Technical analysts and traders believe that certain chart patterns and shapes are signals for profitable trading opportunities. Many professional and amateur traders claim that they consistently make trading profits by following those signals. In this chapter we introduce some types of chart patterns and the corresponding trading strategies, that, according to our extensive historical tests, give the trader an advantage.

Stochastic Combo

The Stochastic Combo trading strategy is based on the rate satisfying a combination of conditions of the various technical indicators. For the buy signal, the chart will have to show a long-term up trend, the momentum indicators will have to indicate that the contract is oversold, the RSI will have to be low, and the rate will have to be near the lower Bollinger Band, showing starting signs of bounce-back. The figure shows such an example:

Figure 24(a). This is a buy signal from our Stochastic Combo model. The chart is in an up trend and all the indicators (RSI, K/D, MACD and Bollinger Band) show that the stock is oversold. Furthermore, it has already turned up.

For the sell signal, the chart will have to show a long-term down trend. Momentum indicators will have to signal that the stock is overbought, that the RSI is high, that the MACD is favorable, and that the rate is close to the upper Bollinger Band, showing first signs of decline. All this is illustrated in the figure below:

Figure 24(b). This is a sell signal from our Stochastic Combo model.

The trading strategy is to ride on a general trend and at the same time enhance profits by capturing the likely short-term mean reversion. If the rate moves as expected, one should hold until it penetrates the center Bollinger Band (a 14-to-20-day moving average), or even until the rate nears the opposite Bollinger Band. If, however, the rate moves in the wrong direction, one should cut losses shortly after it goes beyond the prior day’s intra-day extreme.

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