Kane Jim 09 The 4 Point Continuation Pattern

I(ane Trading on:
The
4-Point
Continuation
Pattern
by Jim I(ane
Tips� ideas and techniques for market traders
Kane Trading on:
The 4-Point Continuation Pattern
By Jim Kane
KaneTrading.com
Kane Trading on: The 4-Point Continuation Pattern
Copyright © 2003 by James J . Kane
Published by Kane Trading
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Printed in the United States of America

Disclaimer
No c laim i s made by James J. Kane, or Kane Trading, that the trading

methods shown in this book wil l result in profits, or will not result in losses.
There is a substantial risk of loss in trading securities, options on securities,
futures, options on futures or any other trading vehicle. Past performance is
not indicative of future results. Trading securities, options on securities,
futures, options on futures or any other trading vehicle may not be suitable
for all recipients of this book. Always seek competent professional advice
when considering any trade. All examples in this book are for educational
purposes only. All material and examples in this book are based on
information obtained from sources that are believed to be reliable, but which
are not guaranteed as to their accuracy or completeness. Nothing in this book
should be construed, in any way, shape or form, as a solicitation of any offer
to buy or sell any trading instrument. James J. Kane, his family and friends,
and associates of Kane Trading have at times in the past and may now or at
times in the future, trade or have traded any or all of the issues used as
educational examples in the book. Any thoughts or opinions expressed in
this book are subject to change without notice. No information provided in
this book should be construed in any way as an encouragement by the
author, publisher or distributors to trade. Each trader must make his or her
own decisions with regard to trading. Each trader must be responsible for his
or her own decisions and his or her own actions, if any. Purchasing or
reading thi s book or parts thereof constitutes acceptance of and agreement to
this disclaimer and exempts the author, publisher and distributors from any
and all l iabi lity and l itigation.
v
Table of Contents
Acknowledgements
.
IX
Introduction 1
The Pattern 3
Conclusion 81
Vll
Acknowledgements
In my evolution as a trader I 've read more material than I can even recall .
The maj ority o f this material has contributed very little to my knowledge
base. That lack of value, for me, in the material, in and of itself, i s important
information. It' s shown me, by a process of elimination, the things that don't
help me, and I can use that information when formulating a trading plan.
In developing material related to Fibonacci trading, two sources have been

of great help. I would l ike to acknowledge these sources, and recommend
that readers look into their materials. See if they might be of as much help to
your own trading, as they were to mine.
I ' d l ike to acknowledge Scott Carney over at Harmonic Trader. Scott ' s book,
The Harmonic Trader, and the material on his website
(www.HarmonicTrader.com). opened my eyes to another way to view the
markets. This was my first substantial introduction to the concepts of
F ibonacci and harmonics in trading the markets. Scott has quite extensive
information on harmonic patterns on his website and has developed several
patterns of his own. Scott and I have since spent endless hours discussing
harmonics and the markets. His historical knowledge of the markets is
extraordinary and has contributed greatly to my own knowledge base.
I ' d also like to acknowledge Robert Miner at Dynamic Traders Group, Inc.
(www.DynamicTraders.com). Robert ' s book, Dynamic TradingTM, was my
next serious excursion into Fibonaccis and trading. This book is extensive
beyond belief. There is so much material in Dynamic Trading™ that I would
have to consider it must reading for anyone interested in increasing their
knowledge of F ibonacci in trading and in Elliot wave analysis. Robert's use
of the time factor is also extensive and will open one ' s eyes to factors
outside of just price. Robert also has Dynamic Trader software available,
which I use for creating charts labeled with various Fibonacci, harmonic and
time factors. It is the software that I used to create the charts for thi s book. I
would l ike to extend an additional thanks and acknowledgement to Robert
for allowing me to use these charts in my works. Information on his
products is available on his website. I recommend checking it out to see if
you feel that it has information that you can use to help your trading. His
contributions in the field are practically immeasurable.
IX
Introduction
I n this eArticle I will present a pattern that I have developed and refined
over many years of intensive study. I have not found the pattern to be very
common, but I have also not found it to be so rare as to be limited in its
practical use. I f one keeps an eye out for it, it will show up enough to be
quite worth the effort, in my opinion.
I did not see this pattern in its entirety at first, as I have with other patterns.
This pattern started to emerge as a pattern for me only after I sequentially
followed a path of trade logic on certain trades. What eventually emerged
was a subset of trades that all shared some common characteristics. When
viewed after the fact, a clearly recognizable pattern was evident.
As I created my outline for this article, I found one aspect very difficult to
lay out. With most patterns I find that the best strategy for explaining them i s
to show a diagrammatic version o f the pattern structure, and then follow up
with chart examples. With this pattern, though, I began to feel that this
approach would not necessarily be the best way to go. After much work, I
left the outline flexible in this regard and moved on to capturing my chart
sequences.
It wasn't long after I began the charting aspects that I realized I wanted to
show the sequential thought process that brought this pattern to light for me,
instead of j ust showing the structure and then explaining what to look for. I
feel that this will provide the most benefit for the reader, since this pattern
develops out of multiple failed trades of other types. These may even be
trades that the trader is actually in, and as they fail, it sets up one more step
of the pattern that we will be examining in this eArticle.
I will include some discussion on the possible psychology of what is

happening as these trade setups (that lead to the pattern) fail . I sometimes
look at the pattern as a ' double whipsaw' pattern. In fact, it' s probably more
accurate to call it a 'triple whipsaw' pattern, and by the time the third
whipsaw has occurred, the road ahead has been cleared, and off it goes. All
of this will be very clear as I present the pattern, and explain what I think is
gOIng on.
1
The reader may have noticed that I 've yet to call the pattern by the name I
have coined for it, ' The 4-Point Continuation Pattern' . I 've done this on
purpose. The reason that I chose the name I did for the pattern will become
very clear as the coming explanation unfolds. I didn't want the reader to be
thinking about the pattern itself, or what might be coming up, as I explained
some of the background information.
Given all this, I want the reader to be prepared for a detai led, sequential
progression of charts as some price action unfolds. I will explain what I am
seeing and thinking, and how I might be trading such a scenario. I will also
add in what I think others traders might be thinking, and how they may be
reacting as the sequence plays out. It won't be until the end of the series that
the pattern structure wil l be completed and, hence, highlighted. I wi ll follow
up with additional examples after that point.
This is not a pattern that I sit and wait for. It's a pattern that forms while I ' m
actively seeing setups in the i ssue, some of which fai l . Almost every time I
see thi s pattern form, I am already following the i ssue closely and setting up
potential trade areas. I f the setups and failures occur in a very speci fic way,
'The 4-Point Continuation Pattern ' emerges. I want to point out before we
start, though, that I feel there i s as much benefit to be gained from the
information I will present as the pattern develops, as from the pattern itself.
2
The Pattern
The first step in thi s pattern i s finding a long, fairly smooth trend. Those
readers familiar with Kane Trading on: Advanced F ibonacci Trading
Concepts know that one of my favorite ways to trade i s to look for well
established trends, and set up groupings on pullbacks, against which I trade.
These groupings allow me to find areas where I might consider a trade, in
the direction of the trend. These groupings form a 'Potential Trade Area'
(PTA) for me.
It' s not necessary to have a ' smooth' trend to trade using the groupings
technique; it' s j ust the main way that I, personally, l ike to use the
techniques. It's also not necessary that the trend i s ' smooth' with thi s
pattern, but unlike with groupings, I ' ve found i t t o b e more i mportant that it
be ' smooth ' . As I lay out this pattern, it will become clear that traders will
have to make evaluations and choices on what i s acceptable to them, and
their 'Trading Plan ' .
Some traders may decide to trade thi s pattern when the trend i sn't smooth,
and others may reject any patterns that don't have thi s smooth trend. I rej ect
most of these patterns that don't have smooth trends to start, but that's me.
There will be many criteria laid out as I develop this pattern, and at each step
traders will have to decide what parameters work for them and fit their game
plan, if any. I will present my favorite parameters, but they are designed for
my specific circumstances and my specific 'Trading Plan ' . Expect that you
will have to work out your own, after some study.
3
Let's start with a look at a smooth trend on a daily chart in the dollar index.
See figure 1.
Figure 1
105.000
104.000
103.000
102.000
101.000
100.000
28 Dec 12 19 2f, hn 9 if, 23 30 Feb 13 20 27 Mar

Chart created by Dynamic Trader (c) 1996-2001
The dollar index has been trending down very smoothly here, and I 'm
looking for an opportunity to get on board the downtrend. There was a small
pullback, but after such a run as the index has had, I would want a larger
pullback before I would consider a short trade. I would wait until a pullback
of significance starts, and then start to build some groupings.
4
Let ' s add some more data onto the chart, and watch for a larger pullback.
See figure 2.
Figure 2
105,000
104,000
103,000
102,000
101,000
100,000
9,000
28 Dec 12 19 2t. Jan '3 1t. 23 30 Feb 13 20 27 Mar 13 20

The index has now pulled back and started to roll back down. If I were
looking to trade this i ssue, I would have already built my groupi ngs and had
them on the chart, before the pullback had reached thi s point. For the sake of
thi s example, though, I am going to assume that the reader only wants to see
how I would evaluate pattern setup. For thi s reason, I will be working a bit
' after the fact' in my presentation here, going on the assumption that we
don't want to consider trades that are outside the scope of the actual '4-Point
Continuation Pattern' itself.
This being the case, our next step is to evaluate i f thi s 'roll-over' i s
happening at an area that is, in the opinion o f the trader, significant. For me
to j udge significance, 1 ' d see if the i ssue is turning at a grouping. This
technique is clearly outlined in Kane Trading on: Advanced Fibonacci
Trading Concepts, whi ch I wil l call AFTC from now on, so as to not i rritate
any readers by constantly repeating the long title over and over again.
5
I will run through the steps that I would follow here in forming a grouping,
but thi s pattern is in no way l imited to the use of groupings in its
development. Any technique that a trader may want to apply should be
adequate, as long as it verifies the significance ofthe area to the trader,
based on the trader's studies and 'Trading Plan '.
I will start by adding a .486 retracement of off the peak at the start of the
smooth trend down. (If the reader i s unfamiliar with this retracement, the
details of its derivation and use are laid out in AFTC). Keep in mind that if I
were looking to trade against this area that we are building, I would have
done all of what we are going to do now quite awhile ago (once the pullback
got fairly started), anticipating a potential resumption of the downtrend in
the area of the grouping. If we are only concerned with the pattern, we can
switch to verification mode, and act after the fact. See figure 3 .
Figure 3
...
... tr
LI-I. 106.000
105,000
104,000
103,000
102,000
101,000
100,000
28 Dec 12 19 25 Jan 9 15 23 30 Feb 13 20 27 Mar 13 20

