81 Patterns within Patterns by Suri Duddella Successful pattern trading requires the knowledge of pattern formation, its arrangement, and its market manipulation. Pattern manipulation is achieved when pattern recognition becomes a reflex action for the traders. When a trader is knowledgeable about patterns, it is difficult not to see patterns within other patterns (embedded patterns). The recognition of patterns within patterns and its body of knowledge of how to react and what to expect helps a trader’s success. Traders benefit by using smaller patterns support and resistance levels as entry and stop levels to trade larger patterns. Examples of embedded patterns include a series of bullish and bearish triangles in a symmetric triangle or bear flag setups in rectangle channels. When a pattern dimension is large and the risk implied by its trading range may also be large. Traders should then look for smaller congestion patterns inside the large pattern near key support and resistance levels to reduce the risk and provide an early entry opportunity into a position. Multiple patterns inside a large pattern cause to change its trading behavior, price targets, and time-frames. Embedded Chart Patterns 1. ABC Bullish Pattern with Rectangle Channel This pattern shows trading ABC bullish pattern and rectangle channel price levels as trail stops. Also, the breakout of rectangle channel's upper trendline signals continuation of ABC bullish pattern trade. 2. Inverse Head & Shoulders Pattern with embedded ABC Bullish Pattern. Inverse Head and Shoulders patterns are traded (from long side) only when price closes above neckline. Most Inverse Head and Shoulders patterns also have an embedded ABC Bullish pattern. These patterns can be traded first as ABC Bullish pattern (ABC entry is much lower than Neckline). The confluence of multiple bullish patterns usually adds additional confidence in the pattern trading. 3. Bullish Gartley Pattern with Bearish ABC Pattern. Bullish Gartley patterns are 5-point harmonic patterns have an embedded ABC Bearish pattern. Gartley patterns can be traded using the confluence levels of ABC Bearish pattern (target levels) couple with Gartley pattern retracement levels (at D). Example of Patterns within Patterns The following example shows current Goldman Sachs (GS) daily chart with a Dragon pattern. (See "How to trade your Dragon" article in ModernTrader magazine, Jan. 2017). Goldman Sachs completed a completed a double bottom pattern In July 2016. GS price started to rise from a low of $138.20 to a high of $252 (82% upside) in a Dragon pattern. Using Dragon pattern trading rules, a long trade entry was entered in late September 2016 above hump level ($169) with first target range at $187-$200 and second target range at $239 to $267. Current GS chart (as of Feb. 25, 2017) shows price reached its first target zone in November 2016 followed by its second target range in December 2016. Since Dec. 2016, GS price is consolidating and it is currently forming a smaller Megaphone pattern (See "Trading Megaphone Patterns" article in Modern Trader Feb. 2017), in the second target zone. It is not uncommon for prices to consolidate and test some key support ranges in large patterns, especially after a steep rise of 82% in price from July 2016.
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