hey traders i want to go ahead and throw
up a timestamp for you right here beside
me because this video did end up being
quite long and for good reason there's a
lot to go
over whenever it comes to chart patterns
the first 10 minutes of this video is
going to be me discussing
the top three things i struggled with at
the beginning of my career
in terms of chart patterns that caused
me to lose money while trading them
and how i fixed those mistakes in order
for chart patterns to become
one of the most profitable ways that i
trade today so i would highly suggest
that you listen to those first 10
minutes but for those of you who
are like i have to see charts i did put
on the timestamp
where i start talking about my rules for
chart patterns and even where i start
going over
full strategies a little later on the
video but again if you're serious about
your trading
then you'll listen up to these first 10
minutes with that said let's go ahead
and get started
instead of making this intro super long
by reading through everything that's
included in this video just
check out the timestamp that's
everything that's included if you see
something
you think is going to be helpful for you
feel free to smash that like button make
sure you subscribe
for more free content and i'll see you
guys on the other side of the intro and
[Music]
disclaimer
welcome back and we're gonna go ahead
and get started with mistake
number one that i made and that i see
traders making
all too often which is not
having objective rules for chart
patterns
this means you look at a chart right and
you say to yourself
oh that looks like a double bottom or
that looks like a head and shoulder
pattern
but you don't really know if it's
correct or not imagine this scenario
so you look at a chart and you see what
you
think is a double bottom but you don't
have rules for a double bottom so you're
not really sure if this chart pattern is
correct so you decide to skip the entry
you don't place the trade
you come back to your computer a few
hours later to see that the
market shot up like a rocket ship would
have hit multiple targets and made you a
lot of money
so you kick yourself and go man i knew
it looked like a double bottom should
have been in that trade
if you haven't been through that yet in
your trading career then just give it a
minute i'm sure you will
at some point i know i've been through
that before myself
and let's go ahead now into a different
scenario scenario number two you look at
a chart
a stick with double bottom you see what
you think is a double bottom or we'll do
head and shoulders this time
you see what you think is a head and
shoulders pattern
so you place your trade right you're all
excited i know i traded that correctly
it looked
like a head and shoulder pattern so i
should be good to go the trade goes on
to lose
and then you come back to your computer
and you're staring at your chart
for 30 minutes asking yourself was that
really
a head and shoulders pattern if this is
something you've been through leave a
comment below
to let other traders know that they're
not alone i know it's something i've
been through
personally and all of this confusion
frustration
and inconsistency is due to not
having rules for your chart
patterns that's why it's so important
not having rules for chart patterns
would be like
trying to cook a really good meal with
no recipe whatsoever
unless you're a culinary expert chances
are
you're going to be ordering a pizza
later that night because you didn't have
a recipe to tell you
exactly what to do whereas if you have a
recipe
then that recipe is going to ensure that
you're taking the correct steps
and that you know exactly how to prepare
that specific
dish in trading we want rules so that we
know exactly when
to use chart patterns so that we avoid
inconsistency
and confusion and we ensure that we can
be consistent and avoid making mistakes
when identifying
chart patterns now later in the video i
am going to go over my exact rules
for chart patterns we just talked about
the mistake and what you need to do to
avoid it which is make rules
later in the video when we fix the
mistakes which is my plan for later on
i'm actually going to give you my exact
rules
for double bottoms double tops head and
shoulder patterns and inverse
head and shoulder patterns but before
that i want to make it all the way
through the mistakes
first so mistake number two is trading
chart patterns in the
middle of nowhere let's dive into that
right now
so what does it mean to trade chart
patterns in the middle of nowhere
well it just means to trade them with no
other confluence
and i remember whenever i first started
trading i'll admit it
i would go out into the market i would
see a double bottom
and i would buy why because i saw
somebody on youtube tell me that a
double bottom
meant a reversal i had no other
confluence i wasn't looking at higher
time frame trend
or structure levels or any other
indicators or any other confluence at
all
and i was expecting that chart pattern
to work and i would lose trades
constantly because of it
now that's not because chart patterns
don't work
that's because no matter what you're
trading whether it be chart patterns
candlestick patterns
something based on indicators there's no
one thing that will create profits i
didn't understand that
whenever i first started trading i
always was looking for the one thing
i was looking for the magic indicator i
was looking for the magic candlestick
pattern or the magic chart pattern
that would be profitable with nothing
else and that doesn't exist
instead what we have to do is combine
a number of technical factors including
the chart patterns in order to create an
edge or an advantage or a money making
strategy
in any market we need to add things like
higher time frame trend and structure
levels
like areas of value based on indicators
like trend based on indicators
like the market being oversold and
creating divergence on double bottoms
these are all factors that we can add to
chart patterns
to make them go from something that is
nearly irrelevant
to a rules-based strategy we can use to
make money over time
just to drive this point home a little
further let me give you an analogy
let's say that you're having a house
built and the contractor comes up to you
and he says
hey sorry uh all we have is the wood for
this job
you look over you see a bunch of two by
fours two by sixes and plywood laying on
the ground
and he goes there's nothing i can do
about it
what's my point my point is having
wood is not all you need
to build a house you're going to need
roofing supplies
like shingles or metal depending on what
you choose you're going to need
bathroom supplies like a sink a tub a
shower you're gonna need
nails and screws to put the wood
together so
wood is a great thing to have when
you're building a house
but it's not all you need and in the
same way
double tops double bottoms chart
patterns in general are a great thing to
have
when you're building a strategy and
you're building a trading plan
but they're not going to be all you need
we need to add
other factors with them in order to
ensure that they become a profitable
strategy for us
this is a huge mistake that i made
towards the beginning of my trading
career and one that i hope
this video helps you to avoid and later
on
i will be going through a number of
different factors we'll actually be
creating
an entire rules-based strategy around
head and shoulder patterns
and double tops and bottoms but again
