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Chart Patterns for Day Trading

| March 8, 2024 | By

Market traders commonly use chart patterns to identify positive-expectation trading opportunities. When used in conjunction with other indicators, such as support and resistance levels, chart patterns can be powerful tools for generating profits.

No matter whether you favor an open-high-low-close (OHLC) or candlestick format, understanding how to use chart patterns for day trading is valuable. Read on to learn how specific formations can help you trade the futures markets from a position of strength.

Timing the Market

The phrase “timing the market” refers to buying or selling a product ahead of a directional move in pricing. Market timing is especially important when it comes to getting in a sudden direction move or “breakout” in price. You know the old saying, timing is everything―for futures day traders, truer words may have never been spoken.

Without question, correctly timing short-term futures breakouts is a challenging task. However, several unique chart patterns for day trading can help you identify a market ready to breakout. Inside price bars, Dojis, rectangles, and pennants are a few of the most popular.

To optimize the potential of chart patterns, day traders typically employ multiple time frame analysis when searching for opportunities. Accordingly, longer time frames, such as daily and weekly charts, are often used to place 90-, 60-, 30-, 15-, 5-, and 1-minute charts into a manageable context. By using charts in this way, you can spot a potential breakout on longer time frames while timing the market using shorter periodicities.

Adding Confidence to Chart Patterns

Like most technical indicators, chart patterns for day trading function best when used with other technical tools. For instance, combining chart patterns with the following technicals can greatly enhance your ability to identify potential market breakouts:

  • Key numbers: Key numbers may be naturally occurring round numbers or previous daily, weekly, monthly, or yearly extremes.
  • Support and resistance levels: Support and resistance levels are a product of technical indicators or additional studies. Fibonacci tools, moving averages, and pivot points are a few examples.

Implementing a combination of technical indicators is one way of filtering out bad trades and confirming good ones. However, be forewarned―using too many at one time can lead to various pitfalls, including analysis paralysis.

Any trades are educational examples only. They do not include commissions and fees.

Using Chart Patterns to Trade Breakouts

When it comes to trading breakouts, getting in early is the name of the game. One of the ways that active futures traders accomplish this task is by identifying chart patterns for day trading that occur in the vicinity of other key levels. By taking this approach, you may define precise market entry points that promote optimal timing.

To illustrate, let’s assume that Dakota is trading E-mini S&P 500 (ES) breakouts on a Tuesday morning. Shortly after the traditional NYSE cash open (9:30 a.m. ET), Dakota observes the following technicals:

  • On the daily chart, it’s evident that Monday’s ES range traded inside of the previous Friday’s range. Monday also formed a daily Doji pattern, with a high of $3,750.00, a low of $3,695.00, and a close of $3,722.50.
  • Overnight action in the ES was significant and slightly bullish. A modest range was posted from $3,715.00-$3,749.75.
  • As of 10 a.m. ET, Dakota recognizes a rigid pennant formation set up on the ES 30-minute chart. The 9:30-10 a.m. ET price bar has a high of $3,749.75 and a low of $3,743.25.

Given the scenario above, Dakota believes that there’s a good chance a bullish breakout is brewing above the $3,750.00 handle. The inside range of Monday’s session, daily Doji, and 30-minute pennant near Monday’s high all point to the market rallying above $3,750.00. To get in on the action, Dakota does the following:

  • For market entry, Dakota places a stop market or stop limit buy order at $3,750.25.
  • To manage the trade, Dakota places an initial stop loss order beneath the 30-minute pennant at $3,742.25. Given the assumed 32 tick risk ((3750.25-3742.25)*4), a profit target is placed at $3,766.25―a risk versus reward ratio of 1:2.

The beauty of this trading strategy is flexibility. If price doesn’t touch the entry point, then the trade goes unelected. If price rallies and fizzles, there may be an opportunity to move the stop loss to break even, should a strong bullish breakout occur, Dakota will realize a handsome 2:1 payoff.

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