the wider the better) and then entering one or two ticks above that bar's high or below the bar's low. I found significant success using this basic technique and use it in examples throughout this book. For example, if I am presenting a 'long' setup in a pattern after a trendline breakout, I initiate a 'long' trade only at 1 or 2 ticks above the breakout bar's high. Similarly, if I am presenting a short setup after a trendline breakdown, I initiate a 'short' trade only at 1 or 2 ticks below the breakdown bar's low. These entries are only valid for the next 3 to 5 bars. Beyond that, the setup may not materialize and should be avoided in most cases.

Stop Rules

Most patterns are traded after clear confirmation signals. The success of Pattern structures is dependent on market conditions. A pattern failure may occur when the pattern setup is not valid due to price-action reversals. For example, a Cup and Handle pattern formed in bear markets may fail more than in bullish markets. Even though I like dollar stops in my short-term trading, there are many times the stops are set at a critical Fibonacci confluence level, or at a major swing high or major swing low, or at some trendline support/resistance levels. Once the price breaches any of these levels, in weaker or stronger markets, the pattern structure will fail. Trading against these levels is really a futile proposition. Sometimes pattern ranges are so large that the risk-to-reward may not be attractive. Hence, stop protection at the half of the pattern range is considered. For harmonic patterns, I implement Fibonacci retracement/expansion ranges for stops.

Target Rules

Managing stops and targets is an art form. Every pattern has its own targets and stops. My trading rule is "never enter a stock just because of some price level (e.g., Fib. level, MA, Support) alone, but always exit because of some important price level to protect your profits." This rule applies very well to targets. I base many of my targets on a portion (Fibonacci ratio) of the prior swing range or multiples of the prior swing range. In channel trading, it is the range of the channel or depth of the patterns, such as in head and shoulders or swing highs/swing lows prior to the pattern formations.

Fibonacci Focus

I employ Fibonacci ratios extensively to show support and resistance levels. I use a specific set of Fibonacci extensions and Fibonacci projections. The primary Fibonacci numbers I focus on are: 0.382, 0.5, 0.618, and 0.786 for the retracements and 1.272 and 1.618 for the extensions. The secondary Fibonacci focus is: 0.236, 0.886, 2.272, and 2.618.

Harmonic relationship Focus

Harmonic price zones occur when there is a convergence of harmonic price ratios/numbers or calculations that occur in a specific area. The trade reversals in these zones have a very high probability and can be traded with confidence. I have used harmonic price zones in the book to focus on certain trade examples.

Major Swing High or Swing Lows

Markets stage major support and resistance zones at key turning points called 'swing highs' and 'swing lows.' A major phase of support is established through a series of lower lows followed by higher highs forming a swing low and a resistance phase is established by higher highs followed by lower lows forming a swing-high. In this book, I focus on taking advantage of these support and resistance zones for either a primary or secondary target. I have used major swing highs or swing lows as protective profit targets. Most traders like to protect their profits at major swing high or swing low as the trade has a high probability of turning or pausing at these levels.

Chapter 1 : Chart Types 1.1. Basic Charts

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