for now i want to go ahead and get
through the rest of the mistakes so
let's move on to mistake
number three mistake number three that i
definitely made and that
i see traders making all the time is
not being consistent with chart patterns
and by consistency i don't mean
consistent in the way that you trade
them we talked about this a little bit
before in the story i told at the very
beginning of the video but
a big mistake for me was going out and
taking five trades based on chart
patterns
losing three out of five three out of
five
and then just giving up on chart
patterns all together and switching
strategies
to something completely different this
is the downfall of so many traders that
it's not even funny
and it's something that nearly caused me
to never become a profitable trader
because i would constantly switch
strategies
after a sample size of like five trades
or ten trades
and i would go oh i lost 6 out of 10
this doesn't work
right and that may be something that
you're dealing with right now so what i
want to
give you is an example let's say you're
flipping a quarter
and you flip that quarter 10 times we
know that a quarter has two sides right
which means you have a 50
chance of fitting heads a 50 chance of
hitting tails but if you only flip that
quarter 10 times
it's not going to be tails five times
and heads five times very often you're
likely gonna get six and four seven and
3
2 and 8 sometimes because 10 flips of
that coin
is nowhere near large enough of a sample
size for you to determine
that that has a 50 chance in the same
way in trading
we can't look at just 10 trades we
placed with
chart patterns and go oh this doesn't
work we need a much larger sample size
and before that
we need to build an entire strategy so
what we're going to do
in order to fix this issue is i'm going
to teach you how to do something called
back testing so
in back testing we're going to look at a
hundred instances where our rules based
strategy happened
in historic data and we're going to
gather that data
and then we're going to judge the
strategy based on that data that we now
have
if the data turns out that we have a 60
chance to win
with a greater than one to one reward to
risk ratio then we have
what is known as an edge an advantage we
have a money
making strategy that we can stick to so
those are the three mistakes that i see
traders making
the most and those are the three
mistakes that were the most difficult
mistakes for me to get past when trading
chart patterns
now what i want to do is move on to
showing you how to fix them
in order to do that we're going to dive
down into some charts and i'm going to
share with you
my actual rules for double bottoms and
double tops and head and shoulder
patterns and inverse
head and shoulder patterns so let's go
ahead and dive into that right now and
i'll see you there
[Music]
okay so now we made it to the good stuff
if you guys made it through all of that
talking it was some really important
points that i did want to get across
before teaching you the entire strategy
and the rules i have
for these chart patterns if you made it
through all of that that is awesome
thank you so
much go ahead and give this video a like
if you've gotten value from it so far
and now
we're going to take a look at the actual
rules i have for
double bottoms first then we'll move on
to the rest of the chart patterns so
really really simple here as you can see
this is the double bottom pattern that
we are going to be looking at but
for the purpose of this video what i'm
going to do is put on market replay mode
so you can see
exactly what i would be doing after the
first bottom was made
so after we see a first bottom this
looks like what this looks like a
regular pullback but what this
is is a situation where we could
possibly see
a double bottom and a reversal now what
are the rules for that double bottom
as i mentioned earlier you always want
to have rules for each chart pattern
that you're going to be trading
my rule for these is that i make a box
from the lowest
body of the swing low to the lowest low
of the swing low we'll do that with
horizontal lines to make it easier to
see
so that would look like this right here
this would be the zone that i want price
to test but not close below what does
that mean
that means that price can come down with
candles
and i can see a wick come into this zone
i can even see a body close right here
in this zone
i can see a wick come past this zone all
of that
would be a valid double bottom for me
but what i cannot see
is price come down and then a candle
close below this zone
and the logic behind this is that a
close below a previous low like we have
right here
indicates further down pressure and
indicates that we could be seeing a
continuation
of this downtrend that we have so i want
market to stop
before this low but i want it to at
least test
the lowest body of this swing low so
this is what that looks like with
real candles if i click forward a bit
you'll see that we now
have a test of our first bottom bottom
excuse me
giving us a double bottom but we don't
have any candles that are closing below
our wick so the market's showing us
rejection from our first bottom by doing
this
and with that being the case now seeing
rejection from that
this would already qualify as a double
bottom for me now
i do not trade just because i see a
double bottom we're going to get into
entries
and a lot of other factors that we add
to these type of chart patterns
a little bit later in the video but
right now i want to go through all the
rules that i have for double bottoms
double tops
head and shoulder patterns and inverse
head and shoulder patterns
a question i get asked a lot on double
bottoms is how many candles do i need to
see
right here in the middle i don't
necessarily have a rule for this
but if you wanted to create a rule you
could say that you need to see between
five and let's say 25 candles between
your first bottom and your second bottom
that's just a way
to give you an objective rule that's not
what i use i don't really have a rule
for that
i just want to make sure this looks like
an upside down v
when i'm looking for chart patterns and
i know that's subjective but i've been
doing this for a really long time
and i don't really need a rule for that
personally again if you do use 5
to 25 candles in between for your double
bottoms now
as we can see this double bottom did
happen and played out really nicely
again
we'll go over entry stops and targets a
little bit later on in the video right
now
i want to go over double tops so now
that we've looked at a double bottom
let's find a double top and do the same
thing
[Music]
and ironically really close by we have a
good example of a double top
so this is what we're looking at for a
double top
right here and what i'm going to do is
the same thing i did with double bottoms
we're getting into market replay mode
and i'm going to show you what i would
do after the first pullback at this
point
what does it look like it looks like
we're in the middle of what
a pullback we have a push higher pull
back push higher
pull back at this point the only way for
us to define a double top
is to wait for price to get to our area
go ahead and see if you can
assume or guess where my area is going
to be
my area is going to be from the top of
the bodies
of the swing high to the very high of
the wick
of the swing high and that looks like
this top of the bodies
top of the wick we now have a zone where
i want to
see price touch and test
