No two patterns behave alike. Triangles and pennants are ideal shapes that rarely occur with perfection in the real world.
Three strikes and you’re out. Price should break out of a pattern no later than the third time a key price point is tested, to the upside or downside. Failure of price to reach the third test in either direction favors a breakout in the opposite direction.
Use the rule of alternation to predict how a pattern will develop. Corrections should alternate between simple and complex shapes in a series of impulses.
Every pattern has an underlying positive or negative appearance that represents the likely outcome. So if it looks bullish or bearish, it probably is.
The sharp breakout above an ascending triangle often signals the climax of an entire series of rallies.
Rising wedges can lead to very powerful upside breakouts, but they are too undependable to enter until the move is underway.
Demand perfection on the inverse head and shoulders reversal. They attract attention only when every rule is fulfilled: the neckline must line up correctly, the two shoulder lows must be at the same price, and the breakout must pierce other known resistance (MAs, gaps, etc.) on high volume.
Double triangles that form after strong rallies are very bullish for a new move of equal size to the one that occurred just before the first triangle.
The contraction in price range and volatility that follows a new pattern seeks a natural balance point corresponding with the location of the new impulse. Use Bollinger Bands and rate of change indicators to identify this pivot in advance.
Every pattern is a solvable puzzle defined by support, resistance, and volatility. Look for highs and lows to point to a natural exit spot in time. Volatility should decrease into this apex and expand out of it.
Volume should dry up as each of the three rallies comprising the head and shoulders pattern uses up all the available bull power. The lower the volume on the right shoulder rally, the higher the odds that the neckline will eventually break.
Excellent long trades on the head and shoulders can be initiated at the right shoulder neckline when accumulation diverges positively from the bearish pattern. Also watch closely when the neckline breaks but price immediately pops back above it and indicates that few stops were waiting.
The deeper the downslope of the head and shoulders neckline, the greater the prospect for a bearish break. Stay away from ascending necklines completely. These patterns easily evolve into sideways motion.
Calculate the Fibonacci relationship between the left shoulder peak and the head length of the head and shoulders pattern. If the left shoulder topped at a Fib retracement such as 62%, the right shoulder should go no higher and may be a good short sale entry point.