This report illustrates my 4 preferred charts patterns to identify before a breakout.
It's important to note before reading further that due to the fractal nature of the market, you can identify these patterns form within a larger pattern - such as a big accumulation structure. Fractal means patterns form within patterns.
The schematic below shows the idealised points of entry (green circles) when applying the Wyckoff methodology. The 2 upper green circles represent breakouts from an accumulation structure. In essence, I'm trying to identify 1 of the 4 optimal chart patterns to form before these idealised points of entry and in the context of a Stage 2 uptrend.
Volatility Contraction Pattern / Wyckoff Wave
Cup with Handle
High Tight Flag
Darvas Box
With each of the 4 chart patterns above there are several keys things to identify before taking an entry:
- Reduction in price volatility;
- Lessening of volume before the entry (preferably half the 30 day average);
- Low risk technical area of support preferably less than 7% from the pivot point.
The above 3 points are important to help you reduce risk and better identify supply has been absorbed (less selling coming to the market).
Remember too, never trust a breakout without a large increase in relative volume.
We can go a step further by understanding the optimal Japanese candlestick and candlestick patterns we want to see at the breakout. Japanese candlesticks contain a wealth of information regarding supply and demand.
The first 3 candlestick patterns are ideal to see at a breakout. The 4th pattern is more common to see at a spring.
Hope you've found that educational.
JC