and be rejected from so in this case
what i can see is the market can move up
and i can have just a wick come into
this zone i can have a body of a candle
closed in this zone i can even have
wicks that go up past the zone all of
that is valid for a double bottom for me
excuse me a double top for me what i
don't want to see is trend continuation
i don't know the market coming up here
and then creating a candle that closes
above this high
of the double top for the same reason as
we didn't want something or a candle
excuse me
closing below the first low of the
double bottom
this insinuates trend continuation to
the upside
i'm not going to be trying to trade a
double top to the downside when i have a
close above candle
so those are my rules for a double top
again if you need rules for in between
use
5 to 25 and let's see how this played
out
if we click play do we have a valid
double top right now
yes we do why is that the case well we
have the market rejecting this area
by not closing above our previous high
so with that being the case we have a
valid double top now this specific trade
took a while
a little bit of consolidation here
before it actually pushed lower but this
double top did push the market
lower eventually in a dramatic way so
that is my rules for a double top and a
double bottom if you want a more
detailed version of that
since i kind of sped through it for this
video the reason i did that is because i
have a full length video
just going over double tops and bottoms
that will give you everything you need
to understand these two patterns
and that'll be right up here in the top
right hand corner of the screen you'll
see a little card
pop up right now so with that being the
case and now that you know my rules for
double bottoms and double tops let's
move on and talk about my rules
for head and shoulder patterns and
inverse head and shoulder patterns after
that
we're going to be talking about and
building out a full strategy by adding
other technical factors to these
patterns in order to make them
strategies we can stay consistent to and
that can make us money
over time
all right so what we have here is a
valid head and shoulders pattern
according to my rules this may not look
like a perfect head and shoulders
pattern and that's on purpose
i'm not here to show you absolutely
perfect examples i want to show you
real-time examples
that you can actually take and apply to
real markets and this is a real-time
example of a head and shoulders pattern
that meets all of my rules let's talk
about why doing the same exact thing
that we did last time
by placing the market in market replay
mode which makes it really easy for me
to teach so at this point what do we
have
we have a market pushing up pushing down
pushing back up what we call this
is our right shoulder and the head of
our pattern the rules for this
is we need a break and close below and a
higher high excuse me i said below
a break and close above and a higher
high than our previous high
in order to count this as the head of
the pattern once we have the head
of the pattern the next thing i wait for
this is my first
rule after getting the head of the
pattern is i wait for the market to come
down and
retest the first shoulder so if we're
drawing this out
as a trend we would see the market
pushing up to a high
pulling back to our shoulder and pushing
up to a new high
this pullback to our shoulder i put a
horizontal line
on the lowest bodies of that pullback
what i want to see
and also on the lowest low of that
pullback
what i want to see is similar to the
double top and double bottom
thing i want to see the market come down
and test this area
i do not want to see a candle close
below it
what i want to see is that the market
has come down
and tested this area with either a wick
or a body can close in it
and a wick can go past it the only thing
i can't see is a body closing below
this area so anything else is fine as
long as we
test and reject this area to the upside
so let's see what price does as i click
play
right there we have a test of this area
with this
candle wick right here so right now my
rule number one
is met which is a test of the bottom of
the previous
shoulder so that would be this zone
right here which did get tested right
here
my next rules are that since we already
have that one done
and i'll just leave that here in case i
need to do another example my next rules
are that
i want to see price come up at least
to the right shoulder but price cannot
touch the head of the pattern let me
make these a little bit bigger it might
be difficult to see
there and there is my termination point
for my second
rule what this means is i want to see
price
push up and at least test this shoulder
and as long as price does not push up
all the way
to our head of the pattern and touch it
i don't want to see the market
touch that head of the pattern
whatsoever if it does it's an invalid
trait
turns into more of a double top than a
head and shoulder pattern so what i'm
what i'm waiting for is this area to me
my termination zone and again this area
is between the bodies of the candles the
highest bodies
of my right shoulder and the highest
bodies of the head of the pattern
that is the termination zone for what is
considered
our left shoulder so at this point we
know we can see
price or we must see price at least
touch 129.57 because that's the highest
bodies
of our right shoulder we know that price
cannot touch
the highest bodies of the head of our
pattern as long as that happens
and we see a push lower we have a valid
head and shoulders pattern let's see
what price does
eventually we push down and we break
through the neckline and i do need
a break through the neckline zone in
order to classify this
as a valid head and shoulder pattern now
let's go through that really quickly one
more time to make sure
you understand it we need the creation
of a right shoulder we need price to
break above that right shoulder
within the creation of the head which
just means we need to start seeing a
pullback
the initial thing we're looking for with
that pullback is that
it comes down and tests the bottom of
our right shoulder
we want it to at least test the bodies
of that swing low
but we do not want to see price close
below the low of that swing low
as long as we get that as we do here and
the market starts pushing higher we
now have another zone to pay attention
to between the highest bodies of our
right shoulder
and the highest bodies of the head of
our head and shoulders pattern this is
the termination zone
for our left shoulder which is this
right here as long as we have the market
pushing down following rule number one
pushing back up
not touching the head of our pattern and
at least testing the right shoulder
then we have a valid head and shoulders
pattern as long as
we break through this neckline zone
with a candle in this case we did and
the market
continued lower which of course will not
always happen but in this specific
situation it did
so those are the rules for my head and
shoulders pattern i know that was a long
one but
we're going to dissect the rules for an
inverse head and shoulders we're going
to go over that a little bit more
quickly
since you now kind of comprehend the way
these rules
work so let's take a look at inverse
head and shoulders pattern then we'll
dive into a complete strategy
using these chart patterns combined with
other technical factors to create
a money making trading strategy
[Music]
an inverse head and shoulders pattern is
