What are h Pattern Stocks?
The “h” Pattern is a style that emerges on a chart shaped like a lower case letter 'h', and it can emerge in the Forex, Futures, and Stock markets. It shares some characteristics with a bear flag but is more distinct compared to it.
While in a Bear Flag formation, the consolidation under the larger area of bearish candles is under the half bar, or at most at the one-third point, as seen below
Typical Bear Flag
In a “h” pattern, the consolidation is above the half bar and usually lies in the upper third quarter area of the bearish candle.
In the case of a Forex chart, there will usually be a lot of wicks as well. Be prepared to put in a lot of screen time as well as an assessment to identify the pattern.
Highlighted section in h pattern shows difference from Bear Flag
How to Use the h-Pattern
Many traders use the h pattern as a shorting strategy in trading stocks that are in decline. It can also be used to enter new trades with stocks that are under correction.
The pattern is also useful for shorting trades on price bounces and adding on to shorting trades when the breakout from the pattern occurs.
When a trade is breaking from its spot price and falling further, the strategy above is useful for applying any downward trend which makes it a useful pattern to learn.
It can particularly effective during major corrections such as the dot com bubble around 2000, the 2008 global financial crisis and other relatively minor corrections ranging from 3 to 10 %.
“When you're in a crisis of, you know, tremendous proportions, it's beyond any human capability to control, you just make the best decisions you can, and you just hope that your intuition is correct.”
- Rudy Giuliani. Former Mayor of New York City
The h-Pattern Strategy’s Usefulness
The h pattern’s sell strategies are useful to adopt and apply as they can help you hedge against downside risks and secure your trades during downside movements.
Since the h pattern shows a shift from bullish to bearish trends, there are opportunities for traders to enter new trades.
The h pattern shows how the assets price is falling after reaching a high (the high bar of a lower case h). This high is then followed by a steady decline, which is shown by the inverted U that follows the high bar of the h, as shown below.
As a trader, you get your entry point to short an asset at the high point, which we will call tier one. When the asset drops and reaches the base of the h, this makes tier number two. You can see that it has now clearly formed the 'h'.
Once the h pattern breaks and drops into the last leg of the h, it can drop fast, and if you are shorting this region of the 'h' as a trader, you can wait for it to bounce back. Once the pattern breaks the previous day's lows, there can be another set of downs, and a little bear flag can emerge.
This technique uses h patterns and short trading as well as add-ins to make sure that the falling markets do not affect your portfolio trading. You continue using bounces to compare with moving averages and then short accordingly.
Then you keep on juggling between bouncing, shorting, and adding according to how the asset behaves.
As long as it keeps going low, you keep shorting, and if it comes back up, you cover your position a little and add on to squeeze a little for returns out.
This goes on until it reaches the low point that you set as your exit point.
This strategy is ideal for h pattern trading, and once you have practiced it a little, you will become used to it. The selling setup is easy to apply using the tier one and two trading system as it moves lower.
The h pattern can also be used to short during pricing bounces. You can get stopped out if you don’t short during bounces. As the price nears your stop price, you short the asset and move against the resistance points.
This dual combination means that you can move against the resistance points as well as with it. In either case, as you get a good price and it starts breaking out, you can add to the asset and earn inflow.
In bounces that can be shorted, you start at the base of the h, which is Tier 1, and then move from there to Tier 2. You can get a good price and use momentum pricing to break from the last day's low points by shorting these bounces.
h Pattern: Summary
The h pattern has some links with the bear flag. In bear formation, the consolidation occurs under the half bar, or at most at the one third section of it.
In “h” patterns, the price consolidation starts and ends between the half bar and the upper third quarter area of the bearish candle. There is a lot of practice and simulation practice needed before starting real time trading on the pattern.
While there are several ways to trade during h pattern trends, the two techniques listed are the most common and effective to use.
Remember that for shorting during price bounces, the price needs to fall under the previous day’s low point.
Another key strategy is to try to apply the tier 1 tier 2 system to break down the pattern as it can help assess trades better and identify cash flow opportunities. Since the pattern is mainly bearish, it is better to focus on cash flow gains and net your trades without entering the red zone
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