Completed chart patterns as reward-to-risk arithmetic

Measure the completed structure first

TradersWeek editorial view: treat a completed flag, pennant, or triangle as pre-trade arithmetic. Measure the structure, size the stop, and accept the setup only when the implied payoff clears a personal reward-to-risk bar.

Risk is defined first as a maximum acceptable loss so a planned profit can be compared with that loss before a trade is taken or rejected. The reward-to-risk ratio is the planned gain versus the planned loss, fixed before entry so a trade can be accepted or rejected on arithmetic rather than impulse.

A pattern is treated as having an edge only after it completes. Unfinished structures are not used as entries.

A useful default, not a universal rule

A commonly cited 3-to-1 reward-to-risk guideline is presented as a useful default, not a universal rule, because styles and time frames differ.

Under a 3-to-1 reward-to-risk plan, three losing trades of equal size can be offset by one winning trade that reaches its target, leaving the account at break-even if risk is held constant.

The same skeleton for every triangle

A triangle pattern is a contracting range, ascending, descending, or symmetrical, whose height at the base is added to the breakout to set a target.

Triangle trades use the same skeleton across those forms: enter on a break outside the pattern, place a stop on the opposite side or just inside the breakout line, and set the target by adding the triangle base to the breakout.

In the March 11, 2008 Apple symmetrical-triangle example, a $16.67 base added to a $124.10 breakout implied a $140.86 target against a stop near $119, producing more than 3-to-1 reward versus a $5.10 planned loss.

Tighter triangle stops at the apex or a nearby close can lift the reward-to-risk ratio but also raise the chance of being stopped out by ordinary noise.

Flag and pennant targets from the pole

A flag or pennant is a brief, tight pause after a sharp pole. The pole length becomes the measured target once price breaks the flag or pennant.

After the February 29, 2008 downward break at $135.60, measured objectives near $130.22 or $129.32 were paired with a stop around $137, about $1.40 of risk versus $5.38 or more of planned gain.

After price runs past a target

When price runs past a target, one approach is to scale out, move the stop to the target on what remains, and trail the rest, or to exit into a newly completed pattern that supplies its own measured objective.