just a head and shoulders pattern
flipped
upside down and looks a little bit like
this this is the one we're gonna be
taking a look at
as an example and just with every other
pattern
i'm gonna go ahead and put on market
replay mode to ensure that i can teach
this
in the best way possible as if you were
actually looking at it on a real chart
so if we're looking this looking at this
on a real chart and analyzing it
we can see that we have a push down to a
shoulder which is actually right here
the reason i just did that let me
explain that to make it easier as well
here we have a low but here
let me draw it out we have a lower low
with that being the case
this is what our pattern would look like
it would go to there since that's the
lower low
then we have our first shoulder pushing
up
to this high right here we then need
what in order to classify ahead
we need the market to break through this
low since we did break and close below
and create a new low down here
we now have a left shoulder and a head
what are we looking for at this point
what would you expect us
to be looking for based on what you know
about the regular head and shoulders
pattern we just looked up
well we want to see the market test this
area
let me make these black that might be
hard to see with everything being blue
so we want to see the market test this
area right here why
because this is the area between the
bodies
of this pullback and the wick of this
pullback with that being the case
this is the area we want price to test
how do we want to test this area
we want price to push up and at least
touch this area with a wick
we can see a body close in this area we
can see a wick go above it
what we do not want to see is price push
up higher
and end up creating a higher high right
here in
price compared to the previous high over
here
so let's press play and see what happens
right there do we have a test of our
zone that does not
close above our zone yes we do
so at this point what are we looking for
we already have the test of our zone and
if this pattern is just the opposite
of the regular head and shoulders
pattern then we would make a zone
out of the bodies of the left shoulder
along with the bodies of the head of
this pattern
this is the termination zone that we're
looking for
for our next rule what does that mean
that means we want to see price
now pull back and at least touch this
area
but what we don't want to see is price
come all the way down and touch the head
of the pattern if we get a touch
of the head of this pattern then it
invalidates the pattern but as long as
we get a test
of the previous shoulder then we're good
to go to start looking for
that break to the upside so this is the
area
that we're paying attention to for our
next rule it is going to be between
this shoulder and the head of the
pattern so let's see what price does
as we push up we do push up a bit higher
right here but we do not
close above our zone so with that being
the case is this still valid
yes it is and we're still looking for
the test of our previous shoulder
so let's go ahead and see what happens
with price
we push down we test that shoulder we
now have a break of our neckline zone
this is all turning into a valid head
and shoulders pattern so
we're gonna go through that really
quickly one more time
what we're looking for is the push down
which we have right here
we're looking for the first shoulder to
create a pullback we're looking for a
break through that pullback to create
the head of the pattern
at that point we create a zone with the
top of our first shoulder
that zone needs to be tested but cannot
be closed above
we then want to see a pullback from that
zone to
our second zone our second zone is
between the left shoulder
and the head of the head and shoulders
pattern once we get
a test of that zone we know we're
looking for the break
of the top zone for a valid head and
shoulders pattern
what we don't want to see is something
like this where the market comes down
and then we touch the head of the
pattern that's more of a double bottom
not really a head and shoulders pattern
anymore so that invalidates head and
shoulders patterns but
as long as we just get a touch of the
zone and we get a breakout above
our first zone we have a valid inverse
head and shoulders pattern
so those are my rules for each of the
patterns that we learned
that takes care of mistake number one
which if you remember
mistake number one was not having rules
around chart patterns at this point
you should have solid and set in stone
rules for each of these two
slash four chart patterns and now we're
going to do
is move on to actually adding other
confluences
and other conditions to this so you're
not trading chart patterns in the middle
of
nowhere and that is called creating a
strategy so let's move on
to creating a strategy right now so
anytime you're building a strategy
around anything not just chart patterns
there's a system i like to use
that i created that's called c e s t
and what c e s
t stands for i know what you're thinking
i have great handwriting
is conditions entries
stops and targets so when you're
thinking about
building rules around a full strategy
not just around
chart patterns right when you think
about building rules around
a full strategy by adding these
confluences you want to have rules
for the conditions before you look for
your actual entry
you want to have rules for why do you
press the buy or sell button
what is your exact entry you want to
have rules for where is your stop loss
going to go and ideally you want to have
rules for a target
but there are some traders including
myself at times that
do subjective targets which you can do
once you become more experienced but
in a nutshell what you want to make sure
is that you have rules
for conditions entries stops and targets
and that's what we're going to dive into
now is conditions entry stops and
targets
for the strategy we're going to
almost got him can you all see that
there's a gnat in here
for the strategy that you are about to
learn so
let's get down to some charts and
actually talk about some of the things
we can add to
chart patterns in order to turn them
into strategies because if you remember
the mistake number two was trading these
patterns with no other confluence
let's start adding confluence and see
what kind of strategy we can come up
with
there are two different ways i like to
trade these chart patterns one is the
typical
reversal chart pattern and that's the
one we're going to go over first
so let's go ahead and talk about it
really quickly in order to trade
a reversal it would look something like
this we may see a market pushing lower
price pushing lower pushing lower and
then
we may see a head and shoulders pattern
that
signals a reversal in price to start
heading
higher this would be an example of an
inverse head and shoulders
reversal pattern in the same way we may
see a market pushing higher
pushing higher price going higher and
then we may see
a double top the break of the neckline
and that signals
a reversal to the downside this is the
typical way
that you will see these chart patterns
traded and now
that you have exact rules for each of
these patterns
that you know exactly when they actually
happen you're no longer confused
about how to spot them we're going to
start to add different confluences
in order to build an entire strategy in
a very simple way and again one of my
favorite ways
to trade chart patterns as reversals is
by simply adding an rsi
