“Pipe” patterns form at market tops or market bottoms due to price exhaustion. Usually the first “Pipe” is a spike in prices and then followed by another spike by at least a similar length in the opposite direction. As the name suggests, the “Pipe pattern” looks like two parallel lines which form at the market extremes. “Pipe” patterns must be very distinct compared to the rest of the bars and must be visually obvious in the chart. “Pipe” patterns can also form during the intra-day rallies or intra-day sell-offs, but they are more reliable in daily and weekly charts. Daily “Pipe” patterns are illustrated by two bars showing opposite sentiment spanned by a significant time. Pipe pattern trades are entered in the opposite direction of a current trend. “Pipe” patterns are rare, and are one of the best patterns to trade.

Trade: Although, the “Pipe” pattern is a very successful pattern, it must have a clear confirmation prior to trades. For a “Pipe top” pattern, prices must trade below the low of the “lowest low” of the two pipes to enter a “short” trade. For a “Pipe bottom” pattern, prices must trade above the “highest high” of the two pipes to enter a “long” trade.

Stop: For a “Pipe bottom” pattern, place a “stop” order below the “lowest low” of the pattern. For a “Pipe top” pattern, place a “stop” order above the “highest high” of the pattern.

Target: The “Pipe” pattern provides an excellent opportunity to trade for low risk and high reward. The first target for a “Pipe bottom” pattern is the length of the larger of the two Pipes. The second target is the twice the length of the largest Pipe above the trade entry. Similarly, for a “Pipe top” pattern, the first target is the length of the largest of the two Pipes, and second target is the twice the length of the largest of the two Pipes below the trade entry.

Trading Pipe Top Pattern

Trading Pipe Top Pattern

The example above illustrates a formation from Cisco’s weekly chart. After a prolong rally in 2003, Cisco reached its exhaustion level at $29 and posted a reversal bar to complete the “Pipe top” pattern. The lowest low of the “Pipe top” pattern is at $26.25.

  1. Enter a “short” trade below the “lower low” of the “Pipe top” pattern at $26.
  2. A “stop” order is placed above the high of the “Pipe top” at $29.
  3. The length of the larger of the two Pipes is $3. The first target is placed at $3 below the entry level from $26. The second target is placed at $6 below the entry level from $26.

Trading Pipe Bottom Pattern

Trading Pipe Bottom Pattern

The example above illustrates a “Pipe bottom” pattern formation from the EBay daily chart. In 2006, EBay sold off from the $32 level to the $23 level. At the beginning of August, 2006, EBay posted a “Pipe bottom” reversal bar at $23. The larger of the two “Pipe” bars are at $24.5 and closed above the previous bars’ high. The length of the largest Pipe bar is $1.5.

  1. Enter a “long” trade above the high of the second bar at $24.50.
  2. Place a “stop” order below the low of the “Pipe” pattern at $22.75.
  3. Place the first target at $1.5 above the entry of $26. The second target is placed $3 above the entry at $27.50.

Source : “Trade Chart Patterns Like the Pros” by Suri Duddella