Trading between the lines: pattern recognition and visualization of markets

Insights into a pattern-based method of trading that can increase the likelihood of profitable outcomes
While most books on chart patterns, or pattern recognition, offer detailed discussion and analysis of one type of pattern, the fact is that a single pattern may not be very helpful for trading, since it often does not give a complete picture of the market.
What sets Trading Between the Lines apart from other books in this area is author Elaine Knuth's identification of sets of patterns that give a complete analysis of the market. In it, she identifies more complex chart patterns, often several patterns combined over multiple time frames, and skillfully examines these sets of patterns called "constellations" in relation to one another. These constellations turn sets of individual patterns into a more manageable set of patterns, where the relationship between them can lead to tactical trading opportunities. Shows how to apply complex patterns to specific trades and identify opportunities as well entry and exit points Markets covered include commodities, equities, and indexes Presents an effective trading approach based on real market cycles-as opposed to computer simulations-that are found in active markets

Moving beyond the simple identification of basic patterns to identifying pattern constellations, this reliable resource will give you a better view of what is really going on in the market and help you profit from the opportunities you uncover.

Q&A with Author Elaine Knuth
How can a trader improve his/her ability to recognize patterns and visualize where the market might be going?
It is the old adage, experience is the best teacher. Years of market observation has been my teacher. Every day I update data on all markets – even those I am not actively following. I first run an automated a computer scan on capturing patterns built on some of the ideas in the book. While I am doing this, I also visually scan the end of day action of each market before opening. I go through about 70 charts, spending about a minute or two on each one. This gives a daily feel for what is going on in a market. If I see something interesting, I also then spend more analysis time on that market. Then if any of the automated scans also pick up something, I also take a closer look at those markets. This may sound simple, and rather dull, but if you enjoy the markets it is as interesting as reading a good article or report in the morning.

While going through each market I ask myself:
• Is it range bound?
• Is it in a trend acceleration phase?
• Is it creeping along with very low volatility?
• Or do I even know what is going on at first glance? If not, why not?

Let’s say we have a market in a strong and accelerating trend phase, breaking out to ever new highs over the past weeks. Then on the daily scans, we detect that momentum is now weakening against still rising prices. This can be important information.

So once we decide to take a trade and go short, for example, the next logical question is what do we expect from the trade? Or ask where might the market be going?

That is not quite the right question. As traders we are not in the forecasting business. We do not know where the market will go, but instead we build a trading scenario(s) around the current price action and price history.

So with this daily pattern presented and possible trade opportunity, we then take a look at the weekly price history. And ask, for example:
• What was the price range before the most recent breakout to new weekly highs?
• Did this breakout level also act as support, bringing in more buying?
• What drove the buying then?
• What is the collective market motivation for selling now?

In summary, the trigger on this example was the daily action; and the actual trade entry on the intraday price pattern. (Identifying support and resistance or pivot points on the daily session.) The visualization of possible targets -- where the market might be going -- and overall market