Best Day Trading Chart Patterns

Don't you just love the word "best" as it applies to anything in life?  Well, wait until we walk through the best chart patterns for day trading and you will see sometimes that the use of this adjective is applicable.

Interested in Trading Risk-Free?

Build your trading muscle with no added pressure of the market. Explore TradingSim For Free »

As a trader, you are literally bombarded with hundreds, if not thousands of trade opportunities on a daily basis.  You can use a number of methods to dwindle this enormous list down, including volume requirements, volatility, and float.

To that point, I have 3 setups that I have seen consistently in the market that have proven profitable to traders, which I will cover in this article.  For each setup, we will cover the strengths and weaknesses.  As a trader, it is up to you to identify the best day trading chart patterns that align with your trading style.

Morning Consolidation

Instead of saving the best for last, I am going to lead with the need.  The morning consolidation is by far my favorite day trading pattern.  Below is the makeup of the pattern:

  1. A minimum of 4 bars moving strongly in one direction
  2. After a high or low is reached from #1, the stock will consolidate for 1 to 4 bars
  3. The high or low is then exceeded prior to 10:10 am

Let's take a look at a few working examples to further illustrate the point.

Bearish Example of a Morning Consolidation

Bearish Morning Consolidation

Bearish Morning Consolidation

In the above example, UWTI experienced a nice gap down in the morning.  After gaping down, the stock had a 3 bar consolidation, before swiftly crashing through the low of the day.  This sign of strength to the downside resulted in a swift decline of over 4% in under an hour.

Develop Your Trading 6th Sense

No more panic, no more doubts. make the right decisions because you've seen it with your trading simulator, TradingSim.

Bullish Example of a Morning Consolidation

Bullish Morning Consolidation

Bullish Morning Consolidation

In the above bullish example, after a quick two bar consolidation under $137, the stock immediately showed a sign of strength and blew through resistance.  A key point to note on the breakout and the subsequent move higher is that the stock never experienced a deep retracement.

Strengths of the Morning Consolidation Pattern

  1. The pattern is easily identifiable on the chart.
  2. The pattern doesn't require all day to materialize, so you can size things up quickly on your chart.
  3. The pattern will follow either a strong gap or a series of bars moving in one direction.  This ensures you will be in a stock with volatility, which is key to turning a profit day trading.

Weaknesses of the Morning Gap Consolidation Pattern

  1. You will need to exercise patience and not enter the trade until either the high or low of the day is broken.
  2. Since the entry point is predicated on a breakout, you could find yourself in a bear or bull trap; stops are critical if you want to obtain long-term success.
  3. Once in a position, the market will at times experience reversals at the 10 am, 10:30 am, or 11 am time slots.  Keep an eye on these time zones, as your winner can become a loser in a hurry.

Reversal Chart Pattern

I have never figured out how to master the reversal chart pattern in full disclosure.  It may be something in my brain, where I need things to continue on their current trajectory.

Below is the makeup of the pattern:

  1. A stock experiences a sizable gap up or down.
  2. After making one or two pushes in the direction of the primary trend, volatility begins to dissipate.
  3. Around 10 am, the stock begins to trade sideways and/or reverse sharply.

Bearish Reversal Chart Pattern

Bearish Reversal Pattern

Bearish Reversal Pattern

In the above example, MMSI ran straight up into the 10 am time slot.  Just when things couldn't get better, the gas completely ran out of the stock.  Any longs that jumped on the bandwagon near the end of the move were slaughtered, as the stock did not experience any sort of bounce, which would have allowed longs to exit with some dignity.

Bullish Reversal Chart Pattern

Bullish Reversal Pattern

Bullish Reversal Pattern

Things were going really well for the bears until that huge green candlestick appeared at 10:15 am.  From this point, FET rallied but did provide the bears a little refuge to exit their losing positions a little after 11 am.

Strengths of the Reversal Pattern

  1. If you time it just right, the gains will come swiftly as everyone is tripping over himself or herself to exit the position.
  2. 10 am to 11 am provide the perfect opportunities for trend changes as 30-minute and 1-hour traders enter the morning action.
  3. You instantly know if you are wrong if the primary trend continues.
  4. Opening price and/or gap zone are obvious exit points for winning trades.

