1st Retrace; look for Pivot

Retest; Support becomes Resistance

1st test of Support

Breakout
Breakthrough

2nd retracement

Anatomy of a Breakout

A Breakout is defined as price trading through some previous pivot level. In the example
above, the breakout is through a Support pivot.

On shorter timeframes (1Hr), it is rare for price to trade straight through a level without some
“to-ing and fro-ing”. Often, it may take price two attempts to break through support; other
times, price will break through on it’s first attempt, only to retrace and test the old support
pivot for resistance. The diagram above shows instances of both.

As with Breakdowns, previous pivot levels are important to highlight, as it is often these that
price will find it’s way back to. Before the trend continues with renewed vigour, it is criticle
the a new “base” level be set for the move. It is during this “base setting” phase that price will
retrace as long positions are closed, and the market has had the opportunity to prepare itself
for the latest swing.

Multiple trading opportunities arise from the many combinations of tests, re-tests, retracements
and breakouts. Candlestick entry setups, along with correctly identified zones of support and
resistance, should be considered befor high probability, high R:R trades can be found.

Anatomy of a breakout through resistance

 Failure at Resistance

1st Retracement at Pivot

Breakdown

2nd Retracement at Pivot

Anatomy of a Breakdown

At a test and failure at resistance (Red line), price will often struggle at the most recent level of
pivot resistance in the uptrend (Green line), and then go on to re-test the major resistance level.
As the sentiment of the market changes from Bullish to Bearish, one must allow the market to
prepare itself for the new trend downwards. Those with existing positions etc... must be given
the opportunity to prepare their portfolio’s before the market can move without resistance.
One must also consider the activies of larger players, who having identified the new short
opportunities, will manipulate the market to give themselves a better entry (e.g. “stop
hunting”, etc... ). Antics such as these must be allowed to exhaust before taking a new position
in the market. The size and number of the retracements will vary, from a full retracement, to
very subtle hesitations (a “pause for breath”) before the major swing downwards.

When trading off resistance on smaller timeframes (circa 1Hr), a short trade should not be made
until the market has had the opportunity to settle in this way. Multiple entries can be found from
both the peak of the retracement, (with a stop placed above resistance), or from a break of the
resistance - now support - pivot where price has stalled (with stops above the peak of retracement).

The method of entry is largely discretionary, and will depend on the candlestick entry
setups that are available. Also, the previous levels of support and resistance pivots should be
taken into consideration, in order that a trade with attractive R:R can be identified.

Breakdown at Support
 Stop

Long Setup

Entry

Entry

Short Setup

Stop

Hammer / “Pin Bar” entry setup

Bullish setup: at the bottom of a downtrend, prices fall to a significant level and reverse. Set
entry at High + 1 pip, with stop set below Low - 1 pip and vice versa.

Stop
Long Setup
Entry

Entry
Short Setup

Stop

Tweezer top / Two Bar Pin entry setup

Bearish setup; Price has failed at resistance pivot over two bars. Set short entry on a break of
pattern low, with stop at pattern high + 1 pip. Reverse for Bullish setup.

Stop
Long Setup
Entry

Entry
Short Setup
Stop

Bulish + Bearish Harami / Inside Bars

Consolidation signal for entry, price may break either way. Place entries and Stops at extreme
range of pattern +/- 1 pip. The longer the consolidation range, the stronger the breakout move
is likely to be.
 Long Setup Stop
Entry

Entry
Stop Short Setup

DBL High Close / DBH Low Close

Similar to tweezer patterns. Set entry on break of pattern high or low, with stop set at pattern
low or high as appropriate.

Entry
Short Setup

Long Setup
Entry

Break of DBL / DBH

Entry for scalps. In a trend, a continuation trade. No stops, momentum to carry trade for a
small profit. Not suitable on longer timeframes. The more bars, the greater the momentum of
the breakout.

