- : August 22, 2021
- : Prashant Shah
Affordability Patterns – Part I
Price going above previous high is a bullish swing breakout. Price falling below previous bottom is bearish swing breakout.
We can trade based on these simple swing breakout patterns. For example, buy when price goes above previous swing high and exit if it falls below the previous bottom. Hence, previous bottom becomes our stop-loss.
P&F helps in trading these simple yet effective swing patterns. P& Double-top buy is a bullish swing breakout and double bottom sell is a bearish swing breakout pattern.
Using P&F, the pattern becomes objective. We can change the box-value to trade this pattern for short-term, medium-term, and long-term horizon. Box-value can also help us assess the risk
In the above image, if the boxes are more in the stop-loss column, the initial risk would be more. We can define the risk using this feature of P&F charting method.
For example, number of boxes in that stop-loss column should not be more than 7. If I scan for swing breakout pattern using this criterion, my scanner will not show the stocks having more than 7 box risk.
When we scan for the double-top buy pattern, it is possible that stock has travelled more after the breakout. We can ask software to show only stocks trading below 5 boxes after the breakout.
See below image.
In above image, number of boxes in column of ‘O’ are 7 and boxes in the breakout column are not more than 12. They are defined as 12 because criterion is 7 boxes in retracement column and not more than 5 boxes after the breakout column.
This pattern is defined as ‘Affordable breakout - bullish’ pattern in TradePoint. Similarly, there is ‘Affordable breakout – bearish’ pattern available in TradePoint.
These patterns are available in pre-defined pattern list. Criteria of 12 and 7 boxes can be altered based on the risk appetite and the preference of the trader.
You can change the parameters and create systems for scanning and back-testing. We can run scanner for these patterns on end-of-the-day timeframe and real-time as well. Criteria can be kept as not more than 2 boxes instead of 5 when you are scanning it in real-time.
This is a simple attempt to trade swing breakout and defining the affordability in the scanner itself. That helps us in filtering the stocks based on our risk criteria. Candidates appearing in scanner list can be analysed further using other tools and methods of analysis. If we control the risk, our risk-reward ratio in trading will be improved. Money in market is made by improving the risk-reward ratio.
We will talk more about this pattern in the next newsletter.