The .486 was a good choice for a starting point. The next significant point
that I see is the small pullback from the first part of January. I can eye the
6
chart and see that thi s i s going to be close to a .786 retracement, so I ' l l add
that retracement onto the chart. See figure 4.
Figure 4
...
... tr
LI-t 106.000
105.000
104.000
103.000
102.000
101.000
100.000
28 Dec 12 19 25 Jan 9 16 23 30 Feb 13 20 27 l\'1ar 13 20

Chart created by D'inamic Trader (c) 1996-2001
The .786 retracement has fallen just about right on the .486 retracement from
the last peak. So far, this is indicating to me that the i ssue is 'harmonic ' . I ' l l
now add an external retracement using the swing-high from the last, more
notable pullback. Again, I can see that thi s will be in the area of a 1 .272
retracement. As I explained in AFTC, if your eye isn't at the level yet to
make an accurate guess as to what retracement or projection to put on the
chart, simply put anything that might be close on the chart. In this case you
might try the 1 .272 and 1 .6 1 8 external retracements. Then simply delete off
what fal l s wel l outside the groupi ng area.
7
I ' ll j ust add on the 1 .272 retracement here. See figure 5.
Figure 5
-to
... tr
LI-l 1 06. 000
105. 000
1 04 .000
103.000
102. 000
1 01 . 000
100.000
28 Dec 12 · 19 26 Jan '3 16 23 30 Feb 13 20 27 Mar 13 20

'
Chart created by Dynamic Trader (c) 1 996-2001
The 1 .272 external retracement fel l just under the other two numbers, but
sti l l very close. In my opinion, this i s forming a very tight groupi ng in this
area. I ' m going to add two more numbers onto the chart, and see how they
fal l . To do this, I ' m going to key off of the l ast two significant peaks that
came before the data shown on the chart.
Since forming groupings i s outside the scope of this eArticle, I ' ll just state
what I am adding, without scrolling the chart back to actually show the
peaks. I ' l l leave it to the reader if he or she wants to pul l up a chart and look
back to see what I 've done.
8
I ' m now going to add a . 3 82 retracement from the last significant peak that
came before the data shown on our chart. See figure 6.
Figure 6
...
-ko- tr-
LJ-I. 106,000
105,000
104,000
103,000
102,000
101,000
100,000
23 Dec 12 19 2& Jan 9 1& 23 30 Feb 13 20 27 Mar 13 20

That . 3 82 retracement fell j ust about exactly on top of our . 786 retracement.
I still don't understand how some can say that this is all random. I ' m going
to add the last retracement on now, and I ' m going to do that from the most
significant peak of the down move, the retest of the maj or high in the doll ar.
To me, thi s is an extremely significant point in the dollar ' s trading history. I f
a Fibonacci retracement from that point, wel l over a year ago in time, fel l
right into m y grouping, I would feel pretty strong about the setup.
9
I ' ll add a . 1 86 retracement from that peak onto my chart. The . 1 86
retracement can be derived directly from Phi (<1» (the Golden Ratio
(=l .6 1 8)), and I find it quite useful for my trading. See figure 7.
Figure 7
...
... tr
LI-l. 106 . 000
105.000
1 04 . 000
103. 000
1 02 . 000
1 0 1 . 000
100. 000
28 Dec 12 19 26 Jan 'l 16 23 30 Feb 13 20 27 Mar 13 20

The . 1 86 retracement, from that peak of wel l over a year ago, fel l almost
exactly on top of the 1 . 272 external retracement from the recent price action.
To me, that ' s truly amazing, and I find it hard to believe it' s just another
coincidence. Given al l this, I'm confident this reversal point was very
'harmonic ' , and turned at a point of significance. Keep in mind that al l of
these calculations could have been done as soon as the dollar index started
heading up in early March.
10
For clarity, let me remove all of the extra lines that I used for these
calculations, before we move on. See figure 8 .
Figure 8
....
-4. tol
J-l.
1 06.000
105.000
104. 000
1 03 . 000
1 02.000
1 0 1 . 000
1 00 . 000
9 . 000
8 . 000
28 Dec 12 19 26 Jan 9 16 23 30 Feb 13 20 27 Mar 13 20

Chart created by Dynamic Trader (c) 1 996-200 1
This would have been a grouping that I would have considered trading
against for a downtrend continuation trade, as laid out in AFTC. For what
we are doing right now, it satisfies my need for the reversal to happen at a
signifi cant area. Understand that I'm not saying it is critical that the reader
use the method I have used to determine significance for the reversal point.
I f you have your own technique for doing this, and you are wil l ing to do the
work to determine that this pattern wil l work to your satisfaction using your
parameters and criteria, then by all means follow up on that. I am only
presenting the context that I have found useful for me, and my ' Trading
Plan ' . I 've done little experimentation using various other techniques for
determining significant points for this pattern.
Before I move on, l et me discuss a little bit of what I think is on the minds of
many traders at this point. With a long, well-established downtrend in place,
11
there are many traders short the i ssue. As the trend continues on, some
undoubtedly get a little bit 'jumpy ' and want to protect profits. I f a reversal
starts to build up some steam, many traders wil l start to cover and take
profits, in what could be called a classic ' short-covering ral ly ' .
This can draw i n new longs, and further extend the rally. At some point
these factors may exhaust themselves, and new shorting may take place.
This would be even more l ikely if the factors that have led to such an
extended trend are stil l i n place. In other words, the big players return to
continue distributing.
Now, let's say that I got short against thi s groupi ng. The i ssue has started to
move a little bit in my favor, so I ' m thinking that the trade is going OK, so
far. But what about all those new longs, what are they thinking? They are
thinking the trade i s rolling over, and thi s i s l ikely happening to them very
soon after they chased their way in and got on board. This is good for me,
because they are about to start bailing out and driving the i ssue down.
12
Let's move ahead a l ittle bit on the chart, and I ' l l continue the discussion.
See figure 9.
Figure 9
105.000
104. 000
103.000
102.000
1 0 1 .000
1 00.000
9 . 000
28 Dec 12 19 26 J�n 'j 16 23 30 Feb 13 20 27 Mar 13 20 27

A nice down move did get going, and my short trade against the grouping is
doing quite well , so far. It is likely that many of the longs have bailed out,
and are now on the sidelines. But check out that l ast bar. We now have a
strong reversal bar, which took out two previous bar highs and filled a gap.
Will that be it, or is an uptrend now starting?
Many traders, including myself, are seeing that thi s may be the 'higher low'
that marks the reversal of thi s significant, long downtrend that has been in
place. This i s l ikely to trigger some new long traders, and a re-entry from
some of the longs that just bailed out. As soon as I see this, I want to see
how close thi s initial reversal is to a F ibonacci number.
13
I ' ll add a .786 retracement to the chart, and evaluate what I see. See figure
10.
Figure 10
�
...
4
- fr-LJ
-l 106. 000
105.000
1 04 .000
1 03 . 000
'\��
1 0 2 . 000
t �J
1 0 1 .000
100. 000
-- �8 .550 Ret 0.786
28 D€!c 12 19 26 hn � 16 23 30 Feb 13 20 27 Mar 13 20 27

This initial reversal is happening very c lose to a .786 retracement. It's not
exact, but it's pretty c lose. How did I know to start with a .786 retracement?
I 've done this so many times that I could easily see it was c lose to a .786. If
you aren't sure, try the several that are most likely. In this case a .6 1 8, .786,
and . 886 would have been good choices. It won't hurt to have extra
retracements on the chart. You can always erase what you don't need.
14
Let' s move on a bit, and see what i s happening. See figure 1 1 .
Figure 1 1
105.000
1 04 . 000
103.000
1 02 . 000
1 0 1 .000
1 00 . 000
98550 Ret 0.781;
28 Dec 12 19 26 hn 9 16 23 30 Feb 13 20 27 Mar 13 20 27 A

The DX is going ' straight up' without taking out any previous bar' s low. I f
you are a Japanese candlestick fan, it has now thrown a ' spinning top' bar. I f
I were short off of that grouping, I would have been scaling out all the way
up from the last reversal just above that . 786 retracement. If I weren't
completely out of the trade by this point, I would be very c lose to out.
That is my style of play, according to my ' Trading Plan ' . Certainly there are
traders with trading plans that would have them stil l sitting on a short trade
off of that grouping. I ' m not saying that I don't think this could reverse here
and continue back down. I ' m saying that my game plan says that i f it doesn 't
continue down (without backing up and giving me this kind of 'heat'), I 'd
rather scale out and walk away with something. I may miss the big move if it
does flip back down, but overall I 've decided that I 'm not going to give back
that much.
15
But what about some of the other traders right now? What i s the ' wrong-way
crowd' doing, and thinking, in here? I suspect that many of the new shorts
off of that grouping are now panicking and have been covering as this new
rally got going. So another ' short-covering' rally may be taking place.
Traders are l ikely getting more and more j umpy, as this thing keeps flip
flopping.
I would have been one of those traders, covering my shorts all the way up.
I magine if you were a trader who tries to be ' always i n ' . Some plans call for
a trader to be on one s ide or the other at al l times. Thi s trader was short, and
then got long, then short again, and now long. And thi s thing has now
thrown that ' spinning top' bar, which might mean another reversal is at
hand. That trader is absolutely dizzy right now, and many i n that position
have had enough.
What I ' m wondering, though, is what is happening right now? I want to see
if this bar has turned back down at a Fibonacci number, or c lose to one. I say
turned back down, because the bar close is quite a bit below the bar high. In
real-life, I would be watching this thing very closely on a lower timeframe.
16
I ' l l add an .886 retracement onto the chart. I ' l l point to the retracement with
an arrow, s ince it is hard to see. It fal l s j ust a small amount under the
previous group ing. See figure 1 2 .
Figure 12
I) j lj
iBi im ��! 8 i�� 102.000
1)1
i�lim ��! U�g
71
101.500
))
101.000
100.500
II
100.000
�9.500
�9.000
98 .550 Ret 0.786

