Drift Patterns: Valuable and Underappreciated
CL1 Hourly Chart
Before getting to the main body of the post I want to make a point. One of the most important advantages for a non-institutional trader is the ability to step away. If markets are overly volatile, take some time off. If you feel compelled to trade, significantly reduce position size as your risk management levels will need to be widened. And, it's highly likely that your fills are going to be terrible.
I know, I know…. There are many touting their ability to nail the turns. That dynamic hasn't changed since the 80s when I began trading and probably has existed as long as there have been markets. But, if you don't see a brokerage statement it didn't happen. If it did happen (it didn't) you would still need to know the anatomy of their trades, how much risk, how much reward, what happened between entry and exit and so forth, to make a reasonable assessment.
One of the most powerful but under-appreciated categories of patterns are the drift patterns.
• Flags, pennants and small lateral trading ranges all fall into this category.
• The patterns are fractal, that is, they appear across all time frames.
• Small drift patterns are extremely common across all trending markets.
• They are important because their completion reaffirms the underlying trend.
• The manner in which they develop, for instance, the slope and extent of the decline, can often offer clues as to the market's strength.
• Active traders can use the breakouts of the pattern to enter or add positions in clearly trending markets.
Most trends unfold in a push - drift - push pattern, sprinting quickly in the direction of the trend, accruing a short term overbought or oversold, and then drifting counter to the sprint.
• These patterns "drift" against the prevailing trend, alleviating short term overbought or oversold conditions.
• Think of the drift as a "pause that refreshes."
• It is important that the market DRIFT. The best examples contain overlapping price ranges (in whatever perspective you are working in) and don't typically retrace much of the prior sprint.
• Volume will generally decline throughout the pattern, particularly if the pattern builds over 5-10 periods.
• The best examples have substantial range overlap from day to day.
To be entirely fair, the classic literature:
• Requires a sharp move, or a flag pole for the pattern to fly from.
• A decline in volume as the pattern builds.
• The pattern lasts no more than 10-15 bars.
• Suggests that the pattern will generally occur about midrange in a trend move.
In my experience, finding drift patterns that fill all these "requirements'' is difficult.
My personal approach minimizes the requirements. As long as the pattern occurs after a decent thrust and then drifts against the prevailing trend, I can use it to develop either an entry to the prevailing trend or simply as a simple validation of the underlying trend.
• Importantly, the pattern is typically better defined in the chart of one perspective lower. For instance, weekly and daily, or daily and hourly.
• I have included a daily chart. The daily defines the trend and you can easily identify the drifts.
• I have also included an hourly chart. You can clearly see the potential entry points.
• Like any other trade, risk management stops are a must.
Do your homework. Spend a few weeks learning to identify these patterns on your charts. Then spend more time devising entries and risk management parameters around the pattern.
In future posts I will show how to use drift patterns to enter after a market breaks out from a trading range or a pattern.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
Before getting to the main body of the post I want to make a point. One of the most important advantages for a non-institutional trader is the ability to step away. If markets are overly volatile, take some time off. If you feel compelled to trade, significantly reduce position size as your risk management levels will need to be widened. And, it's highly likely that your fills are going to be terrible.
I know, I know…. There are many touting their ability to nail the turns. That dynamic hasn't changed since the 80s when I began trading and probably has existed as long as there have been markets. But, if you don't see a brokerage statement it didn't happen. If it did happen (it didn't) you would still need to know the anatomy of their trades, how much risk, how much reward, what happened between entry and exit and so forth, to make a reasonable assessment.
One of the most powerful but under-appreciated categories of patterns are the drift patterns.
• Flags, pennants and small lateral trading ranges all fall into this category.
• The patterns are fractal, that is, they appear across all time frames.
• Small drift patterns are extremely common across all trending markets.
• They are important because their completion reaffirms the underlying trend.
• The manner in which they develop, for instance, the slope and extent of the decline, can often offer clues as to the market's strength.
• Active traders can use the breakouts of the pattern to enter or add positions in clearly trending markets.
Most trends unfold in a push - drift - push pattern, sprinting quickly in the direction of the trend, accruing a short term overbought or oversold, and then drifting counter to the sprint.
• These patterns "drift" against the prevailing trend, alleviating short term overbought or oversold conditions.
• Think of the drift as a "pause that refreshes."
• It is important that the market DRIFT. The best examples contain overlapping price ranges (in whatever perspective you are working in) and don't typically retrace much of the prior sprint.
• Volume will generally decline throughout the pattern, particularly if the pattern builds over 5-10 periods.
• The best examples have substantial range overlap from day to day.
To be entirely fair, the classic literature:
• Requires a sharp move, or a flag pole for the pattern to fly from.
• A decline in volume as the pattern builds.
• The pattern lasts no more than 10-15 bars.
• Suggests that the pattern will generally occur about midrange in a trend move.
In my experience, finding drift patterns that fill all these "requirements'' is difficult.
My personal approach minimizes the requirements. As long as the pattern occurs after a decent thrust and then drifts against the prevailing trend, I can use it to develop either an entry to the prevailing trend or simply as a simple validation of the underlying trend.
• Importantly, the pattern is typically better defined in the chart of one perspective lower. For instance, weekly and daily, or daily and hourly.
• I have included a daily chart. The daily defines the trend and you can easily identify the drifts.
• I have also included an hourly chart. You can clearly see the potential entry points.
• Like any other trade, risk management stops are a must.
Do your homework. Spend a few weeks learning to identify these patterns on your charts. Then spend more time devising entries and risk management parameters around the pattern.
In future posts I will show how to use drift patterns to enter after a market breaks out from a trading range or a pattern.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org
