Knight, High-Probability Trade Setups

Tim Knight, founder of Prophet Financial Systems (now part of the TD Ameritrade stable) and a well-known blogger (Slope of Hope), takes yet another look at pattern trading in High-Probability Trade Setups: A Chartist’s Guide to Real-Time Trading (Wiley, 2011).

The bulk of the book is devoted to nineteen patterns: ascending triangles, ascending wedges, channels, cup with handle, descending triangles, descending wedges, diamonds, Fibonacci fans, Fibonacci retracements, flags, gaps, head and shoulders, inverted head and shoulders, multiple bottoms, multiple tops, pennants, rounded bottoms, rounded tops, and support failure. In each case he defines the pattern, explains the psychology behind it, and provides examples.

The two shorter parts of the book provide an overview (a primer on chart setups and the author’s personal trading journey) and tips on setting stops and being a bear as well as a guide to real-life trading.

For those who are familiar with the literature on chart patterns there’s not much new in this book. The illustrative charts are, however, such a decided improvement over those in the classic Edwards and Magee volume, Technical Analysis of Stock Trends, which has seen multiple editions over the years, that it is worth adding to a reference library. Moreover, the examples are drawn primarily from recent price action. Given market volatility over the past few years it’s easy to find charts that graphically illustrate most patterns. For instance, all of the rounded top examples were drawn from the bear market from late 2007 through early 2009. “The reason is that the market conditions leading up to 2007 were so strong (although wavering in the summer of 2007) and the conditions following the peak gradually deteriorated into an unmitigated collapse. Thus the formation of the domes—the rounded tops—was just about perfect. … Under normal circumstances, formations this clean are infrequent.” (p. 278)

For those who are looking for a solid introduction to pattern trading Knight’s book is first-rate—clear descriptions and lots of ProphetCharts. For those who are old hands at chart patterns the book bears testament to the fact that sometimes profitable patterns really do stare you in the face.