indicator and using this rsi indicator
as my signal
that we're ready to reverse and what i
mean by that is when the rsi is oversold
it's telling you that the price of an
asset has been pushing down
for a while we know that what goes up
must come down and in the same way
with financial markets what goes down
eventually will go back
up as well at least for the most part
and with that being the case what we're
looking for
now is going to be these same price
patterns these same chart patterns
you've learned the rules to
already to happen when markets get
oversold for an inverse head and
shoulder pattern
we would look for the market to go into
an oversold situation
we would then have specific rules for
our
entry stops and targets again
this is going to be our condition we're
going to do this on some real charts i
just wanted to give you a quick
overview the opposite would be true for
a double top or a
regular head and shoulder pattern we
would be waiting for the market to
double top
but only trading that double top if the
market has went overbought
because that overbought condition is
telling us that this market
is primed to have a possible reversal
again we'll go down some charts and talk
about entries stops and targets and i'll
give you examples
of full trades let's go ahead and do
that right now okay here we are on the
four hour chart of the aussie yen i want
you to see if you can spot the head and
shoulders pattern here
hopefully you were able to it is right
here quite easy to see this one it's
nearly a perfect head and shoulders
pattern and
is our other condition met that we've
already talked about
did price go into the overbought area of
the rsi
while creating this head and shoulders
pattern yes it did
so let's go ahead and talk about what
would happen if we were actually seeing
price
create this head and shoulders pattern
as we have throughout the video
so right here we already have what we
call our first shoulder right
it's right here what's the next steps
we're looking for we want a
test of this area here the bottom part
of
our first shoulder we need price to come
down and test that does it
yes it does once we've tested that we
need price to then
push up and at least touch
the bodies of our first shoulder but
price cannot touch
the highest bodies of the head of the
pattern so here we get the touch of the
previous shoulder
without pushing up and touching the head
of our pattern do we have
a valid possible head and shoulders
pattern right now
yes we do now again as mentioned for
conditions these are our conditions for
the actual pattern itself
another condition is the market must be
overbought
at the head of the pattern let's put a
vertical line here
as you can see here this green line is
showing the head of the pattern
and yes the market is still above the 70
line
of the rsi by the way my settings for
the rsi are exactly as they come i just
have a 14 period
rsi so with all of this coming together
we now have
a valid strategy not just a valid head
and shoulders pattern
but we have a valid head and shoulders
pattern when the market is primed
to reverse coming out of an overbought
situation
so at this point all we need right now
what do we have we have all the
conditions met
now we need to know how we're going to
enter this market well to confirm
this head and shoulders pattern i need
to see a break
and close below the lowest body
of the neckline so this is what's
considered the neckline the two the
bottom of the two shoulders
is considered the neckline of this
pattern
what i need to see is a breaking close
below the lowest
body of that neckline so let's go ahead
and get rid of these lines to make this
easier
at this point all we're waiting on for
an entry is a close below
that body of this neckline the lowest
body of the neckline
let's see what price does we move
forward and move forward again
yes we get that close right here on
this candle so at this point when we're
creating a strategy
we have our conditions met our
conditions are we have all the
conditions met
for a head and shoulders pattern the
market's coming out of a
valid overbought situation telling us
that this market is primed for a
reversal
after conditions we then looked for
entries
our entry specifically was the breakout
of
the neckline of the head and shoulder
pattern
and very specifically was the breaking
close below the lowest body
of that neckline so at this point we
have a valid entry let's go ahead and
put a position tool on
right here for a stop loss here on the
four hour chart to make things very
simple
i'm going to use 20 pips above the entry
candle
now for stops and targets it's
completely up to you what you use
this is just an example strategy and i'm
just showing you how you would go about
building a full strategy
using these chart patterns for me let's
go 20 pips above the entry candle
that'd be about 81 pips and for targets
i
personally normally go for about a 1.4
to 1
with my first targets and i have two
separate positions that's way too
complicated to get into
in this video that's already going to be
lengthy so you can either do
a straight 1.4 to 1 reward to risk which
is what we're going to do throughout the
video
but some other examples of things you
could do is you could go with a two to
one reward risk ratio or
you could come down to the next previous
level
of structure that you think the market
will bounce off of
to the upside so with that being the
case let's hit play
and this trade worked out pretty well if
you took a either 2 to 1
or a 1.4 to 1 but if you would have
tried for those extended targets it
looks like
you would have been stopped out in that
case but again that's an example of the
full
strategy at this point we have
conditions with the conditions for
our pattern and our condition of being
overbought
on the rsi we also have our entry which
is a close below
that neckline we also have stops which
in this case was 20 pips above
our entry candle and we had targets
which
for me are going to be a 1.4 to 1 on the
rest of these examples
so that was a full overview of the
strategy we're now going to take a look
at this full reversal strategy
on each and every one of these chart
patterns starting now
with the the inverse head and shoulders
pattern which is just the opposite of
this
flipped up upside down let's go take a
look at that
right now okay so this one's a little
bit less clean of a pattern but
guess what guys that's exactly what
markets look like at times you're not
going to have
the cleanest looking pattern every
single time you place a trade so why
don't you go ahead and see if you can
spot this inverse head and shoulders
pattern based on the rules
you have learned so far in this video
hopefully you were able to see it
it is in fact right here and let's go
ahead and confirm that by checking our
rules
we have a push down after this push down
we want to look for the lowest low
which is right here for our first bottom
and that is our right shoulder we then
get a pullback
and then a break breakdown means that we
now have a
shoulder and a head to this pattern we
then want to
see what we want to see price come up
and test between
the highest bodies and the highest highs
of our initial shoulder pull back right
here so what we want to see is price
come into this area
but not close above it do we get that
right here yes we do as i said before
a wic can go above this area that's
totally fine i just want to see the
closing prices
and opening prices not go above it so in
this case we have a valid