-98.500
�8.000
Mar 13 20 27 Apr
Chart cre.�ted by Dynamic Trader (c) 1996-2001
The DX has turned j ust about right at an .886 retracement, and also right at
the bottom of the grouping. To me, this i s something I would be watching
for, and something that i s very significant. I know that there are many very
tired, whipsawed traders out there at this point. I f this thing starts down, I
feel that a lot of traders are not going to believe in the move, or take the
trade. They are too 'beat up' .
17
I ' ll add in one more price bar, and assess. See figure 1 3 .
Figure 13
1) j q
lSi ;e�� @I 8 ;gij� 102.000
j)1
1
iijU§� ��! 9i��
71
101.500
101.000
J 100.500
11
100.000
t
r9.5OO
r9.000
H 111
98.550 Ret 0.78&
LgS.500
-98.000
27 . Mar 13 20 27 Apr
The DX has ' retested' the grouping, and reversed at the .886 retracement.
The next bar was a solid down bar with a close near the low of the bar. Now,
would I have been too whipsawed to consider entering a trade off the
grouping and the .886 retracement? Remember, I woul d have scaled out of
the first short trade, and likely walked away with a small profit. Would I
have been long on thi s l ast ride up?
If you've read AFTC you know that, in this timeframe, I would not be long.
I trade with the trend on the traded timeframe. To be long on that higher low
i s to call the end to that very l ong downtrend. That's a game I don't play.
I ' m thinking about getting short to get back on board the downtrend.
If I feel the downtrend has went a long ways and may have l ittle left to give,
that's fine. I ' ll j ust stand aside. B ut one thing you won't hear me say is:
' That trend has had it, time to reverse. ' I ' ll wait until a new trend i s
establ ished, and use the grouping o r ABCD techniques t o get on board.
18
Let ' s move ahead a few more price bars on the chart. See figure 14.
Figure 14
1) i q
18�;ij�� 1l1 8;ij� 1 02 .000
jJ1
1
IOI:m ��! S:��g
71
}) 11
1 0 1 .500
1 0 1 . 000
1 00 . 500
j 1j ti l
100.000
-99 . 500
-99. 000
Hh
98.550 Ret O.7aE.
rs.soo
l
rs.ooo
27 M.ar 13 20 27 Apr
The DX i s now picking up steam to the downside. All I can think of is: those
poor traders. I also notice that the l ast bar has a fairly long lower tai l . I s this
thing going to reverse again?
19
I ' l l draw in a trendline off of those two swing-lows. I want to watch thi s line
for one reason. Almost every trader on the planet will have that trendline on
his or her charts. See figure 1 5 .
Figure 15
i8iim ��! 8;9i� 102.000
jJ1
lflq }t lj j
l�l:m ��( U�g
71
1 0 1 .500
1 0 1 .000
100. 500
100.000
f'99 . 500
Hh �
f-99 . 000
98.550 Ret 0.786
-98 . 500
-98 . 000
Mar 13 20 27 Apr 10
Just as I suspected, the DX is starting to turn up. But the last bar has done
the same thing as the previous bar, only in reverse. The last bar has a long
upper tail. I see this as indecision.
20
I ' l l add in two more price bars, and we' l l evaluate. See figure 16.
Figure 16
======t=======�
�
��
;;;;;;;;
;; ;;;; ;;;;
;; ;; ;;;;;;;;;;
;; ;;
;;;:;
;;;;
;; ;;;;;;
;; ;;
;;;; ;;; lSi ;e�� @( B;9ij� 1 02 . 000
= ��= mi:m ��! �:��g
1)1
1 0 1 .500
1 0 1 . 000
1 00. 500
1
100.000
�
----:;�---- 98.550 Ret 0.78&
13 20 27 Apr 10
More indecision as the DX approaches the trendl ine.
21
I ' m going to add in one more l ine here, and that's a horizontal line from the
previous swing- low. See figure 17.
Figure 17
1
��;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;
;;
======t===========i======== 18iim
;;;;
;; ;;
;; ;; ;; ;; �IU Bi�� 102 .000
l�U§� ��i U��
1J1
�
1 0 1 .500
1 0 1 . 000
1 00. 500
1 00 . 000
f99 . 500
f99 . 000
h
-98. 500
-98. 000
Mar 13 20 27 Apr 10
Chart created b';l Dynamic Trader (c) 1 996-2001
If the trend line is breached, it will l ikely initiate some new shorts, as wel l as
cause whatever longs are left to capitulate. But where might buyers step in? I
want to at least watch the area of that swing-low. Remember, I intimated that
I might be short again off of that .886 area (more on this after we discuss the
pattern in awhile). I f I were short, I ' d want to be watching behavior at areas
that I think others are watching.
22
Let me add another price bar onto the chart, and reassess. See figure 1 8.
Figure 18
1 ) 1 1t
i8i;m ��1 8i�� 1 02 .000
iiji:m ��I U�g
Iq
.71
1 0 1 . 500
1 0 1 .000
100. 500
j 11
100.000
l�
lt
./
[-99 . 500
[-99 . 000
l 98.700 3 1Mat1J3
>
./" 98.550 Ret I) .713b
-98 . 500
h�
-98 . 000
27 Mar 13 20 27 Apr 10
Wow, now that ' s incredible! The trendline gave way, and they dropped it.
The bar close is almost right at the l ow.
23
I ' l l add another price bar onto the chart, and see what is happening. See
figure 19.
Figure 19
1tIj1
l�iim �§I Bi�� 102 . 000
j) 1
i9l:m ��i U��
71
1 0 1 .500
1 0 1 . 000
1 00 . 500
1I
100.000
l v1
II .---""
9 . 500
L 98.700 31M.3tD3
'38550 Ret 0.786
ha
M r 13 20 27 Apr 10 16
Not again! I t does seem as though some buyers were waiting right at that
swing-low point. The DX is struggling to find direction in here. Bear with
me as we fol low this as it unfolds. There wil l be a method to this madness,
once you see the pattern. That wil l allow you to see what I watch for, and
what I consider 'noise ' .
24
I ' l l again add one more price bar, and evaluate. See figure 20.
Figure 20
102.000
1 0 1 . 500
1 0 1 . 000
100. 500
1 00. 000
�9 . 500
�9 . 000
�8. 500
�8 . 000
27 Mar 13 20 27 Apr 10 1&

The DX i s getting a pretty good bounce off of that swing-low point. Right
here, though, I see a possible 'test' of that trendline from underneath. A
convincing move up from here and I ' d be scaling out of the short trade,
agam.
25
One more price bar for the chart, and we ' l l reassess. See figure 2 1 .
Figure 21
i8i;ij�� f B;��
llll]
102. 000
lij i:M ��! U�g
j I)
)'I
1 0 1 . 500
1 0 1 . 000
1�
100.500
1I t
100.000
II
9 . 500
9. 000
�-
L 93.700 3 1Mat03
98550 F.:et I) .78(,
h
8 . 500
8 . 000
Mar · 13 20 27 Apr 10 16
F inally! The DX couldn't sustain the upward move and reversed hard, taking
out that swing-low. I didn 't draw it in, but look at the chart and mentally
draw in a trendline from the highs of the bars on this last down leg,
excepting the peak high bar. The trendline 'retest' bar failed right at that
trendline.
26
Let's see what happened from here. See figure 22.
Figure 22
�
j
n
/I j
==��E ��::=======: l��i�� i 8i�t IIIJ!1 I!I WI
102.000
1 0 1 . 000
100.000
jH
h j
9 . 000
::::..
---::r-c:== =====t=+t=l=t== ""
L 98.700 3 1MarlB
.." 0.786
1
27 Mar
� ' 13 20 27 Apr 10 1f> 24
1
The area of the swing-low, where I expected a bounce, did bounce the DX.
And once that area was broken, the DX hung around there for a whi le. But
then it did something a l ittle unusual. It broke the swing-low (from early
March) for the entire down move without a second thought, and didn't look
back.
27
Let's l ook at the chart with quite a bit more data on it. See figure 2 3 .
Figure 23
27 Mar 13 . 20 27 Apr 10 16 24 May 8 15 22 2'3 Jun 12

Chart created by D')"namic Trader (c) 1 996-2001
The DX just went into the tank after that point. And I ' m sure you are saying
that is al l fine and good, but what did we just do, and what did we learn?
You've gotten through the hard part, following every step of the way as thi s
thing unfolded. A s I mentioned earlier, I ' ve done thi s because I think in the
l ong run it wil l give you the most educational value for your time spent.
When this is all done, you shoul d not only be able to see the pattern, but
understand some of the factors that may go into its development. This should
be information that you can use when you make trades that eventually could
become parts of the pattern. This wil l give you more ways to look at the
potential trade setups that occur as the pattern develops, and more ways to
view management on trades that you may already have in place, as they are
viewed in the unfolding context of this pattern.
28
Let's now look at a chart of the DX starting where the first DX chart started,
and ending with all the data the last chart had. I n other words, from where
we started, to where we j ust ended. This wil l show the whole picture, from
the initial trend, though the pattern, and then the follow through. See figure
24.
Figure 24
Dec 03 Feb Mar Apr May Jun

Chart created by Dy'namic Trader (c) 1 996-2001
The area that we analyzed i s right in the middle of the chart. You can see
that it has a very distinctive structure.
29
1'11 outl ine the trends that we looked at. See figure 25.
Figure 25
1 06, 000
1 04 , 000
102,000
1 00, 000
8 , 000

You can clearly see the initial smooth downtrend, the three 'whipsaw'
trends, and the continuation downtrend.
30
I ' ll remove the two long trend highlights so that we can focus on the pattern.
See figure 26.
Figure 26
1 06. 000
104 .000
102. 000
100.000
8 . 000
Dec 03 Feb Mar Apr "''lay Jun

What you see highlighted on the chart, for l ack of a better description, i s the
' guts' of the pattern. If you trade ABCD patterns, especially i f you' ve read
my Trading ABCD Patterns, you are l ikely seeing something here. I will
discuss that l ater on. First, I want to cover what many classical technicians
are l ikely thinking. This is a 'triangle' .
31
Let me draw in the l ines to show the 'triangle' . See figure 27.
Figure 27
1 06. 000
1 04 . 000
1 02 . 000
100.000
8 . 000
6 . 000

