Trading Techniques  |  NOV 1998

Combining Patterns with Indicators by William Q. Smith

Combining a technical indicator with another technical method can be the start of a viable trading system. Here's how to combine a technical indicator with a chart pattern to form one. Pattern recognition and trend-following can be combined to form a useful trading system. The particular pattern being reviewed is the triangle chart pattern, while the trend indicator is the 20-day exponential moving average (EMA). Both techniques can be used as a basis for an entry rule for trading opportunities. For an exit rule, we will rely on a trailing stop based on the parabolic indicator. With that in mind, let’s take a look at each of the methods individually and then determine how to use the techniques together. TRIANGLES The symmetrical triangle consists of two converging trendlines, with the upper or resistance line falling and the lower or support line rising. The point of intersection at the right where the two trendlines meet is referred to as the apex. The triangle is called symmetrical when the angle of both trendlines with reference to the apex is approximately equal. The minimum requirement for a triangle is four reversal points. It takes at least two points to draw a trendline, and in order to draw two converging trendlines, each line must be touched at least twice by the price action.

by William Q. Smith