Profiting with Chart Patterns book

Volatility Test
One of the last things we look at is volatility. The chart on the left is much more 
volatile than the one on the right. What do I mean by volatile? In any given bar, the 
odds of a sudden, rapid adverse move in the other direction is high because of how 
this chart behaves.
Figure 1-3.
Avoid Charts that Cross Two or More Lines Within Five Bars

---

Chapter 1 Tools of the Trade
©
 Nirvana Systems Inc.
1-5
Profiting with Chart Patterns
If you look at Johnson & Johnson from December to January, we had a lot of Gaps. 
The chart is jumping up and down. It is trending down and you could trade a short 
trade there on the idea that the chart is going to keep going down. But, it jumps up and 
down so much that your risk is higher. 
Now, compare that to Exelon on the right. You can see that the moves in this chart are 
actually pretty smooth. In August of 2015, the drop is pretty smooth. The chart just 
keeps moving down and does not have any gyrations one way or the other. If you have 
an Eighths scale drawn on the chart as a tool, you can apply the volatility test by 
asking yourself whether or not there is movement that crosses two of the lines in the 
Eighths tool. 
If you look at the chart on the left, you can see that several bars do cut through two 
lines in the Eighths tool, indicating that it is a volatile chart and is best avoided.

---

Chapter 1 Tools of the Trade
Profiting with Chart Patterns
1-6
nirvanasystems.com
Reward:Risk Criterion
Another point that you can look at that will help increase profitability is to assess risk 
and reward. I did not list this in my steps earlier because, honestly, if you get the right 
pattern identified and you set your stop correctly, this is not that important. Where it 
helps is when you have several opportunities that you are looking at in a given day, 
and you want to pick the best one. The best trade is the one with the highest 
Reward:Risk ratio. What you are going to find in all of the patterns we are going to 
look at is that you can generally calculate a target for the move from the pattern. In 
this example, we have a Consolidation. By looking at that Consolidation, I can 
calculate a target at the point that is marked in the illustration.