Although the second point for the top l ine was a bit high for th is triangle to
be symmetrical to the eye, it is a ' symmetrical ' triangle pattern. As l ong as
the lines are sloping towards each other, one s loping up and one slop ing
down, it' s a ' symmetrical ' triangle pattern. So, what ' s the difference
between the ' symmetrical ' triangle pattern and the '4-Point Continuation
Pattern ' ? Plenty.
32
First, let' s look at j ust the ' symmetrical ' triangle pattern on the chart. See
figure 28.
Figure 28
106.000
104.000
102.000
1 00. 000
8 . 000

This example of the ' symmetrical ' triangle pattern worked out nearly
perfect. There was l ittle retesting of the lower l ine, once it broke. And there
was tremendous follow through. I do not find this to be the case very often
with ' symmetrical' triangles. Although these patterns do have a set of
criteria that distinguish them as ' symmetrical ' triangles, these criteria share
little in common with the criteria of the '4-Point Continuation Pattern' .
In general, the criteria for the ' symmetrical ' triangle pattern are very broad,
and hence the pattern is extremely common. I ' m speaking very loosely here,
but as long as you can draw in two l ines, each with a minimum of two
contact points for the l ines, and the l ines are sloping together with one
sloping up and one sloping down, you have a ' symmetrical ' triangle. You
wait for a break of one of the lines, and make your play.
33
You have no indication from the triangle which way it i s l ikely to break.
Although the traditional technical view is that this is a reversal pattern, j ust
about every reference to this pattern indicates that the pattern is just as likely
to break one way as the other. I refer the reader to any of the innumerable
books on traditional technical analysis for more information on
' symmetrical ' triangles.
Now we l ook at the '4-Point Continuation Pattern' . Let ' s do a comparison.
'4-Point Continuation Pattern ' ' Symmetrical ' triangle
Has a list of very specific criteria Very general criteria.

that have to take place before the
pattern is formed.
The criteria are very Fibonacci No F ibonacci.

intensive.
The pattern is strictly a continuation Generally termed a reversal pattern,

pattern. or tenned ' direction inconclusive' .
The pattern is fairly uncommon. The pattern is extremely common.
The pattern triggers wel l inside the Triggers when one of the triangle
'triangle ' , not once the 'triangle' i s l ines is broken, where everyone on
broken. the planet is watching.
The stop can be placed very close The stop, if it is technical ly placed,
by. is usually quite far away.
The pattern forms after a long, No specific criteria about what

smooth trend. This trend is a part of happens before the triangle forms.
the pattern setup.
It should be quite clear from this comparison that the only commonal ity
between these two patterns is that the '4-Point Continuation Pattern ' also
looks l ike a ' symmetrical ' triangle on the surface. I feel it ends at that point.
I've done this comparison so that it is clear this is not just a variation on a
' symmetrical ' triangle pattern .
34
At thi s point I feel that I ' ve 'teased' the reader long enough, so I ' l l outline
the ' l ook' of the pattern now. I feel that I can now use any l evel of detail that
I want and the reader w il l have the background to fol low right along, and
understand.
I ' ll start with the same chart as i n figure 24, but with some arrows added
onto the chart. See figure 29.
Figure 29
Dec 03 Feb M.3r Apr May Jun

I wil l describe the pattern holistically here, so that we can now see what it
looks l ike. As we get i nto the examples that fol low, I ' l l reiterate, review and
summarize the specific criteria for the pattern.
The pattern starts out with a smooth trend. A countertrend move starts,
which wil l , generally, be larger in scope than the previous ' smal l ' pullbacks
in the trend. Look at the first arrow on the chart. At a point where this
countertrend move is expected to end (based on our pattern criteria), it does.
The i ssue starts to move in the original trend direction again. Look at the
second arrow on the chart.
35
Before a new low for the move can be set, though, the i ssue reverses
countertrend again. Look at the third arrow on the chart. At a point where
this move is expected to end (based on our pattern criteria), it does. I f the
issue reverses again in here, the pattern has completed. This is where the
opportunity arises.
Before saying any more, let me label the chart with numbers. I ' l l remove the
arrows, for clarity. Before reading what comes after the chart look the chart
over careful ly, with the number labels, and see if you can ' see' what is being
l aid out for you. See figure 30.
Figure 30
106,000
104,000
102,000
100,000
-98,000
tHflllJlt*,
1
-96,000
----..----.--------.----- -- - ,
094.000
I-r- .--- -..-- ---.--- �2,000

Dec 03 Feb r',hr Apr May Jun
Chart created b�1 Dynamic Trader (c) 1996-2001
The numbers correspond to the four critical points in this pattern. It is these
four points that prompted me to name this pattern the '4-Point Continuation
Pattern' . When these four points l ine up l ike this, after a smooth trend, you
have the pattern. The pattern is triggered as soon as a reversal is ind icated at
point 4. The specific technique a given trader would use to trigger entry
would depend on his or her own unique trading plan.
36
Point 4 gives the trader a 'potential trade area' , j ust l ike the groupings
technique, the ABCD pattern, and many other techniques do. The goal of the
pattern is to provide this area where the trader might consider a trade. Next,
the trader needs an entry signal. One source for finding entry techniques is
my book Kane Trading on: Entry Techniques. The procedure I am outl ining
here comes from my free articl e Critical Elements of a Trade, which is
'
avai lable on the Kane Trading website.
One of the strengths to this pattern, I feel, is the ability to enter a trade, once
an entry signal i s obtained, so close to technically significant areas. This
al lows a stop to be placed that i s close by, but stil l technically significant.
It's easy to place a tight stop, but not so easy to place an intelligent,
technically significant tight stop. I spend endless hours looking for trades
where I can do this.
F or me, trading is all about finding areas where the reward/risk balance is in
what I cal l a ' sweet spot' . I feel that if there is any secret at all to trading, it
is to trade only those areas that are in this ' sweet spot' . Many sources call
this 'trading with an edge', a term I also use.
I consider the ' sweet spot' a place that not only gives the trader an edge in
terms of what is l ikely to happen at that spot, but also an edge in terms of the
stop-loss placement. This affects the reward/risk ratio in a favorable way. I n
m y experience, this pattern is one o f the best patterns that I have ever found
in this regard. This eArticle is the first time that I have revealed this pattern
to anyone. I will discuss the stop-loss placement in more detail in the
examples that fol low.
37
Let's look at the chart again, but with the three swings within the pattern
highlighted. This shoul d make the structure of the pattern very clear. It
should also make clear what I hinted at earlier in regard to ABCD patterns.
I ' ll discuss that aspect once we absorb the pattern l ayout from the chart. See
figure 3 1 .
Figure 3 1
106.000
104 .000
1 02. 000
100. 000
8 . 000
De.: 03 Feb Mar Apr May Jun

That's what the '4-Point Continuation Pattern' looks l ike. I ' ve gotten to the
point where I can see them on a chart in an instant. This doesn't do me any
good for trading, as they have already played out, but it helps me find
examples to study. The skill is in seeing them as they unfold. That is why I
decided to lay out the pattern as I have so far.
If I just started here, you might be able to recognize the pattern, but not be
able to see it as it unfolds. I have also gotten to the point where I am always
on the lookout as the initial stages of the potential pattern develops, so I can
be ready to make a decision if the pattern completes. Like many of the ski l ls
that I teach, it may take some work and some practice, but you should get it
with time and experience.
38
Let's move on to another example. I wil l shift the emphasis from the details
of bui lding groupings to the details that I look for, with as much trader talk
as I can throw in. I wil l also shift the focus to the criteria that I l ike to use the
most. Keep in mind that I wil l present the criteria that I have found the most
useful to m e, for my ' Trading Plan ' . I present these not for the reader to j ust
clone and use, but as a starting point for individual research into what, if
anything, works for the reader, and his or her own personal ' Trading Plan' .
I ' ll continue with an example in QCOM. I chose this example because

QCOM is a fairly choppy, fairly volatile stock at this point in time (although
nothing l ike it was in the heyday of the tech bubble). I wanted an example
where the lead-in trend wasn't quite so smooth. As I mentioned, I prefer a
very smooth trend to start this pattern off, but that doesn't mean I won 't take
any trade that doesn't start this way. Each step is a j udgment call on what the
trader will accept and reject. This example is right on my own personal
borderline, and that is why I chose to show it.
39
Let's look at a daily chart of QCOM, after a solid uptrend has been in place
for a whi le. See figure 3 2 .
Figure 32
II
0 . 000
39 . 000
1H ) lqi
38. 000
37 . 000
36. 000
35. 000
34. 000
ll li l l 1 1 ) J l l l l ! ! l J l
33 . 000
32 . 000
.
3 1 . 000
)
30. 000
25 May ., 1& 23 30 Jun 13 20 27 Jui

Notice how QCOM has some fairly significant pullbacks i n the uptrend, and
that the last pullback overlaps the price action from the previous swing-h igh.
Generally, I try to avoid initial trends for thi s pattern that have significant
overlapping swings. I n this case, though, there i s only one small overl ap,
and, for QCOM, this i s a pretty smooth trend. So step one is to identify a
fairly well-established, preferably smooth, trend. Each trader has to make a
judgment call on this, based on his or her own 'Trading Plan ' .
40
Let ' s look, as QCOM starts to pull back. See figure 3 3 .
Figure 33
ttlpl
0 , 000
39, 000
38, 000
37, 000
36, 000
35 , 000
34, 000
li l li,
33,000
tl l J l t J t!J 1I l
32, 000
3 1 , 000
30 , 000
25 May 9 16 23 30 Jun 13 20 27 Jul 11