right shoulder or second shoulder now
what's our next
rule our next rule is we need price to
pull back and touch between
the lowest body of our first shoulder
and it cannot touch
the head of our pattern being the lowest
body of the head of that pattern so
with this being the case do we have a
valid shoulder here
yes we do price comes down and tests
this area
without touching the head of the pattern
now with all of this coming together
this is all of our conditions for a
valid
inverse head and shoulders pattern
what's our other condition
we have our pattern we also need to see
oversold
in this case on the rsi indicator
because oversold
means we're primed for a reversal to the
upside
so if we have those two things coming
together we can actually go from looking
for conditions
to looking for entries if for a bearish
entry we're looking for
a close below the bodies of the neckline
what do you think we're looking for
on a bullish entry we would be looking
for the close above
the highest body of the neckline of this
pattern which is right
here if we look at this neckline in
total we have bodies of candles right
here
for the neckline and the highest bodies
of the neckline is actually the next
neckline part of this pattern which is
right here so with this being the case
we have an
entry on this candle the close of this
big green candle
we're using a 20 pip stop loss below the
low 62 that would be an 82
pip stop and for those of you going how
did he get 62 62 is to the bottom
of this candle and i'm adding 20 pips
next up we're looking for targets what
did i say before we're going to do a 1.4
reward to risk ratio for these examples
this
easily got hit here for the inverse head
and shoulders pattern
so again we're just using exactly what
we've learned about these chart patterns
we're then adding the condition of
coming out of either oversold or
overbought
depending on the direction we're looking
to trade and we're adding confluence for
an
entry we're adding rules for stops and
targets again
the best way to build a strategy is by
looking for conditions entries
stops and targets and being sure that
you have all of these in place
before you ever place your trade which
is what we're accomplishing
with this strategy now that we've looked
at the
head and shoulders and inverse head and
shoulders reversal patterns
reversal strategies let's now go move on
to the double bottom and double top
reversal strategies
okay so here we're looking at price as
it would be before even looking for this
pattern and for a double bottom
all we need to see is that one of the
bottoms goes into the oversold
area on the rsi oversold is below 30
on this rsi again it's just regular
factory settings
for the rsi now let's remember what
we're looking for in terms of
a valid double bottom what we want to
see is price
come down and terminate between the
lowest bodies and the lowest low
of our first bottom which would be this
little box
right here so what we want to see is
price come down at least test this box
we can have a wick go below it we can
have a body close in it what we don't
want to see
is price come down in the body of a
candle close below it because that's
telling us trend continuation
to the downside we actually want to see
a double bottom here so
with that being the case let's move
price forward see what we
get slash if we get that retest of this
area
and eventually we do okay now we have
tested this area
as for an entry on this specific pattern
for this specific strategy what we're
going to look for is a candle closed
above the top of the neckline the bodies
of the top of the neckline so there is a
line for that as you can see
that is the top of the bodies of the
neckline of this pattern
so let's move the chart forward here see
if we eventually get an entry
not yet and now perfect now we have an
entry
now for a double bottom that would be
our entry and same thing
we will go 20 pips below our entry
candle the entry candle
is right here so we will have a stop
loss at 14 plus 20
which is going to be 34 pips and we will
have a 1.4 to 1 reward to risk ratio
which is right up here now of course if
you would like
to test this and use this strategy the
same exact way
but put your stop loss below the net uh
the lows of the double bottom
that is totally fine again i'm just
giving you an example
of how you can build strategies around
these
patterns so here's an example of how you
could do it of course you could put
your stop loss below the lows of the
double bottom as well if that's
something you'd like to do
let's click play and see what happens
oh no but stephen i thought every
pattern was supposed to win
just kidding about that of course you
will have losses that's why i wanted to
throw this
in here because it was a perfect example
of a double bottom that met
all of the conditions but lost and guess
what guys losing
is a part of trading it happens but
either way win or lose
this was a really good example of
creating that strategy out of a double
bottom using the condition
of waiting for the strategy to be at the
price excuse me
and the rsi indicator to be oversold
showing you primed for a reversal
this was just an instance where the
market did not cooperate
with that analysis with that said let's
go take a look
at the opposite of this which would be a
double top reversal
right now okay so now we're going to
take a look at a double top and if you
look all back through here
on the rsi every bit of this the market
is trending up
but this is why we wait for an
overbought situation
to tell us that this market is primed
for a possible
reversal we don't just wait for that
right that's our first step so right now
do we have our first step complete
if you were actually trading this or
testing this type of strategy you would
be looking for this
you would see okay we have an overbought
situation and a pullback
what's our next steps double top means
we come back up
and we re-test this top so let's put our
box where we need to which is
between the highs of the wicks the highs
of the bodies of the first top
let's click play eventually do we get a
test
of that first top right here the market
does test that with a wick
we do not get a body closing above this
area so therefore
we have a valid double top now with the
double bottom
we traded our entry was based on the
break of the neckline we're doing the
same exact thing here
we're using the body of the neckline for
the break
and we're going to wait for a candle to
close below the body of that neckline
so this is going to be our entry right
now we have
a double top that happened while the
market was overbought
all of that showing us possible reversal
to the downside
now we need our entry stops and targets
because all of our conditions
are now met the entry being a break
below
our line here and a close below that
line right here
we have that break and close now a lot
of people may be like well
what about this isn't this showing us a
a new pattern
no once i see the double top in real
time and i have my line on the neckline
i'm just waiting for a break of that
i don't really care what happens in
between i'm waiting on the break of that
neckline
to show me price wants to go lower and
that's exactly what happened here so we
would have
a short entry right there we would have
20 pips above
our entry candle which would be 44 pips
we have 24 to the top of that candle
so it'd be 44 as the total
stop loss we would then have a 1.4 to 1
reward to risk ratio
click play and price eventually
