Screening for the patterns is tough. Candlesticks are easier to look for as you mentioned but trying to get a computer to run searches for triangles, etc is quite difficult. So I never screen for chart patterns, even though I trade them.
What I did was consider where patterns, when they were to develop, would be most profitable and reliable. This lead me to stocks which have wide daily ranges and enough volume for me to trade comfortably in.
I joined stockfetcher.com (I think is a about $9/month) and ran screens for volatility on stocks within a certain price range (this could be anything) and meeting a minimum volume requirement. I included a criteria that the average move was high for a period of a month or longer (so as too weed out the stocks that just have a big single day) At that time the most volatile stocks where having daily ranges of about 6-12%! everyday! This can be adjusted to reflect weekly or monthly volatility to suit your time frame. But I was looking for stocks that almost always moved over the time frame I was trading on.
This information immediately lets you know that large moves are having in those stocks no matter what is going on. Now you need an edge. Generally this list returned about 6-10 stocks. If I got more I narrowed the criteria or picked ones with higher volume to get it down to about 8.
If you are swing trading you may be able to watch all eight. As a day trader I reduced it to about 4 by looking at charts for the last month, seeing which ones were likely move, and if any patterns had already developed. Once I found 4 that looked most likely keep moving a large amount (sitting close to resistance/support, or in a major longer term chart pattern, etc) I watched those stocks.
This is where I watched for chart patterns...after I found the stocks I wanted to trade. The chart patterns provide the entry, stops and profit targets for the trade in stocks that already have an extremely high probability of making large moves.
Every day I ran the scan for volatile stocks (you may run it weekly or monthly depending on your time frame), if a stock dropped off I no longer watched it. This meant that volatility of the stock had dropped and was no longer a big enough mover for me to watch. When you know a stock moves on average 6-12% a day (from high to low) you have a huge advantage...and it is just a matter of finding a way to take part in the moves. ------- Now I trade forex (less things to watch, 24 hours a day, can trade at night, no shorting rules etc) and so I have about 8 currency pairs max that I watch at anytime and I just sift through them on different time frames to find patterns.
Trading volatile stocks is not for everyone, but I generally looked for stocks in the $10-$20 with greater than 6% range between the daily high and low and over a million volume. Right now that scan likely won't bring up any stocks (but who knows, I have not run it in at least 9 months) so you may have to tinker to find some stocks that are moving. By this I mean look for stocks that have large daily ranges in different price brackets. In this way you will compile a list of stocks. Stockfetcher lets you save your screens so scanning takes about 5-10 mins a night. No more pouring over chart!
Or you may devise your own way to find the patterns. The question I constantly asked myself is not what is likely to move tomorrow or be the next big thing, but rather, what stocks have a high percentage of making large moves each day, repeatedly? Find 4-8 stocks that move a lot each day or week and you will have some opportunities with very little analysis time put in searching for stocks. Chart patterns, especially triangles which I like the most, appear quite often. If we look for patterns in those stocks we have screened for we will find opportunities and it will require very little time to do the home work. Although some patience is required in waiting for the formations to develop.
One additional note, I avoided the stocks that are traditionally know as day trading stocks such a AAPL, etc. That is why I went with lower priced stocks, that move a lot in percentage terms (but not as much in dollar terms), and still do decent volume.
Why search for stocks that might move tomorrow when you can trade stocks that move everday.
If you would like to learn more or join in a discussion on this topic or many others, visite darkpooltraders.com
By Cory Mitc
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