One of my preferred methods to trade is to try to get on board existing

trends, using the grouping technique to find potential trade areas. When I see
a chart l ike thi s last one, my normal reaction i s to get a grouping, or several
groupings, on the chart right away. This process has nothing to do with the
'4-Point Continuation Pattern' ; it only has to do with my trading preferences.
It turns out, though, that thi s procedure winds up being step two in the
process of identifying and qual ifying the pattern. Recall how I said that the
pattern i s a small subset of factors that all come together as I follow a
sequence of potential trades. That i s how I discovered thi s pattern, by
playing out a logical sequence of trades many, many times, and seeing that I
was winding up with this small subset at the end that had a group of
common characteristics. Thi s small group had survived 'running the
gauntlet' of what you are seeing unfold in this example.
41
Let ' s look at the groupings that I came up with for QCOM. In this example,
you are seeing the group ings on the chart before the i ssue gets to the
potential trade area. Before I am thinking ' 4-Point Continuation Pattern' I
am thinking about this trade. I ' l l also add in a few more price bars of data.
See figure 34.
Figure 34
0 , 000
39 , 000
38,000
37, 000
36 , 000
35 , 000
34 , 000
33,000
32, 000
3 1 , 000
30, 000
25 May 9 16 23 30 Jun 13 20 27 Jul 11 1

I see two, or possibly three, very nice, tight groupings have formed.
Depending on your own particular style and ' Trading Plan ' , you might see
thi s as one broader, but stil l tight, grouping. In reality, it may not matter that
much how you view it from here. What does matter is that you have an area
that you feel meets your criteria for a potential trade area, according to your
'Trading Plan ' .
42
Let me remove all those extra l ines that I used to key off of the swing-highs
and lows, in order to calculate the groupings. I like to do this when I finish
creating groupings, for clarity. See figure 3 5 .
Figure 35
jllp!
0 . 000
1 1l [Itt!l
39 . 000
1 It
38. 000
37. 000
36 . 000
If!iM".
35. 000
34 . 000
)ljl!i . lHJl lJutlJ l

33 . 000
32. 000
3 1 . 000
30 . 000
25 May 9 16 23 30 Jun 13 20 27 Jul 11 1

Chart cre.�ted by Dynamic Trader (c) 1 996-2001
The one thing that I notice when I step back and look at this chart is that
QCOM i s really 'plunging' down here. Although the last price bar i sn't
particularly weak, there was a very large gap down, with further sell ing and
a very weak close on that gap bar. Many times, as I discuss in AFTC, a
grouping wil l be approached in a manner that can look downright scary.
It still amazes me how many times I have seen this, and yet the i ssue turns
right on the grouping. Remember, QCOM i s still in an uptrend at this point
on the timeframe that we are l ooking at. We are looking for areas where this
uptrend may reassert itself. We have ' underlying conditions' in our favor.
43
I ' l l add two more price bars of data onto the chart, and we' l l assess. See
figure 3 6 .
Figure 36
]ltpJ
0 , 000
39 , 000
38, 000
37, 000
36 , 000
35, 000
34, 000
j1 lH1lIj\lltl tlllll) t)
33, 000
32, 000
3 1 . 000
30 , 000
25 May 9 1� 23 30 JUI) 13 20 27 Jul 11 18

QCOM came within a tiny fraction of the top of the highest grouping, and
has bounced up strong. It' s hard for me to say if I would have caught this
long trade, since I almost always wait for the groupings to be penetrated (I ' ll
comment more o n this later in the article).
I have found that if I j ump on my groupings trades early, I frequently have to

take extra ' heat', since many will rol l over and then penetrate the
grouping(s). Regardless of thi s long trade, QCOM has reversed here j ust
about exactly at an area that I consider highly significant. Step two towards
the pattern has been fulfilled, for me.
44
Let ' s look at QCOM with three more bars of data on the chart. See figure 37.
Figure 37
til)!
} jt
0 . 000
I
39. 000
)j
38. 000
37 . 000
1 ) 1
36. 000
i!!iUll�.
35. 000
Ilj t jllt!!1
34.000
H
ljl�fl jl!l!tJljtljl
33 . 000
32. 000
3 1 . 000
30. 000
25 May '3 16 23 30 Jun 13 20 27 Jul 11 18 2

QCOM i s continuing up, and i f a trader did get l ong against the groupings,
the trade is going well so far. When I 'm in the management phase of a trade
l ike this, I put two retracements on my chart when the trade gets to about
this point.
I do this for two reasons. The first reason is that the area of these two
retracements i s an area that I frequently see an issue stall or reverse. I want
to watch that area closely in my management phase. The second reason is
that having now developed and refined the '4-Point Continuation Pattern' ,
this i s the area where I want to see the next reversal happen. (I'm preparing
mysel f for the possibility that a 4-Point may come together from thi s layout.
If not, that ' s fi ne. B ut if it does, I ' ve been preparing.)
You can stil l have a decent, very tradable ' 4-Point Continuation Pattern' i f
the reversal happens before thi s area, but this is my preference, my chosen
parameters. I have had the best success when I focus on the patterns that
45
reverse in this area. So, what retracements do I use? I add the . 786 and the
. 886 retracements. I prefer a ' deep ' point 3 .
Let's see what the chart looks l ike with these two retracements added on.
See figure 3 8 .
Figure 38
0 , 000
39 , 000
38, 000
37 , 000
36, 000
35 , 000
34, 000
33,000
32, 000
3 1 . 000
30 , 000
25 May � 16 23 30 Jun 13 20 27 Jul 11 18 2

QCOM has to go up a bit more to test the area that I have highlighted. It' s
now a waiting game.
46
I ' ll add one more price bar of data onto the chart, and we' l l reassess. See
figure 39.
Figure 39
JIll}j j
0 , 000
39.335 f;:et 0 ,S8G
39, 000
38,770 Ret 0 ,736
38 , 000
37, 000
36, 000
35 , 000
J\j1Jttj
34 , 000
1jtHI \H
33 , 000
j
32 , 000
3 1 , 000
30 , 000
25 May '3 16 23 30 Jun 13 20 27 Jul 11 18 25

QCOM has continued up strong, and has hit the .786 retracement. I ' m
noticing something else that I would l ike on my chart at this point. I would
have added it with the other two retracements, but I need to go step-by-step
so I don't confuse the reader with too much at one time.
I feel that small swing-high j ust down from the top is significant, and I think
an . 886 retracement from that swing-point wil l support what I already have
on the chart. As mentioned in AFTC and other writings, I feel that the . 886
retracement is the most powerful tool i n my trading arsenal at this time.
47
1 ' 1 1 add the . 886 retracement onto the chart. 1 ' ll leave the l ines that I have
used to calculate the retracement on the chart for now, so it i s clear where I
have keyed off of i n doing my calculations. See figure 40.
Figure 40
II I p
0 , 000
===r jHM ��! 8:��

" 335 'e< 0.88'
39, 000
38 , 000
37 , 000
36 , 000
35 , 000
34, 000
1jl}!1
3 3 , 000
tl)J ljJ1JJ1jl
32 , 000
3 1 . 000
30 , 000
25 May '3 lb 23 30 Jun 13 20 27 Jui 11 18 2S

Chart created by D)lnamic Trader (c) 1 996-200 1
This additional . 886 retracement has fal len right in the area that we are
looking at, and very close to the .786 retracement that I had put on the chart.
Now we wait and see what, i f anything, happens in here. We are in the
process of completing step three of the pattern. A reversal here, at point
three, would complete step three.
48
Let ' s move ahead one price bar, and assess what we see happening. See
figure 4 1 .
Figure 4 1
Il pl II �m�il ml
0 , 000
1
39 , 000
II II
38, 000
37, 000
Ilj ))1 )l t Jlfljjl

36, 000
35, 000
3 4 , 000
lllill jltllj}1Jtljl
33 , 000
32, 000
3 1 , 000
30, 000
25 May 9 lEo 23 30 Jun 13 20 27 Jul 11 18 25

We are seeing a fairly sharp reversal just about exactly off of that .886
retracement I just added in. This i s fascinating to me, since QCOM was
moving up strongly, then it gapped up and finished on the high end of the
price bar (although it was a fairly narrow-range bar). Then to suddenly
reverse this strongly, seemingly out of nowhere? This is why I l ike the . 886
retracement so much. Step three is now completed, and point three defined.
As an aside, just as I mentioned in the dollar index example, if I had gotten

into the trade on the long side off of that initial grouping, I would be starting
to scale out here, and if the drop continues I would start to scale out more
aggressively. For me, one big advantage to understanding this pattern i s that
I am now very alert to the area we have labeled on the chart.
F or my trading, I find that it means something to me if a reversal occurs

here, and it means something to me if it doesn't. Both moves tel l me
49
something about what may be going on with the issue, and how I want to
manage any trades that I may already be in.
I ' ll advance the action ahead seven more bars, and we ' l l discuss what we are
seeing. See figure 42.
Figure 42
[l l l! �F :n:� �:: : :::

0 , 000
ll �� h,.
" "O R."'!' 39, 000
38 , 000
J 37 , 000
36, 000
35 , 000
34, 000
jllWJj ·
33, 000
I
j l !�IMlj
32 , 000
3 1 , 000
30, 000
25 May 9 lb 23 30 Jun 13 20 27 Jul 11 18 25 Aug

QCOM has moved down nicely off of the retracement area that we
highlighted. In somewhat typical fashion, though, it has reached some
indecision, with very poor sideways and inside bar action. It is at thi s point
that I repeat a process very similar to what I did at step three. I wi ll now add
the same two retracement to this current move that I added to the l ast move.
Why the same retracements?
For the same reason as before: I have found that these two retracements give
me the best trades. I have seen some great 4-Point patterns happen with . 6 1 8
retracements, and some other retracements. But overall, I have had the best
luck with the . 786/.886 area defining points three and four. Traders should
do their own research with this pattern and find what, if anything, works for
50
them and their own unique ' Trading Plans'. I am giving you the parameters
that I have found the best/or m e.
Let's look at the chart with the . 786 and the .886 retracements added on. See
figure 43 .
Figure 43
0 . 000
39. 000
38. 000
37 . 000
36 . 000
35. 000
34 . 000
33. 000
32.000
3 1 . 000
30 . 000
25 May 9 15 23 30 Jun 13 20 27 Jul 11 18 25 Aug

Now we play the waiting game, again.
51
Let's add in one more price bar, and see what QCOM is going to do here.
See figure 44.
Figure 44
jl �{ r
0 . 000
li:lM IU!iI 39.000
38 . 000
37 . 000
Ilt rfJj !)}j )11111)

36. 000
34.1362 Ret 0 .3% 35 . 000
34. 000
)i1U lull jUflJl

33 . 000
32. 000
3 1 . 000
i 30 . 000
25 May 9 1& 23 30 Jun 13 20 27 Jul 11 18 25 Aug �

