The Master Swing Trader: Pattern Cycles

“Bull, Bear, Top, Bottom, Breakout, Breakdown, High, Low. That’s about it”. Farley’s recommendation is to recognize pattern cycles within these constraints, and trade them. His recommendation is to identify Support/Resistance price points, and trade between them. He spends quite a lot of effort in teaching how to identify these points, and when to enter the trade.

Over the next couple of weeks, I’d like to explore some of his observations and trading patterns, because I think they have merit, at least for discussion and thought. Additionally, after I get back, as I find examples of Farley’s patterns, I’ll post comments and a link to the chart, so you can see setups. You can of course, do the same, and since practice makes perfect, we might comment on these setups that are found.

I’ve already discussed the infamous W and M patterns. This shows one technique that he mentions, but does not elaborate on. In another book (I forget which one), the idea was proposed that if you identify a pattern, such as a W, that you should rotate it 180 degrees to see if you would trade the inverse. If not, don’t trade it.

Farley wants the swing trader to identify the specific cycle, identify the S/R locations which were built by price and volume action prior to the pattern appearing, and trade at the pattern’s turning point. I tried to do this, and failed. Now, I look for the pattern to complete, and trade the momentum on the other side of the pattern. This for me has become much more successful, because I set the stop loss point at the point of the pattern completion, and I can look for volume confirmation of the pattern after the pattern completes.

Without volume confirmation, your pattern is pretty much “a wing and a prayer”. (I almost used the word worthless, but every pattern does have it’s worth). If you get strong buying (or selling) volume after the completion of a pattern, you know the algos liked the setup and the probability is high that the trend will continue. At that point, I change my stop-loss to a trailing stop, and add to my position.

“Try to execute positions just as countertrend movement ends and the primary trend reasserts itself”. In other words, when the market and stock trend is up, look for the pattern on a pullback. When the market and stock trend is down, look for the pattern on a rally. Then, as I said above, look for the pattern to complete with conviction from sellers and buyers.

The last thing that I’d like to mention in this post is that Farley recommends trading with the trend. Don’t fight the tape. When the market is trending higher, don’t short a stock. He says that you can be successful in doing this, but you have to be nimble and able to exit positions rapidly. Remember that like right now, there are thousands and thousands of traders (and the Fed, and other forces) trying to push the market higher. If you short now, you need to be nimble and set your stop-loss tight.

Farley says to look for the pattern to be established in a longer timeframe, and look for confirmation in shorter time frames. This means to look on the daily chart for the pattern to develop, look in the 60 minute chart for the inflection point in that pattern, then look at the 3-minute or 5-minute chart to enter. He says don’t delay to enter. If you do, you’ve lost the opportunity. Remember that opportunities are easily found, but losses are difficult to recover. So I delay a little, looking for volume confirmation.

When I return, I’ll do some examples, but this post is getting too long now. And I have to get ready to go.