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High-Probability Trade Setups: A Chartist's Guide to Real-Time Trading



"Technical analysis, in Tim Knight's way of thinking, is not just focusing on a chart and drawing lines. Rather, it's providing special market insight from years of trading. Tim's latest book makes me feel like I missed something in my own development as a trader and I want to learn more."
—Tom Sosnoff, founder of and current CEO of

"Technical price patterns give traders an edge in any market, but it is a technique that is full of nuances that can be challenging for new traders. High-Probability Trade Setups explains the patterns you need to understand, and fully explains the details of why they work the way they do. Tim Knight is uniquely qualified to provide the detail that is always just skimmed over by other authors. He is one of the pioneers of computerized and Internet charting and has been studying technical patterns as a market professional since before most of today's traders opened their first brokerage account. If you want to fully understand the process of using technical patterns to find and execute successful trades, then I couldn't recommend this book more enthusiastically."
—John Jagerson, founder of and author of All About Investing in Gold

"Tim's latest book shares his lifetime of knowledge with traders who appreciate and utilize charting and technical analysis as a critical component of developing and executing their trading strategies. With High-Probability Trade Setups, Tim adds another volume to what has become a living library of technical analysis for everyone from the beginning investor seeking an education as to the meaning of technical analysis to this latest edition which is for the more active—but still learning—trader who wants to understand the more sophisticated charting patterns and how to use them profitably. Tim lives, eats, and breathes technical analysis and charting, and I recommend this book to all investors."
—Lee Barba, former CEO, Investools

Timothy Knight is the founder of Prophet Financial Systems (now owned by Ameritrade), which has been rated by Forbes and Barron's as the number one online site for technical analysis. He also operates a highly successful trading blog, Prior to starting, Knight was vice president of technology products for Montgomery Securities, where he helped develop PC-based trader workstations before the development of web trading. Knight has traded for more than twenty years, primarily using technical analysis and price charts. He is also the author of both editions of Chart Your Way to Profits (Wiley).
About the Author xiii

PART I An Overview 1

CHAPTER 1 A Primer on Chart Setups 3

The Bulls versus the Bears 4

Why Is a Prediction Valuable? 4

A Word on Shorting 6

Support and Resistance 7

What Happens When Prices Punch Through? 8

History Repeats Itself 11

When Patterns Work Together 13

How to Use This Book 14

CHAPTER 2 My Personal Trading Journey 15

Earliest Interest in the Markets 15

Beginning with the Crash 16

Technical Tools 17

Prophet’s Beginning 18

The Internet Makes Its Appearance 18

Enter Alex and JavaCharts 19

Project Kandinsky 21

The Slope of Hope 22

Lessons Learned 22

ProphetCharts Lives 23

The Three Steps 24

PART II The Patterns 31

CHAPTER 3 Ascending Triangles 33

Definition of the Pattern 33

Psychology behind the Pattern 35

Examples 35

Summary 43

CHAPTER 4 Ascending Wedges 45

Definition of the Pattern 45

Psychology behind the Pattern 47

Examples 47

Summary 53

CHAPTER 5 Channels 55

Definition of the Pattern 55

Psychology behind the Pattern 57

Examples 57

Summary 68

CHAPTER 6 Cup with Handle 69

Definition of the Pattern 69

Psychology behind the Pattern 70

Examples 72

Longer-Term Examples 75

Summary 79

CHAPTER 7 Descending Triangles 81

Definition of the Pattern 81

Psychology behind the Pattern 83

Examples 83

Summary 89

CHAPTER 8 Descending Wedges 91

Definition of the Pattern 91

Psychology behind the Pattern 92

Examples 93

Summary 102

CHAPTER 9 Diamonds 103

Definition of the Pattern 103

Psychology behind the Pattern 105

Examples 105

Summary 110

CHAPTER 10 Fibonacci Fans 111

Definition of the Pattern 111

Psychology behind the Pattern 113

Examples 114

Summary 126

CHAPTER 11 Fibonacci Retracements 129

Definition of the Pattern 130

Examples 132

Summary 139

CHAPTER 12 Flags 141

Definition of the Pattern 141

Psychology behind the Pattern 142

Examples 143

Summary 153

CHAPTER 13 Gaps 155

Definition of the Pattern 155

Psychology behind the Pattern 157

Examples 158

Summary 174

CHAPTER 14 Head and Shoulders 175

Definition of the Pattern 175

Psychology behind the Pattern 176

The Importance of the Neckline 177

Examples 178

Summary 197

CHAPTER 15 Inverted Head and Shoulders 199

Definition of the Pattern 199

Psychology behind the Pattern 201

The Importance of the Neckline 202

Examples 202

Summary 215

CHAPTER 16 Multiple Bottoms 217

Definition of the Pattern 217

Psychology behind the Pattern 219

Examples 220

Summary 230

CHAPTER 17 Multiple Tops 231

Definition of the Pattern 231

Psychology behind the Pattern 233

Examples 233

Summary 241

CHAPTER 18 Pennants 243

Definition of the Pattern 243

Psychology behind the Pattern 244

Examples 245

Summary 253

CHAPTER 19 Rounded Bottoms 255

Definition of the Pattern 255

Psychology behind the Pattern 256

Examples 257

Summary 265

CHAPTER 20 Rounded Tops 267

Definition of the Pattern 267

Psychology behind the Pattern 269

Examples 270

Summary 278

CHAPTER 21 Support Failure 279

Definition of the Pattern 279

Psychology behind the Pattern 280

Examples 281

Summary 299

CHAPTER 22 Automatic Patterns 301

Patterns in ProphetCharts 302

Working with the Results 307

Pattern Failures 314

Putting the Patterns to Work 315

PART III Trading and You 317

CHAPTER 23 Setting Stops 319

General Guidelines 319

Below Support 320

Above Resistance 320

Above Trendline 321

Below Trendline 321

Most Recent Low 322

Most Recent High 322

Special Cases 323

CHAPTER 24 On Being a Bear 325

The Philosophy of Shorting 325

Practical Guide to Short Selling 326

Exchange-Traded Funds 328

Puts for Leveraged Profits 330

The Philosophy of Shorting 332

CHAPTER 25 A Guide to Real-Life Trading 337

Trading Rules 337

How to Open a Position 338

How to Hold a Position 341

How to Close a Position 343

Time and Money 343

There Is No Holy Grail 344

Closing Thoughts 345

Index 347