QCOM has absolutely plunged into the area of the retracements. We have a
long bar down, with an extreme close near the lows. We are right in the area
of point four. Everything is now set for the completion of the pattern. So, is
that it, is it done? Do we just j ump on board?
As I have said in my other works: "Only of you want to get squashed l ike a
bug." This thing i s dropping l ike a rock. I wouldn't touch it with a stick right
now. I know many ' 5 -point pattern' traders that take the trade once it hits the
area. Sometimes the i ssue crashes right through the area, and they take a stop
out. Sometimes the stop out i s a fairly harsh hit. I f the flow is strong in a
certain direction, and a significant area is not going to be respected, a gap
open the next day can be common.
So, what do I do? I move to critical element number two in my plan for a
trade, entry technique. I have my potential trade area now. I sit back and
52
look for my entry trigger at thi s point. My game plan has me dropping down
to a lower timeframe, and using one of the techniques that I outlined in Kane
Trading on: Entry Techniques.
Let me make it clear that I ' m not saying that taking a trade as it enters a
potential trade area (this i s basically ' fading' the entry) i s not a viable
technique. You will get into some fai led trades that may be filtered out
waiting for an entry trigger, but in exchange for the willingness to take those
hits, you will almost always get a better price, and have a closer technical
stop-loss point.
Many consider this to be the best way to go. This is a decision that traders
have to make for themselves. My ' Trading Plan ' has me using entry
techniques, and rarely, i f ever, fully ' fading' my entries. I point thi s out here
so that the reader i s aware of other possibilities, and what it is that I teach
here at Kane Trading. Let's continue on.
53
I ' l l add in one more price bar of data, and see if QCOM is going to reverse,
or plunge through the area of point four. See figure 45 .
Figure 45
j1ljl{ r l! )lt iU!i!

0 . 000
39 . 000
38. 000
37 . 000
36. 000
)1!JUl
34.8G2 Ret O.S8E. 35. 000
lIlt
l
34 . 000
�)l
33. 000
V� lnJltj1iI1
32 . 000
3 1 . 000
30. 000
25 May '3 16 23 30 Jun 13 20 27 Jui 11 18 25 Aug 3
Wel l , it' s not quite c lear looking at the daily chart if QCOM is going up
here, but it is clear that the plunge stopped dead in its tracks. I can't even
begin to say how amazing I find that to be, nor how often I see thi s happen.
It appears as though the psychology that I laid out in the last example i s
playing right out here with QCOM.
So, what is the trading strategy here? I wil l state what 1 do, and let the reader
deci de how, if at all, to use and/or adapt this to his or her game plan. Once
the issue reaches point four, the area between the .786 and the .886
retracements (including the . 786 retracement itself), I consider the pattern
ready to trade. I now drop down to a lower timeframe, and I look for an
entry signal.
It a l ittle bit of a semantic word play at this point for me to declare the
pattern ' completed' right in here, because if no entry trigger material izes and
54
the issue plunges right through the potential trade area, there was no pattern.
To me, it' s only a '4-Point Continuation Pattern' if it ' works' . To 'work', it
has to make this final reversal, and then continue the original trend.
At a minimum, it has to reverse and begin to continue the trend. Then it's up
to trade management, and I ' ve gotten all I can ask for with the setup. I
understand that not all setups that start out ' working ' will continue to
'work ' . So, like any potential trade area, once the area i s penetrated, I drop
down to a lower time frame and wait for an entry trigger.
Although I won't show it in thi s article, I got a very good entry signal on a
lower timeframe for this point four potential trade area, at j ust over $3 5 .60.
The reason I am noting this here i s because one of the best things about thi s
pattern is the abi lity to choose a very close, technically significant stop. Just
look at the set of groupings right below point four.
To me, that is l ike a potential barrier j ust sitting there. Not only do I think
that the immediate .886 retracement should be not penetrated, those
groupings sure shouldn't be penetrated, either, or I want out of the trade.
There are some very significant technical areas quite close by which can be
taken into consideration when choosing a stop loss placement. I n a j ust a
short while I will contrast this with the choices one might have if this were
played as a 'triangle ' .
55
Let's add in two more price bars of data, and see what i s happening. See
figure 46.
Figure 46
)I Vl ===;:+:� ::
0 . 000
==== �HM �€1 8:ng 39. 000
38. 000
37 . 000
l
36. 000
--- 34.8&2 Ret O.B8� 35. 000
tJ1 �)l jtw1

3 4 . 000
111 jlJJj jjjf}!

3 3 . 000
32. 000
3 1 . 000
i 30 . 000
25 M<lY 9 16 23 30 Jun 13 20 27 Jul 11 18 25 Aug 13

QCOM is bouncing strongly now, right off of that point four area that we
highlighted. The pattern is clearly evident at this point. Just about any entry
trigger that I could conceive of using would have me well into th is trade
before now.
56
Let's lay out the pattern, with labels, so it wil l be completely clear. See
figure 47.
Figure 47
Jtj�! 3
{
1
->
39 . 000
38 . 000
37. 000
l
36 . 000
U!iUlft�tI
- 4-1'
/1
0--- 34.8&2 Pet 0 .S8E. 35. 000
jIl �)l )IW)

34 . 000
III )1111 JjJI1Jl

:2
3 3 . 000
32 . 000
3 1 . 000
i 30. 000
25 Il'hy '3 16 23 30 Jun 13 20 27 Jul 11 18 25 Aug 8

Chart cre.3ted by Dynamic Trader (c) 1 996-2001
I ' ve l abeled the four points that make up the pattern. I 've left the original
grouping on the chart, as wel l as the .786/.886 retracements for points three
and four. This i s how the pattern will l ay out. The trade, as I play it, i s upon
an entry trigger once the .786/.886 potential trade area at point four i s
entered. One certainly may consider looking at potential completion points
in other s ignificant areas, even though that i sn't my own personal preference.
57
I ' l l add in the l ines that show the initial trend and the swings of the pattern to
the completion point. See figure 48.
Figure 48
0 . 000
39 . 000
38 . 000
37. 000
36. 000
35 . 000
34. 000
2
33. 000
32 . 000
3 1 . 000
30 . 000
25 May 'l 1& 23 30 Jun 13 20 27 Jul 11 13 25 Aug 8

I ' m adding these l ines in for the reader' s reference, to aid in seeing how the
pattern looks. I don 't add these l ines in when I do my actual trade setup.
These l ines will also help me demonstrate an i nteresting point that I alluded
to earlier about ABeD patterns with respect to this pattern .
58
I ' m going to add in the lines now to highlight the 'triangle ' pattern, so we
can make some comparisons. See figure 49.
Figure 49
38 . 000
37.000
36 . 000
---'t:t:::;=r 35.32'3 Ret O .7Gb
-;:;=--41--- 34.8&2 Ret 0 .3SG 35 . 000
34.000
2
33. 000
32 . 000
3 1 . 000
30 . 000
25 M.ay '3 16 23 30 Jun 13 20 27 Jul 11 13 25 Aug 8

If a trader were playing the 'triangle' pattern, this would stil l be in the
waiting stage. Recall how the 4-Point was triggered j ust above the point
marked 4 on the chart.
59
I ' l l add one more price bar onto the chart, and we' l l evaluate. See figure 50.
Figure 50
:rt
0 . 000
3
&C
'lJi l
===dr;s:::;;;==== jiJ"
.::t�4 h'e t
-':'
",, ,.,i.
O . SR6 39. 000
�f �
38 . 000
37. 000
r�
36. 000
-I
35.329 Ret 0 .781;
ii!iU lI�fI
34.862 Ret 0.886 35. 000
34 . 000
71
2
33 . 000
32. 000
3 1 . 000
30. 000
16 25 May ., 1t. 23 30 Jun 13 20 27 Jul 11 18 25 Aug 8
The 'triangle' pattern is j ust now triggering with the break of the upper line.
Thi s is almost three dollars above where the '4-Point' gave me an entry
trigger. I f a trader just got in here, where would a logical, technical stop be
placed? My answer is: I don't see a place that is c lose by that is also
logically and technically oriented.
With the run up off of the point 4 area being so strong, this thing needs a
rest. Even if QCOM winds up continuing straight up from here, this is one of
those trigger areas that I have termed ' guaranteed heat', because it is an area
where a small pullback is extremely l ikely to start, in my experience. This i s
the exact type o f area that I don 't l ike to initiate a trade in.
60
Let me add in some more data, and we' l l see what QCOM i s doing. See
figure 5 1 .
Figure 5 1
0 . 060
39 . 000
�nM ��! 3:��g
38, 000
37, 000
36 , 000
35.32'3 Ret 0 ,7E:&
ii!iM".
34,8&2 Ret 0 ,386 35 , 000
34, 000
71
2
33 , 000
32, 000
3 1 , 000
30 ,000
25 May '3 16 23 30 Jun 13 20 27 Jul 11 18 25 Aug 8 15