does push down and hit that target for
us
again this is the strategy that i wanted
to teach you to give you a really good
example
of adding another confluence like a
reversal scenario with the rsi indicator
showing you a market is primed to
reverse could you use
other things yes you could use rsi
divergence as well
looking at the price of the aussie new
zealand having
nearly equal highs and the rsi having
extremely diverged highs meaning lower
highs
so with that being the case you can add
that as another confluence you can also
add
structure levels looking left on higher
time frames you can add higher time
frame trend
the amount of confluence you can add is
nearly endless but just remember
that the frequency of trades you have
with each confluence you add
is going to drop dramatically because
naturally you're looking for more things
before you can enter the trade so you
want to keep that in mind
the more confluence you add the less
trades you will have throughout the year
so now that you know how i'm using these
patterns
as reversals the second strategy i want
to show you
is how i like to use these patterns in
trend continuation
so let's move on now to using chart
patterns for trend continuation
by adding a completely different
confluence to them and using them at the
end of pullbacks
i'll see you guys there the typical way
of using chart patterns is
exactly like we just went over as
reversals but right now i want to tell
you a really cool way
that i use these types of chart patterns
for trend continuation and what that
would look like
is a market may have prices pushing
higher pushing higher
and then we may see a double bottom at
the end of a pullback for a bullish
trade this is one of the ways i like to
use double bottoms
in trend continuation we're going to
talk about exact rules for it
but i do want to go over a brief
overview with you right now
so that's what a bullish version of this
would look like for a bearish version we
may see prices
pushing lower pushing lower and then we
may see something like this
at the top of a pullback a head and
shoulders pattern at the top of a
pullback
would signal that this market is going
to continue
in the overall bearish trend
so that's what we're going to be looking
for on a chart we're going to have a
different type of confluence
for this and we're going to go over all
of that and i'm going to give you four
real examples on real charts right now
of how i use chart patterns
in order to trade with the trend okay so
as for our confluence on this specific
trend continuation strategy the only
thing we need to add to the chart
is a 200 period ema or exponential
moving average
that's all this black line is and that
is going to be our
trend filter now with the rules you
already know about all of the price
patterns and chart patterns we've
discussed
in this video we're all we're also going
to be using the same exact entry
we discussed on the reversal version of
these patterns so again
one of the only added confluences is
that we have a 200 period
moving average on the chart now this is
a really important part of this
what we want to see is price make a
higher high
like this right here this is our higher
high
now the price pattern the chart pattern
that we use
must be at the bottom of the pullback
from our previous higher high what i
don't want to see
is price doing this and then see a
double bottom right here
i want to see this at the bottom of the
pullback from our previous
highest high so let me show you an
example of that right now what we're
going to be looking at is a double
bottom just to give you a hint
into this we have a higher high this is
in fact
the bottom of the pullback we're going
to put our box on
that we've been discussing throughout
the entire video we're going to wait for
price to get
into that box once it does we are then
waiting for price to break and close
above the bodies
of the neckline of this double bottom so
let's push
price forward we do not
ever close below this box which tells us
that we still have a valid
double bottom we'll continue pushing
forward
and eventually we get a close above
our neckline now as i said the entry is
exactly the same as we discussed on the
reversal pattern
the difference here is going to be that
for trend continuation chart patterns
i'm going to be putting the stop loss
below the previous low of this double
bottom
so this is what that would look like i'm
still going to be looking for a 1.4 to 1
reward to risk ratio
for these examples but i do want to put
a stop loss
instead of being below my entry candle
like we were doing on reversals
below the neckline i keep saying that
below the bottom
of this double bottom the reason is in a
pullback
this market is still considered to be in
an uptrend
until we break these lows so i want to
make sure i'm safe
with the way i'm placing my stops and
targets and then if i hit play
this specific trade did in fact push up
and hit that target
with ease so that was an example of how
i would use
the double bottom chart pattern for
trend continuation we'll go over c-e-s-t
we have conditions which are the
conditions for our pattern itself
the other condition is that we are above
the 200
ema if those two conditions are met then
i can look for my entry what is my entry
a close above the neckline of this
double bottom
i then have to place my stops and
targets and as we said the stops
are going to go below the bottom of this
double bottom target to the one point
four to one reward to risk
is how i personally like to set targets
you can decide on stops and targets on
your own when you're going through your
back testing process
but that's what i like to use so again
that was a good example of how i used
the double bottom chart pattern
for trend continuation let's now take a
look at the double
top chart pattern for trend continuation
so here on the aussie canada is our
first condition met
our first condition is we need to be
below the 200 period moving average
so yes that is met our second condition
is just the rules we already have
for a double top so let's see what
happens here with price
what are our rules for a double top we
want to see the termination point be
between the high
and the bodies of that first top do we
get that
right here yes we do and another rule i
have for these trend continuation setups
is obviously
my neckline cannot come all the way down
to the previous low that would just be
consolidation so as long as that
neckline stays above the previous low
i still have a valid double top in this
case i have that valid double top
and as long as no candle closes above
that first stop
then this stays a valid double top with
all my conditions now met
what do i need to focus on the entry
what is the entry
breaking close below the neckline the
bodies of the neckline
of the double top so if we hit play
you'll see that we eventually do
get that close below the bodies of the
neckline we have
a entry right here stop loss above the
double top
we then have a let me do this 1.41
reward risk ratio
and if i hit play you will see that this
trade
eventually comes down to
eventually this is how trading goes
sometimes guys so i'm gonna let this run
hit your stop loss isn't that a shitty
situation right
because you got really close to your
target here
and then the market pushed back up
pushed back up and eventually
stopped you out now this is the part of
trading that most people
do not like to discuss for whatever
reason they don't want you to think that
it's a possibility that you're going to