Weaknesses of the Reversal Pattern

  1. You have to time it just right!
  2. Going counter to a strong trend is risky business.  It's like walking in front of a moving train.
  3. You are entering trades later in the day and there is a risk for volatility to dry up after the first hour of trading.

Late Day Consolidation Pattern

My friend, this is by far the hardest of any day trading patterns to master.  Few traders can turn a profit late in the day.  The beauty of the late day consolidation pattern is that the stock will continue in the direction of the breakout into the market close.

Below is the makeup of the pattern:

  1. Trades should be entered after 1 pm.
  2. There should be a break of a lengthy trend line.  This could be a trend line that started from early in the day or preferably a previous trading day.
  3. There should be a minimum of 4 consolidation bars prior to the breakout.

Bearish Late Day Consolidation Pattern

Bearish Late Day Breakdown

Bearish Late Day Breakdown

In the above example of CALA, notice how the stock drifted sideways from noon to 1 pm forming a tight range.  Then slightly after 1 pm, there was a 4 bar consolidation that ripped through the recent low which started a 10$ drop in a little over an hour.

The most important thing to note on the chart is that CALA broke a major trend line in the morning.  Therefore, a trader watching the later breakdown after lunch would have been able to reasonably expect a sizable move due to the significance of the weakness in the morning.

Bullish Late Day Consolidation Pattern

Bullish Late Day Breakdown

Bullish Late Day Breakdown

DTWI had a nice 5 bar consolidation during lunch and then broke out right at 1 pm.  DTWI then went on a run into the close.  Notice how the move up never had a strong pullback to challenge the primary trend.  When you catch these setups, you really have to step back and smell the roses.

Strengths of the Late Day Consolidation Pattern

  1. The stock has the rest of the afternoon to run.
  2. You actually have time to watch the play develop.  Often times in the morning, the market does not afford you the luxury of resting on your laurels.
  3. Technicals work better as the catalyst for the move in the morning has died down.

Weaknesses of the Late Day Consolidation Pattern

  1. The pattern has a high failure rate. For every stock that breaks out and continues in the direction of the primary trend until the close, many fail and roll back over into a lifeless state.  This lack of volatility and volume is what forced me to the reality that late day trading is not for me.
  2. If you aren't careful, you could fall into the trap of holding a position overnight.  As a day trader, this is unacceptable as you are now open to all of the market externals such as earnings reports, clinical trials and all of the other after hour shenanigans of the market.
  3. For those of us that have traded all day, you are exhausted by days end.  You literally feel like your brain has been sitting in a meat grinder.  The earlier you can finish the better, so having to sit there and watch the tape all day can become a bit too much over time.

In Summary

There are tons of chart patterns you can trade in the market; however, these are the three main patterns I have observed over the years.  Like everything else with trading, the more you can focus your attention on one or two areas, the higher the likelihood you will have of success.

The key takeaways are if you don't mind the hustle and bustle in the morning, then the morning consolidation pattern is for you.

If you like to go counter to things in life and act as a lone wolf, then the reversal pattern is more your speed.

Lastly, if you like to dig deeper into chart patterns and compete with other seasoned traders in the afternoon, then the late day consolidation pattern will suit your needs.

I really hope this article was helpful.  To learn more about how Tradingsim can help you become a better trader, please visit our homepage.

Much Success,

Al

Put Your New Knowledge to the Test

Want to practice the information from this article?
get trading experience risk-free with our trading simulator.

Visit TradingSim.com
Al Hill Administrator
Co-Founder Tradingsim
Al Hill is one of the co-founders of Tradingsim. He has over 18 years of day trading experience in both the U.S. and Nikkei markets. On a daily basis Al applies his deep skills in systems integration and design strategy to develop features to help retail traders become profitable. When Al is not working on Tradingsim, he can be found spending time with family and friends.
follow me

Leave a Reply

Your email address will not be published. Required fields are marked *

Comment will be published after moderation