The Futures Chart Formation Thread

[SMI]

This thread is all about (or mostly about) classical chart formations and the modern day variations. Mostly on the Futures Markets. There are a limited number of Futures markets (at least compared to stocks) so that good chart patterns on daily and higher (and even hourly) charts tend not to occur all that regularly. Hopefully we can find a couple of them a week though, these days, there is so much correlation that they may all occur at the same time.

First up - Wheat. Nice breakout last week and seem to be continuation in the overnight session. Hopefully we get a nice bull flag on the hourly charts this week.

Fair warning: Breakouts, in my experience, tend to have a failure rate of around 70% (at least when shooting for the full measured move). It's the 30% that work that really make it all worthwhile.

I don't think a retrace to 672 invalidates the breakout even though it would be a severe flush because there is a diagonal trendline breakout in play as well. So, a retrace somewhere down to that trendline would be scary but not completely invalidate the breakout and any measured move target.

 

[wrbtrader]

It's the 30% that work that really make it all worthwhile.

Do you know the commonality amongst those 30% that works.

 

[SMI]

lol - I wish I did. If I did, obviously the win rate would be much higher. I think anyone who has been around a while will say that breakouts are unpredictable and, the best ones tend to be in the direction least expected. So, no, there is no commonality - the best I think you can do is to be very strict on what constitutes a good pattern. For me, I need 5 touch points on the trendlines and, ideally, a compression indicator such as the ADX should be low.

The low win rate is usually because the pattern is simply morphing into a bigger pattern and so a better breakout is being set up. There's just no way to know that in advance.

Quote from wrbtrader:

It's the 30% that work that really make it all worthwhile.

Do you know the commonality amongst those 30% that works.

 

[intradaybill]

So if we assume one trades just breakouts, he needs a reward/risk of at least 2.33 just to break even not counting for slippage, commissions and trading expenses. To cover all those things and realize a modest profit factor equal to 2, a reward/risk of at least 5 is required.

I wonder why you even bothered to show a breakout trade based on the above. No retail trader can realize a reward/risk ratio of 5 unless is trained for extreme discipline and has big pockets to withstand large drawdown.

 

[SMI]

intradaybill:

The chart pattern is still valid based on my own criteria. I can understand if you don't like it - especially since the breakout bar is so large which means that, as far as position sizing goes, you'll have to go with a much smaller position (unless you took it at the break of the diagonal trendline).

I can also understand it if you don't like the statistics involved in these types of breakouts - most people don't. But, that doesn't mean that the pattern isn't valid OR that there aren't other ways to take trades as the trend develops.

Not everyone looks at all futures markets nor do they look at it with the same eye. So, I am not sure why you would object to posting a chart that could be useful to someone else????

Finally as far as "deep pockets" go, trading futures on the daily charts requires a certain level of capitalization - no question about that. You can't trade these patterns with a 5000.00 account and,even with a 50K account, you'll probably have to pass on some trades and sustain larger drawdowns on the trades you do take. But, the pattern is still valid in my book and I will be looking to buy any substantial retracement (20 points or so) or, possibly even the first down close. If I lose, I lose - that's the nature of the game.

 

[RCG Trader]

Why not just buy a copy of Edwards and McGee? Charts patterns are the same on all charts and on all possible divisions of those charts.

 

[SMI]

Hi RCG:

I am not sure if you're addressing your comment to me or to someone else in the thread or to the group in general. But, if to me, I agree with you - heck, I own three different editions. I just find that I need to tweak the ideas for modern markets - hence I insist on 5 "touchpoints" instead of 4 for many patterns. And, some patterns I just plain don't like at all but that's because I could never really get a handle on them or maybe it's because I didn't study hard enough...

Do you trade chart patterns a-la E&M?

Quote from RCG Trader:

Why not just buy a copy of Edwards and McGee? Charts patterns are the same on all charts and on all possible divisions of those charts.

 

[RCG Trader]

Quote from SMI:

Hi RCG:

I am not sure if you're addressing your comment to me or to someone else in the thread or to the group in general. But, if to me, I agree with you - heck, I own three different editions. I just find that I need to tweak the ideas for modern markets - hence I insist on 5 "touchpoints" instead of 4 for many patterns. And, some patterns I just plain don't like at all but that's because I could never really get a handle on them or maybe it's because I didn't study hard enough...

Do you trade chart patterns a-la E&M?

I used to, until I realized that charts are just a graphical representation of data, now, I no longer require charts.

 

[SMI]

New Chart: July Coffee - triangle consolidation after a nice push down. We're still in the triangle and, because the apex is so narrow there is a good chance that any breakout simply ends up morphing into a bigger chart pattern.

 

[SMI]

Update on July Wheat:

The pullback has formed a triangle on the hourly charts. A break of the upper trendline (above say, 674) on this timeframe would confirm the bullish case. A break of the lower trendline would have me heading for the hills.