Orthodox Patterns: Range-Trading Within the Pattern, Trend-Trading After Breakout

• Ascending triangles
  • Generally bullish, range-bound regime within triangle and switches to a trending regime at breakout.
• Descending triangles
  • Generally bearish.
• Symmetrical triangles
  • Psychology is one of complete uncertainty.
• Rectangles
  • Buyers and sellers in fierce competition within the rectangle range
• Flags
  • Scaled down rectangles. Range-trading regime that comes after a strong trending move, and that normally leads to a continuation of the trend.
• Pennants
  • Scaled down symmetrical triangles.
• Broadening patterns
  • Good opportunity to trade the range.
  • Edwards and Magee point out that broadening bottoms do not occur in stocks because the psychology behind the pattern is suited only to tops (i.e. a very excited public getting involved near the top of a trend). The eventual break (to the downside for a broadening top) should provide for quite a strong trending regime.
• Head and shoulders
  • Trend exhaustion and reversal pattern at the end of an uptrend.
  • Period when the H&S pattern is forming, is more often than not a range-trading regime.
• Reverse Head and Shoulders
  • Trend exhaustion and reversal pattern at the end of a downtrend.
• Double tops and bottoms
  • Signals an important trend reversal that will usually be accompanied by a strong trending regime.
• Rising wedge
  • Market is fighting for its life to delay the inevitable decline. It becomes harder and harder for the market to rally but it does continue to make slight new highs.
  • Usually occurs around major turning points and at the end of long trends.
• Falling wedge
  • Opposite of rising wedge. Demanders eventually win out against the powerful but ultimately limited suppliers.

There are a few key things you can do to avoid overconfidence in trading:1. Know your limits: It is important to know how much you can afford to lose before entering into a trade. Overconfident traders often disregard this rule and end up taking on too much risk, leading to large losses.2. Do your research: Before making any trades, it is crucial that you do your research and understand the market you are investing in. Overconfident traders tend to take unnecessary risks without fully understanding the market or their investment.3. Be humble: Be aware of your own limitations and do not let your ego get in the way of making sound decisions. Overconfident traders often think they know more than they actually do and this leads to poor decision-making.4. Have a plan: A good trading plan should include entry and exit points, as well as risk management strategies. Having a plan will help you stay disciplined and avoid overtrading, which is often the result of overconfidence.5. Stick to your plan: Once you have a plan in place, it is important to stick to it and not let emotions or greed get in the way of following your plan. Overconfident traders often abandon their plans when things don’t go their way, which usually leads to further losses.