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Patterns to Focus On (& Avoid) In the Stock Market

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In trading, you’re gonna constantly hear about patterns, patterns, patterns. And you need to recognize good patterns versus mediocre patterns. In today’s article, I’m gonna talk to you about two patterns to focus on, as well as two patterns to avoid.

You’re gonna hear patterns, patterns, patterns, all the time in day trading, swing trading and even investing. And there’s hundreds of patterns out there. You should, you know, we’ve reviewed many books on the SteadyTrade podcast, as well as in our YouTube videos about locating chart patterns.

A favorite book of mine is, Japanese Candlesticks by Steve Nison. Now, there are tons and tons of chart patterns in there. You should use that as a reference. But at the end of the day, especially, in momentum stocks, one of the things we like, ’cause there’s only a handful of patterns that tend to repeat, repeat and repeat.

And you know, again, if you’re listen to the SteadyTrade podcast, we drive home that idea of finding your one setup. Your one thing that consistently works for you. Then, expand to two. Then, expand to three, et cetera.

So, I wanna talk to you about two chart patterns that you should look for, that you should immediately add to your repertoire. And two patterns that you should ignore.

Number one, is what we call, the clean chart.

I mean, it’s kind of a vague term. I’m sure, if you’re new to trading, you look at any stock chart and you think, jeez, there’s stuff all over the place. It looks messy to me.

What’s a clean chart? Well, when we say, clean chart, we’re looking for a stock that is breaking out of previous levels. So, say, a stock has gone from one to two, back to one, back to two, back to one, back to 250, back to two.

You know, it’s this kind of up and down, sideways, up-and-down pattern. And then, at some point that stock, if it has (mumbles) catalyst, can break out of those levels. That’s what we refer to as a clean chart.

Because now, you’ve really got, for lack of a better term, blue sky above. Now, it doesn’t mean that that stock will continue to go higher. But you have to put your mind in the psychology of the long-term traders, of the day-traders that have been stuck in this stock through those ups and downs.

They finally see that breakout to new levels. They get excited. They add to their new positions. There’s tons of traders using stock scanners out there. Which, if you’re not using StocksToTrade, you should definitely check it out.

Because it allows you to spot these clean breakouts. So, now, once it breaks out of that channel, we call it, it shows up on everybody’s radar. So, you got new buyers coming in. You’ve go that, you’ve got those bad holders, those long-term holders. They are like, woo-hoo, we’re at new highs, let me buy more stock.

More buyers means, the potential for the stock to go higher. Then, the other reason we like that clean chart is, it gives you a clear stop-loss. So, I know, I’m doing the hand gestures. But, you know, as you see those peaks, as the stock continues to peak-out at a level and then it breaks through that, you’ve got a very clearly defined stop-loss.

If that stock falls back to that level, it’s now a failed breakout. It’s a failed clean chart. You know that, okay, I tried this trade, it didn’t work, I stop out. Remember, one of the biggest parts of trading being successful, being consistent, is taking small stop-losses, controlling your losses and moving on to the next trade.

A losing trade is never a bad trade if you research the process and you stuck to your stop-loss. The only bad trade is, when you are wrong and you’re gonna be wrong a million times in your career.

But the bad trade is when you’re wrong and you stay in the trade. So, look for those clean charts. Use StocksToTrade to spot.

The next, my favorite pattern, is what we call, the parabolic, the supernova.

The, you know, there’s a million different terms for it. This is those charts, that particularly, in low float stocks, we see this pattern several times a week. Sometimes, several times a day. And you can use StocksToTrade to spot these with the pre-build scanners.

But the (mumbles) about this pattern is, you’re looking for these stocks that had been dead forever. You know, they basically have done nothing. And then, an event comes out, they’re in a hot sector, they get some sort of a catalyst, whether that be a contract or an earnings announcement. And they just go up, quote-unquote, ridiculous.

Maybe a 100%, 200%, 300% on the day. These are the patterns that we look for, because the volume comes in. You’ll see record volume, you’ll see a huge move. These are great patterns if you have risk management to buy into the close, what we call, a gapper.

These are they types of setups that tend to continue going the next day. Because everybody gets home at night, they do their research, they see this big gainer, they see the news and they wanna buy-in the next morning.

So, you recognize that ahead of the herd, you buy into the close, these stocks in the supernova pattern, tend to run for a multiple days, you sell into those spikes and then, you just look to repeat that over and over again.

So, keep an eye out for the clean chart as well as the supernova. And then, the last two, I wanna talk about our patterns to avoid.

First, is what we call, a messy chart.

I’m amazed at the number of people that will try and look for these stocks that are just stuck in a range. They might see news. But remember, unless the stock is exploding higher, ignore the news.

So many traders make this mistake of believing the press release. Remember, low-price stocks or all stocks, they’re publicly traded ’cause they need to sell shares, you know. They need to sell stock to fund operations, to pay employees, you know, to do all these, to just buy raw materials, even.

So, they’re there to sell stock. So, if you believe a press release on a stock that isn’t moving, you’ll be stuck, it will go sideways, you will hate your life.

Avoid those charts that don’t breakout.

Jump back in this article where I talked about the clean chart. When I talked about that choppy area. You don’t buy until it breaks out on news.

And then, the last pattern is, you know, you’ll hear many traders like Tim Sykes call this, the crow. I just call it an ugly chart and the opposite of the clean chart.

This is just that long-term down-trending chart.

Where, I mean, the stock was a $100 a year ago, it was $50 six months ago, it’s $5 a month ago and it’s 50 cents today. I’m not sure why, but there’s a certain allure to newbies, you know. You’ll hear, buying on a discount.

Oh, you’re buying the stock at 50 cents today, it was a $100 a year ago, you’re gettin’ it on sale. Remember, a stock went from a $100 to 50 cents, for a reason. It’s probably a terrible company. It’s probably selling shares to just desperately stay alive.

The odds of these stocks bouncing is so low. They do bounce occasionally. But you’re better off buying a lottery ticket or going to Vegas because 99 out of a 100 of them, or 999 out of a 1,000 of them never bounce.

So, avoid those long-term down-trending charts. So, again, to patterns to look for, two to ignore. Comment below, what’s your favorite pattern? Do you try and buy stocks at 52-week lows, hopin’ they bounce? Or do you look for those clean charts? Or what other patterns you look for? The (mumbles), the head and shoulders. There’s a million chart patterns out there.

Comment below and let me know what your favorite is. Thanks for reading our article.