Chart created by D'l'namic Trader (c) 1 996-200 1
The heat came for the 'triangle' trader after a bit more of a run up, so
although QCOM dipped below the entry point for that trader, it wasn't a lot
of ' heat ' , nor was it immediate. Sometimes the 'triangle' plays work quite
well , too. Keep in m ind, though, if you l ook at these plays from the
perspective of a 'triangle' trader, that the plays I am presenting here are very
successful '4-Point Continuation Patterns ' . Most of these successful patterns
will look great as simple triangle plays, too (although the entry points would
be vastly different).
The point i s that while almost all successful '4-Point Continuation Patterns '
wi l l also b e successful triangle plays, very few 'triangle' plays wil l b e ' 4-
Point Continuation Patterns ' . What I ' m trying to make clear i s that I don't
find 'triangles' to be anywhere near as successful as they appear to be when
one is only l ooking at 'triangles' that can be drawn on successful '4-Point
Continuation Pattern' charts.
61
Let's see how thi s one played out over the l onger term, after the pattern
completed. See figure 5 2 .
Figure 52
6 . 000
4 . 000
2 . 000
38. 000
36. 000
34.000
32. 000
30 . 000
May Jun Jul Aug Sep
QCOM strongly continued the previous uptrend after the pattern completion.
Note the ' congestion' around the level of point three (the area of the
.786/.886 retracements), before the rally continued.
62
Let's look at one more version of the chart. I ' ll remove the groupings and
retracements, and the l ine for the initial trend. I ' ll remove anything else
extraneous, and leave just the price data and the labeling for the pattern
itself. Then we' l l discuss a few interesting things before we move on and
look at our two final examples. See figure 5 3 .
Figure 53
lriJ )
6 , 000
jt1tjI}Illj
4 , 000
�
2 , 000
J/
1
Ift)lt)
3 0 , 000
}lth�I)Jj)
·lJl l �jrJ
38, 000
36 , 000
4
34, 000
2
It
tun tJUJ J
l� 32, 000
30 , 000
9 if, 23 30 Jun 13 20 27 Jul 11 13 25 Aug 8 15 22 29 Sep 12
There' s the pattern, sitting right in the middle of the uptrend. I s that a
coincidence? I n my opinion, it' s not. Here' s a hint that I frequently use in
my own trading. I find that these 4-Point patterns sometimes form as some
type of a variation of a larger ABeD pattern, where the 4-Point pattern is
l ike the Be leg.
I also find that these ABeD patterns are frequently alternate ABeD patterns,
most often .786 alternates. (I fully explain ABeD patterns and alternate
patterns in Kane Trading on: Trading ABeD Patterns .) I make the most use
of this in my management phase. When the second leg of the trend i s
approaching the area of a .786 price proj ection o f the first leg, I start t o think
63
about scaling out of some of the position, and tightening up some of the
remaining stops.
Now, let's look at one more aspect that I have found fascinating with this
pattern. Those who are familiar with my ABCD techniques know that I very
commonly see smal ler ABCD patterns in the BC leg of ABCD patterns. This
can be especially helpful in setting up multiple trading opportunities. I got to
thinking that the 4-point acts a lot like the B C leg of an ABCD.
After letting this mull around in the back of my mind for a while, and
continuing to look at many more 4-Point charts, I finally saw it. Perhaps you
have seen it now, too. Don't be discouraged, though, if you haven't, it took
me a long time to finally see it. Let me make a quick reference back to some
high school math (don't fret, it will be painless). I was thinking how they
sometimes say, for example, that a point is really a ' degenerate ' circle, or a
circle is really a ' degenerate' ellipse, and so on.
I got to thinking that this pattern is really a degenerate ABCD pattern . It' s an
ABCD pattern where the C point retracement is ' deep ' , and the CD leg
didn't develop. So instead of point four going past point two and forming a
nice ABCD pattern, they hit it early and the ABCD couldn't complete.
When this happens according to all the guidelines that I 've set up, you have
a '4-Point Continuation Pattern' instead of an ABCD pattern. Maybe I just
have way too much enthusiasm for my job, but it is extraordinari ly
fascinating to me to interpret this pattern in this context. And it makes me
wonder, how many patterns are degenerate versions of other patterns? As I
find answers to that, I will certainly write them up.
64
Let ' s move on to two more examples. I expect a few readers are asking if
this pattern can be found on intraday charts. The answer i s yes. Let's start
with a I 5-minute chart of AMZN. See figure 54.
Figure 54
'"42 . 000
-4 1 . 500
f"4 1 .000
f"40 . 500
-40 . 000
39. 500
39 . 000
�------.---.-
1f Aug4m
AMZN has the prerequisite smooth trend here for a '4-Point Continuation
Pattern' to develop. This is step one.
65
I ' l l add on quite a bit more data in one shot, since I think we have the basics
down at this point. See figure 5 5 .
Figure 55
[42,000
M 1.500
-41.000
-40,500
MO , OOO
39,500
39,000
1f AlJg4m St
Chart created b';I Dynamic Trader (c) 1996-2001
Let's make an assumption here that the first pullback on the chart has turned
in an area that the trader feels is adequately significant. This is step two.
Given that, we can do steps three and four right now in one shot, and be
ready to wait for an entry trigger on thi s one.
In real life, sometimes I ' m j ust scrolling charts and I see pretty much what
we see in this chart. At this point I put my step three retracements on the
chart for confirmation (although I can see by eye that this one is j ust fine),
and my step four retracements on, to point to the area that I want to look at
for an entry trigger.
66
Let's do these two steps now. See figure 56.
Figure 56
kf2.000
-41.500
[41.000
40.500
-40.000
39.500
39.000
iF . Aug4m 5t
Point three was right in the area I prefer for the reversal of that point. We
have now hit the reversal area for point four. I would be dropping down to a
lower timeframe and choosing my entry techni que.
67
I n case it i s not clear to the reader the layout of the pattern here, I ' ll label it
before I show how thi s one played out. Don't feel bad if you aren't seeing
them yet. I developed this pattern after many years of trading these related
areas. It was quite awhile before I finally saw that there was a pattern there
at all. See figure 57.
Figure 57
=====� 39.8% Ret 0.e8�

39.805 Ret 0.786
39 . 500
----l�-'--
-- 39.175 Ret 0 .78E.
- -'--
- -- 3'3.070 Ret O.SSI;
39. 000
3
1
1f Aug4m 5t
Chart created b'Y Dynamic Trader (c) 1 996-2001
That should make it quite clear what i s going on. I did get an outstanding
entry signal on the lower timeframe on this one.
68
Let ' s see how this one played out. See figure 58.
Figure 58
2 , 000
1 , 500
1 , 000
0 , 500
0 , 000
39, 500
---'jr+'-------'H---:--- 39 ,175 R�t 0 ,786

----
'----' ----h--tt-.--- 3'3,070 Ret 0 ,S8G
39, 000
38 , 500
1f Aug4m 5t Gw
That move was about al l AMZN had to give on this one. It did not make it to
even the .786 price projection. Sometimes that's the way it is, and why
management of trades is so important. Still, I feel that the pattern gave an
excellent potential trade area that had p lenty to give for a trade on a 1 5-
minute timeframe. The reward/ risk scenario met the criteria of my 'Trading
Plan' on this one.
Look at the chart and think about where you might have placed your
protective stop loss around point four. Look at the amount you would
theoretically have at risk, and what the potential reward might be. I find the
reward/risk ratio very favorable with this pattern, for my trading.
69
Let's finish up with an exampl e in the S&P e-mini on a I S-minute
timeframe. See figure 59.
Figure 59
1 rjIIIItl11JjfIII1{j 1 1 60 , 00
ffI 1 1 55 , 00
J!ljlfl
1 1 50 , 00
1 1 1 45 , 00
!
1 1 40,00
3t
Chart created b'), Dynamic Trader (c) 1 996-2001
The ES has a smooth uptrend i n place, so step one i s fulfilled. Let's assume,
again, that the first pul lback that forms point two is in an area that the trader
deems adequately significant, hence fulfilling step two. We would now need
to do step three, which is verify that the pul lback that has formed point three
i s in the area of the .786/. 886 retracements, and hopefully close to one or the
other.
Let me make a point here. I ' m primarily concerned that the reversal be in the
area that is formed by the two retracements, the .786 and the .886. If the
reversal occurs anywhere in that area, I ' m satisfied. In additional, though,
the c loser the issue turns to the exact point of either of the retracements, the
h igher 'grade' I give the potential trade, and the more interested I become.
70
I can see that the ES has reversed at point three very close to a .786
retracement, so I ' ll j ust add that one onto the chart. I f you aren't so sure yet,
j ust add both the .786 and .886 retracements. See figure 60.
Figure 60
1 1 60 . 00
1 1 55 . 00
1 1 50 . 00
1 1 45 . 00
1 1 40. 00
3t
The ES reversed at point three right at the . 786 retracement, to the tick. Step
three is now done.
71
I now need to add in my retracements for point four, which i s step four of
the process. I ' l l add in both the .786 and the . 8 86 retracements. See figure
61 .
Figure 6 1
1 1 60 . 00
1 1 55 . 00
1 1 50 . 00
1 1 45 . 00
1 1 40 . 00
3t
We are now ready to wait for an entry trigger at this point. The pattern is just
about completed, and it wil l either reverse, or it won't. Sometimes it will
trigger me into a trade, and then turn right back around and stop me out. Do
you know what that's called? Trading. That's why I 'm very often heard
saying: "That's what stops are for".
I don 't want to leave the impression that thi s pattern works out every time.
No pattern does, and definitely not this one. What the pattern does for me,
though, is it points me to an area that I may consider for a trade, in the
context of my overall 'Trading Plan' . And the fact that I feel I can place a
technically significant stop very close by makes the pattern quite attractive
to me.
72
Again, let me draw the pattern on the chart and label it, so it is clear just how
' c lean' this pattern really is. I ' l l also remove the extra lines that I used to
calculate the retracements, for clarity. See figure 62.
Figure 62
1 1 1 65 , 00
----"r=-- 1 1&2,OO Ret 0,786
1 1 60 , 00
2 1 1 55 , 00
1 1 50 , 00
1 1 45 , 00
1 1 40 , 00
3t
Before I show how this one played out, let me make a comment. As thi s
chart sits right now, the . 786 retracement hasn't been hit yet. General ly, I say
wait until a grouping has been penetrated. But understand that I don't trade
with ' fixed rules' ; I trade using 'guidelines' . I use my judgment every step
of the way, and I make adjustments if I feel the need.
I have chosen, for my own trading, to trade the 4-Point pattern most often
when points three and four reverse in the .786/.886 area. These retracements
do not form a 'grouping', though; they form more of a general area. This
area is formed from j ust two retracements, which is not enough for a
grouping. If the internal structure on the lower time frame allows me to find
additional numbers I frequently use them, but most of the time that is not the
case.
73
Also recall that I said some nice patterns set up with .6 1 8 retracements, and
other retracements. I prefer the area of the . 786/.886 retracements, but the
pattern doesn 't mandate that the reversals occur there. So, what i s the point
to all this?
I ' m looking at this 1 5-minute chart on the ES and noticing that the .786
retracement hasn't been hit yet. But I ' m also noticing that the ES has traded
just seven-hundredths of a point above the .786 retracement. I f I were to wait
i n here for one more tick down before I would consider an entry signal that
would be almost completely arbitrary, to me. As far as I can see, the spirit of
the pattern has been fulfilled here, and I 'm ready to take an entry.
To be so strict here as to wait for one more tick down before accepting an
entry signal would have no trading basis. I n fact, once the i ssue trades
beyond the .6 1 8 retracement, I frequently start watching for entry signals. I f
a real ly nice entry triggers, I ' ll usually take it. M y thinking is that I can stop
out and re-enter after hitting the .786/.886 area if I have to.
I use my trading experience with the issue, and my j udgment, to make the
call when it unfolds. I mention this here to point out that I never trade ' cut
and-dried ' , although I try to make the patterns and setups as clear and
concise as I can when I explai n them.
74
The reason for this discussion wil l be quite clear when I show how this last
example played out. See figure 63 .
Figure 63
1 1 80 . 00
1 1 75 , 00
1 1 70 , 00
1 1 65 , 00
1 1 60 , 00
1 1 55,00
1 1 50 , 00
1 1 45 , 00
1 1 40 , 00
� �
There were several good signals on the lower time frame that I found
acceptable, despite the fact that the ES never did actually touch the . 786
retracement. And the ES j ust rocketed up from right above that . 786
retracement. If one had waited for that extra tick down, no trade would have
been possible. To me, that would make no sense. I must trade with
guidelines that have room for evaluation of each individual situation.
I ' ll finish this example with two management tidbits, even though they are
not directly related to the pattern itself. Whenever I see anything ' cool ' , I
feel the need to point it out. I find that when I take off my 'trading hat ' , and
take on the role of a trading educator, I rarely get more pleasure than
pointing out things l ike what I wil l point out right now. It is finding and
sharing these amazing little things that really makes this worthwhile for me.
75
Recall how I said that once the second leg of the trend has reached the . 786
price projection I begin to think about scaling out? Let's put that proj ection
on the chart, and see how it looks. See figure 64.
Figure 64
-------!t-
F
1 1 80 , 00
1 177,72 App 0 ,785
1 1 75 , 00
1 1 70 , 00
1 1 65 , 00
1 1 60 , 00
1 1 55 , 00
1 1 50 , 00
1 1 45 , 00
1 1 40 , 00
� �
Thi s is one of the points where I get very alert. Do I j ust start taking profits?
Absolutely not. I wait to see what happens, But this is an area where I will
start to peel off parts of my position if certain trailing stops are hit (see Kane
Trading on: Trailing Stops for exact details).
76
Let's see what happened from here. See figure 65.
Figure 65
1 1 80 , 00
1 1 75 , 00
1 1 70 , 00
1 1 65 , 00
1 1 60 , 00
1 1 55 , 00
1 1 50 , 00
1 1 45 , 00
1 1 40 , 00
� �
I find it uncanny how often I see this. This area gives me a heads up to get
ready to start some scaling out. I ' ll finish with one more of those j ewels that
I l ike to share so much. Although I make it very clear in AFTC that I never
try to pick the end of the trend on my traded timeframe, one can use the
techniques in that book to find areas where reversals might occur, even if
temporarily, and factor that into the trade management.
As I explained in AFTC, Scott Carney over at Harmonic Trader first