Generic Entry conditions

 R

R
R

R R
S

S R

S S

S
S

Symmetrical Triangles

Found in Range bound markets. Trendline support and resistance push price inwards, where consolidation occurs.
Price eventually breaks out either north or south. At least one of the trendlines must have been tested and held
(i.e. at least 3 pivots).

Symmetrical Triangles show the market is in indecision; previously range bound, profit taking and short squeezing
are forcing the market into a corner. Once S or R is broken, the market is again confident of the new price trend.

R R S R
R

S S S S

Ascending and Descending Triangles

Most effective as continuation patterns, but failures and reversals do occur. A Support or resistance pivot is
repeadetly tested and holds, with each retracement falling closer and closer to the pivot level. The Pivot level must
have been tested at least 3 times, along with the trendline acting as support or resistance.

In an eascending triangle, supply is repeatedly offered to the market at the pivot resistence level. As price falls away,
new demand is introduced to the mrket at increasinf price levels. A break of resistance shows that the supply above
this level has been exhausted, and bulls now control the trend. Reverse for Descending triangles.
 R
R
R
R R
R
S
S
S
S
S
S

Pennants

Trend Continuation patterns. In an uptrend (or downtrend), converging support and resistance lines are found.
Price exhibits a period of consolidation, before breaking out of range and continuing with the current trend. Each
trendline must have been tested at least 3 times.

Pennants are like a little “rest” for the trend. After a retracement, control of the market switches from bulls to bears,
and bank again. In an uptrend, if bears fail to reverse the trend and start a trend of their own, bulls re-gain control
of the market and prices continue to push north. Reverse for a downtrend.

R
R
R
R

S
S
S
S

Flags

Flags are a range-bound retracement pattern. In a downtrend (or uptrend), prices begin to retrace. They then
oscillate between a support and resistance trendline, gradually moving against the recent trend. Once the trendline
holding up the move is broken, price then continues on it’s current trend.

Similar to Pennants, Flags represent a pause in the current trend. Bulls and Bears exchange blows while price is
consolidating, only to continue it’s move in the prior direction once the period of profit taking, shirt covering etc...
has come to an end.
 R
R

R
S

S
R
R
R
S S S

Converging Wedge

Converging Wedge patterns are usually Bearish, irrespective of the current trend direction. They are similar to
symmetrical triangles, except the pattern is set at an angle, rather than parallel to the bottom price axis. They are
fairly weak patterns, occuring infrequently and difficult to spot. Failures do occur.

R
R
R
S S
S
R
R

Diverging Wedge

Diverging Wedge patterns are usually bullish. Comprised of trendline support and resistance that diverge at the end,
these patterns are difficult to spot and faitly weak as a result. They are similar to Broadening Megaphone patterns,
except are found to run at an angle as opposed to parallell with the price axis.
 R

R
R
R
R

S
S
S
S
S

Broadening Megaphone / Inverse Symmetric triangle

Rare and difficult to detect, but very reliable. Two trendlines of support and resistance that
diverge at the end of the pattern. Similar to Diverging Wedges, but parallel to the price axis
and much more tradeable.

Megaphone patterns can be traded in many ways; breakouts, swings, and retracements and
bottoms / tops. See further for details.

R
R
R

R R
S
S
R
S

S S

Diamond Patterns

Diamond patterns are made up of ascending and descending support and resistance. They can
also be considered as a Megaphone pattern immediately followed by a symmetrical triangle,
and are very reliable.

Like regular megaphone patterns, there are numerous ways to trade diamond patterns, with
breakouts of trend continuation and reversals possible. For reversals, Diamond Tops occur
much more frequently than Diamond Bottoms, although the continuation patterns form
far more regularly than either of these.
 R R
P
R R

S S
S S S

Rectangle Channels

Mostly continuation patterns, but occaisionally reversal patterns, Rectangle Channels are very
reliable. Combined of two parrallel support and resistance pivots, price is range-bound between
the two levels. Upon breaking out of the channel, price usually continues in the direction of
it’s previous trend.

Rectangle Channels can be traded as breakout setups (i.e. continuation or reversal), or as range
bound consolidation setups.