Anti Pattern Trading Strategy

Posted in: Trading Article, Trading Tutorials

Some of the best chart patterns to trade, such as bull flags, are simple and that includes the “anti” pattern by Linda Raschke.

The anti pattern takes into account both a pullback and a momentum move that setups up the pullback.

As described in my article about trading pullbacks, we want the pullback in price to be lazy and not strong moves in the opposite direction.

 

Why is it called “The Anti”?

We use the term anti to establish that we are taking a trade based on the direction of longer term momentum by using the short term momentum to spot the opportunity.

But we are looking at a special type of pattern that is different than trading pullbacks as a continuation pattern.

An anti trade could be setting you up in the early parts of a trend change – the whole picking a bottom or top.  It is not something we should be aiming for but it is always a possibility.

The anti trade also has  built in stop loss and take profit guidelines to help you set up a trading plan for them.

 

The Anti Pattern – In Pictures

The original way of finding an anti trade setup was by using the stochastic trading indicator set to the following:

  • %K is set to 7
  • %D is set to 10
  • Smoothing, if available on your charting platform, is set to 4

anti price pattern stochastics

The anti is easy to spot as we have the orange line (slow line) with a slope to the downside.

The blue line (fast line) has crossed to the downside under the orange line and has hooked up towards the slow line.  This is the trading opportunity and the pattern we are looking for.

You can see a few crosses on the stochastic oscillator and although Raschke based the trades on the indicator, adding price action is a solid addition.

We want to have an indication that the instrument we are trading has a potential reason for a strong reversal move.

 

Give Me A Reason 

Nothing says reversal more than a market that has found itself in a climatic position.  There are several ways to define this including overbought or oversold, failure tests, and we can use simple trend channels to give us a heads up that this is price movement to watch.

Markets move in a rhythm where the volatility is mostly constant.  Nothing too big shows up and those are the times that trading opportunities may not be present.

When we see something new come into the market, we should take notice.

anti pattern setup

We can trade the anti right from the stochastic indicator which would have you in a great trade.

Adding in price action and structures will add to the case of taking a trade.

You want to know if there is any reason to suspect we may get a reversal.

The move up in price was three months in duration without much of a pullback.  When price puts in the first high and pulls back, we do get an “indicator anti” but there was no trigger short.  We will discuss triggers later.

The last high on the right makes things interesting as price rallied from the first real pullback in this Forex pair.

Price ranged and then price ran to the upside from the bottom of the range.  For breakout trades to have some edge, you’d want to see some type of basing or higher lows into the resistance level.  Not seeing that does not guarantee a breakout failure, but it tilts the odds.

We get a failure test of highs and price collapses.

Also note a bearish divergence on the indicator and we also get a lower low on the indicator.

Price puts in a lazy pullback, a trend line break, and a run to the downside.

Indicator Anti

You can see that the stochastic indicator has the slow line making a downward slope along with the fast line pulling back.  This is textbook when using the indicator for the pattern.

 

Profit Potential of The Anti Pattern

The anti falls into the retracement setups, pullbacks, so we can use the same methodology to manage these trades.

I have written about measured moves and that is what we could aim for when trading the anti.  Use the target as a guideline and monitor for any adverse action around the profit objective.

You are looking for another leg down in price in this example that roughly equals the first leg.

profitable trading anti

In this example, you can see price has completed an A-B=C-D move in price and bottomed out.

Your stop loss could go a distance above the pivot located at “C” or use the ATR to set your protective stop.

 

Trigger In Your Trade

You could just jump into a trade when the price action appears to be stalling during the pullback but that is highly subjective.

There are several methods you can use for your trade trigger including trend line breaks, lower time frame structure, or simply buying breaks of highs or selling new lows.

This is a chart of Corn and is the four hour chart.  The daily chart had fallen to support after breaking from a trading range and was rejected.  We also saw the indicator slope upwards after putting in a double bottom while the market made new lows.

You can see on this four hour chart the large momentum green candles and from that, you can infer momentum on the higher time frame.

trade entries on the anti pattern

Types of trade entries

  1. Price breaks the bottom of the trend channel and is quickly bought back up
  2. Price is forming a range just below the trend line and below the resistance zone of the range
  3. Wait for price to breakout and buy the close

The top white line is the measured move objective and by monitoring price, you can see the buyers were running out of steam.

Stop loss is generally around the low of the pullback with a buffer to avoid being washed out of the trade.

 

Summary

The anti pattern can lead to a reversal in trend but the expectation should be conservative.

We want to see a market that has a reason to snap back and continue.  We can use many methods to do so but watching from strong moves in price that have not been seen before is a simple approach.

Add a trend channel can also help you see a break in the rhythm of market action.

Look for a strong move against the previous direction and then a weak pullback.  This pullback may need to be inferred from the higher time frame unless you are dropping to lower time frames to see the action.  One day red candle in a sea of green is a pullback on the lower time frame.

Make sure you use proper risk, honor your stop loss, and don’t get greedy.

trading candlestick reversals

 

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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