Day-Trading Chart Patterns

Stock market chart patterns are fractal, which means that they look the same no matter how much you zoom in or out. So, if you are taking up day-trading, you can use any of the traditional chart patterns: flags, triangles, wedges, the head-and-shoulders, etc. For example, the rising-wedge pattern that you see on the 5-minute SPY chart in the afternoon, will behave exactly the same as the one you see on the daily chart.

However, while you can use the same patterns, there are additional pitfalls on the lower time-frames. The good news is that most of these pitfalls are scheduled, and you can see them coming. For example, suppose that you are trading the S&P futures and a nice head-and-shoulders bottom forms on the 5-minute chart at 9:15am – fifteen minutes before the opening of the New York Stock Exchange. Should you put on a long position? Perhaps, however the opening of the stock market causes volatility in the futures, and it is best to avoid that.

Often, you will see the open, FOMC announcements, economic reports, and other events smash good patterns. It is usually a better idea to observe the event from the sidelines, watch which pattern forms in its aftermath, and then look for an entry point.

Other times, the event will complete the pattern. For example, suppose that a head-and-shoulders top pattern has been forming in the morning. Prices are rallying up to the right-shoulder when a negative economic report is released at 10am. The market dives, and it’s a pretty good bet that it will hit the target of the H&S.

For an extensive and detailed explanation of pattern day-trading, be sure to read my book: The General Theory of Day-Trading.