introduced me to the pi (n) external retracement. I have since done a lot of
research, and have found that an Indian mathematician has recently done a
proof that relates pi (n) and Phi (<1» (the Golden Ratio (= 1 .6 1 8)). It seems
almost hard to believe that two irrational numbers l ike pi and Phi could be
related in the same equation, but it is so. To me, this explains why I see pi
and Phi in so many naturally occurring situations.
77
I ' l l add the 3 . 1 4 external retracement, calculated from points one and two of
the pattern, onto the chart. See figure 66.
Figure 66
1 1 80 , 00
1 1 75 , 00
1 1 70 , 00
1 1 65 , 00
1 1 60 , 00
1 1 55 , 00
1 1 50 , 00
1 1 45 , 00
1 1 40 , 00
� �
Another example of what seems, to me, to be an endless string of

' coincidences' ? Wel l , you know what 1 think. You need to deci de what you
think.
78
Before I proceed to the conclusion, let me summarize the steps that I use for
the pattern.
1 . I find an i ssue that i s in a smooth, well-established trend. I wait for a

pullback to start that i s beyond the scope of the ' smal l ' pullbacks that
the trend has been exhibiting so far. I label thi s first reversal point
with a 1 on my chart.
2 . Once a pullback gets underway, I set up a grouping. I confirm that the

i ssue turns at a place that I consider significant. I label this second
reversal point with a 2 on my chart.
3 . Once the i ssue reverses again, I set up the .786 and the .886
retracements. I f the i ssue turns in the area of the retracements, I label
that reversal point with a 3 on my chart.
4. F inally, I put the last set of .786/.886 retracements on the chart,

retracing the move from points 2 to 3 . I label the chart in this area
with a 4. If the i ssue reaches thi s area, I make a decision i f thi s trade
meets the requirements of my own uni que trading plan. I f I feel that it
does, I look for an entry trigger on a lower timeframe. I f I get an entry
signal, I manage the trade according to my 'Trading Plan ' .
I have found the process very straightforward to implement, once I got used
to it. And as I mentioned, I ' m frequently already involved in trades with the
very same i ssue as the sequence unfolds. I think the reader will find the
potential pattern setup very easy to spot in the early stages, once some
practice time has been put in.
79
Conclusion
I hope that I have been able to clearly present to the reader a pattern that has
been of significant use to me in my own trading. I tried to present the pattern
as it unfolded for me, including as many of the thoughts that I had along the
way as I could remember. It i s my hope that in presenting the pattern as I
have, the reader will have gained far more than if I had j ust revealed the
pattern and stated the criteria that I l ike for trading the pattern.
I felt that this was a golden opportunity to present the reader with a
multitude of what I consider to be useful, hard earned concepts and
techniques, along with the pattern itself. I like to refer to this as 'trader tal k' .
It is this talk that has helped me the most in the educational material that I
studied when I first started. And it was this 'trader talk' that I found the most
lacking in the materials I was able to find.
Although it is a longer, and more monotonous, road to fol low listening to

everything I have to say, I think that you wil l be well rewarded for the effort
you have put forth to get to this point. Many of the things that I have
presented here have taken me years of study and experience to develop.
They are things that I have not seen presented anywhere else. My goal with
the material that you have j ust read was to provide the type of education and
insight that I was not able to find when I first started. With this eArticle, I
feel that I have succeeded in my goal.
81

Kane Jim 09 The 4 Point Continuation Pattern

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Kane Jim 09 The 4 Point Continuation Pattern

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I(ane Trading on:

Copyright © 2003 by James J . Kane

Published by Kane Trading

ALL RI GHTS RESERVED. No part of this publication may be reproduced,

This publication is designed to provide accurate and authoritative

Printed in the United States of America

No c laim i s made by James J. Kane, or Kane Trading, that the trading

In developing material related to Fibonacci trading, two sources have been

I will include some discussion on the possible psychology of what is

28 Dec 12 19 2f, hn 9 if, 23 30 Feb 13 20 27 Mar

28 Dec 12 19 2t. Jan '3 1t. 23 30 Feb 13 20 27 Mar 13 20

28 Dec 12 19 25 Jan 9 15 23 30 Feb 13 20 27 Mar 13 20

28 Dec 12 19 25 Jan 9 16 23 30 Feb 13 20 27 l\'1ar 13 20

28 Dec 12 · 19 26 Jan '3 16 23 30 Feb 13 20 27 Mar 13 20

23 Dec 12 19 2& Jan 9 1& 23 30 Feb 13 20 27 Mar 13 20

28 Dec 12 19 26 Jan 'l 16 23 30 Feb 13 20 27 Mar 13 20

28 Dec 12 19 26 Jan 9 16 23 30 Feb 13 20 27 Mar 13 20

28 Dec 12 19 26 J�n 'j 16 23 30 Feb 13 20 27 Mar 13 20 27

-- �8 .550 Ret 0.786

28 D€!c 12 19 26 hn � 16 23 30 Feb 13 20 27 Mar 13 20 27

98550 Ret 0.781;

28 Dec 12 19 26 hn 9 16 23 30 Feb 13 20 27 Mar 13 20 27 A

98 .550 Ret 0.786

i8iim ��! 8;9i� 102.000

More indecision as the DX approaches the trendl ine.

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27 Mar 13 . 20 27 Apr 10 16 24 May 8 15 22 2'3 Jun 12

Dec 03 Feb Mar Apr May Jun

Dec 03 Feb Mar Apr May Jun

Dec 03 Feb Mar Apr "''lay Jun

Dec 03 Feb Mar Apr May Jun

Dec 03 Feb Mar Apr May Jun

Now we l ook at the '4-Point Continuation Pattern' . Let ' s do a comparison.

'4-Point Continuation Pattern ' ' Symmetrical ' triangle

Has a list of very specific criteria Very general criteria.

The criteria are very Fibonacci No F ibonacci.

The pattern is strictly a continuation Generally termed a reversal pattern,

The pattern is fairly uncommon. The pattern is extremely common.

The pattern forms after a long, No specific criteria about what

Dec 03 Feb M.3r Apr May Jun

I-r- .--- -..-- ---.--- �2,000

De.: 03 Feb Mar Apr May Jun

I ' ll continue with an example in QCOM. I chose this example because

25 May ., 1& 23 30 Jun 13 20 27 Jui

25 May 9 16 23 30 Jun 13 20 27 Jul 11

One of my preferred methods to trade is to try to get on board existing

25 May 9 16 23 30 Jun 13 20 27 Jul 11 1

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25 May 9 16 23 30 Jun 13 20 27 Jul 11 1

25 May 9 1� 23 30 JUI) 13 20 27 Jul 11 18

I have found that if I j ump on my groupings trades early, I frequently have to

25 May '3 16 23 30 Jun 13 20 27 Jul 11 18 2

25 May � 16 23 30 Jun 13 20 27 Jul 11 18 2

25 May '3 16 23 30 Jun 13 20 27 Jul 11 18 25

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25 May '3 lb 23 30 Jun 13 20 27 Jui 11 18 2S

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25 May 9 lEo 23 30 Jun 13 20 27 Jul 11 18 25

As an aside, just as I mentioned in the dollar index example, if I had gotten

F or my trading, I find that it means something to me if a reversal occurs

[l l l! �F :n:� �:: : :::

25 May 9 lb 23 30 Jun 13 20 27 Jul 11 18 25 Aug

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