be frustrated
emotional and lose trades this happens a
decent amount
when you're actually trading live and
it's just a part of trading again
i don't want to cherry-pick the best
examples possible of just winning trades
and that's it
i'd like to cherry-pick examples that
look really nice for you to be able to
learn from
but i also want to show you the reality
of trading which is at times you will in
fact
lose trades but that was either way a
really good example of how i would trade
a double top in trend and it is
something that has given me an advantage
over a large sample size
so let's now move on to how i would
trade the
inverse head and shoulders pattern with
the trend
so right now i want you to see if you
can actually spot this inverse head and
shoulders pattern before i point it out
hopefully you were able to see it right
here it is a pretty large pattern
but this is what we're seeing we have
the market pushing down
to a low pushing back up to a initial
shoulder pushing down breaking below
that low
for the head of our pattern what's our
rules now here is our termination box
between the highs of those first candles
right here
and the bodies of those candles do we
have a termination in that zone we do
the next termination zone we have is
down here between the lowest bodies
of the first shoulder and we cannot
touch
the head of the pattern right here is
that rule met with this candle
yes it is so we'll go ahead and draw
that out we have a push up
we then have a pullback to this shoulder
what are we waiting on now
to enter this pattern we're going to
enter in the same exact way
we're waiting for a break and close
above the highest bodies
of the neckline which is right there so
i push the market forward
you will see that we do get that entry
right here
so our first condition was what we need
to see price
staying above the 200 period moving
average our second condition
was just the conditions for the head and
shoulder pattern itself
our entry was a close above that
neckline we now need to work on stops
and targets
for a head and shoulders pattern i do
things a little bit differently here as
well
my entry would be the close of that
candle of course my stop-loss would go
below
the most recent shoulder which is right
here and then i would also
still have my 1.4 to 1 reward to risk
again
that's my favorite target scenario it
gives me a better winning percentage and
also
keeps me above a one to one reward to
risk ratio let's see
how this bullish inverse head and
shoulders pattern with the trend played
out
as you can see it did push up and
eventually hit targets and move on to
what would have been
great targets eventually if you would
have been patient and held onto
this trade but that's an example of how
i trade inverse
head and shoulder patterns with the
trend and a full strategy
you can now take and go test in the
markets to see if it's profitable
for you and to see if it's something you
want to add to your trading
arsenal the last strategy we're going to
take a look at is how i trade
regular head and shoulder patterns with
the trend let's go ahead and go take a
look at that
right now okay so let's work through c
e s t first our conditions are we below
the 200 period moving average
meaning that overall long term we are in
a downtrend
yes we are do we have the conditions met
for a head and shoulders pattern
yes we do let's go ahead and discuss
them one more time really really quickly
push up shoulder down push up
head down we gotta terminate inside of
our box
right here do we do that yes we do we
need to push up and at least touch
the bodies of this shoulder without
touching the head of the pattern all
that's true correct
yes it is so since all of that is true
what are we waiting on now we're waiting
on a close below
the lowest low of the neckline let's see
what we get
price eventually does in fact close
below that we would have
an entry right there our stop loss for
this specific pattern
would be above the most recent shoulder
since we have that in place we can now
set a target for me
yet again 1.4 to 1 reward to risk ratio
clicking play and as you can see price
pushed down
to more than hit those targets again
this is the full rule set
for a strategy you can actually take and
go
test in the markets you can test this
because it has completely objective
rules
we have an objective rule for being
below the 200 period moving average we
have an objective rule
for how we classify a valid head and
shoulders pattern we have objective
rules for entries
stops and targets and my friends this is
exactly how you go about
building a profitable and easy to stay
consistent to
trading strategy and eventually a
trading plan having a roles-based
trading strategy like what i just taught
you is absolutely
necessary in order to become a
consistently profitable trader
but it's not going to be all that you
need you still need to
take those rules write them down and
then go back test them in historic data
since they are objective rules and every
part
of your strategy is defined that becomes
a lot easier
also you need to create a risk
management plan and a full trading plan
built around the strategy you choose to
trade
and all of that is absolutely necessary
as well and just as important as the
strategy itself
but it's not something i actually have
time to get into in this video because
it's already super long
so if you're interested in some more
advanced training then we do have
a small amount of space available in the
eap training program we keep
members limited because i answer every
trading related question
personally for every student so yahoo
finance actually just did
a article on the eap training program i
will link that article below
in the description but in this program
what you'll learn essentially is more of
the strategies that i use
on a daily basis you will also learn
everything you need to know about risk
management and about creating a full
trading plan it pretty much takes you
step by step from wherever you are in
your trading journey through the process
of creating a profitable and a full
trading
plan it also comes with what i call
priority email which means
every single email that you send that is
trading related about the course or
about trading in general will be me
personally answering those it is a
mentorship program and i'm here to guide
you along your path
to becoming a professional trader on top
of all of that there is much more
included that you can find out about in
either this yahoo finance article
or you can go over to
eaptrainingprogram.com either way is
fine but on top of all of that it also
comes with a 60-day
money-back guarantee meaning that for
any reason if you decide
that you don't feel as though the
program is as valuable as you thought or
if you just decide you don't want to
trade anymore feel free to send my staff
an email telling them your situation and
i'll get you refunded
asap so with that being the case it is a
risk-free offer if you'd like to take me
up on that go ahead and click
the top link in the description or go
visit the yahoo finance article which
will also be linked
in the description if that is not
something you're interested in that's
totally fine too
make sure you keep it locked here by
clicking that subscribe button click
like
if you made it to the end of the video
make sure to comment and let me know
i'm gonna go eat i'm starving it's like
five o'clock and i haven't even eaten
breakfast yet so i'm out
and i will talk to you guys in the next
video see you soon