setup patterns the five price structures that repeat

Price patterns repeat because they reflect underlying human behavior — accumulation, distribution, fear, greed, exhaustion. These patterns are not magical, but they occur with enough frequency to create edge if you can identify them and size accordingly.

Here are the five structures that appear across all markets and timeframes.

see also: gn23-game-theory-markets · gn29-regime-identification · gn24-donchian-turtle-system

1. breakout from range

Price consolidates for N periods (20-50 bars depending on timeframe). Volume falls. Then price breaks above or below the range on increasing volume. This is the Donchian breakout — the basis of Turtle Trading.

Setup: Long after breakout above range on vol > 30-day average. Exit below entry + 2 ATR.

Win rate: ~40-50% (losers small, winners large). EV positive in trending regimes, negative in ranging.

2. failed breakout (reversal)

Price breaks above range, initiates breakout move, but fails to sustain. Closes back into range on higher volume. This structure shows liquidation of breakout buyers and often precedes a move in the opposite direction.

Setup: Short after price closes below breakout high on high vol. The “distribution” structure.

Win rate: ~45-55% but with better risk/reward in mean reversion regimes.

3. mean reversion to moving average

Price overshoots significantly from moving average, then mean reverts. Usually driven by short-term momentum exhaustion or tactical stop-loss hunting.

Setup: Long at 50/100 day moving average after a significant drop below. Exit after reversion to average or above.

Win rate: ~55-65% but small wins. Good for capital efficiency, bad for R:R.

4. double bottom / double top

Price tests a level, bounces, tests again, and on second test breaks through or holds. This structure is powerful because it shows a second attempt at a liquidity level.

Setup: Long after second test holds and price closes above. Short after second test fails and closes below.

Win rate: ~50-60% depending on timeframe (longer timeframes more reliable).

5. trend continuation (pull back and resume)

Price in strong trend, pulls back to moving average or recent support, and resumes. This is the highest-probability setup for trend followers.

Setup: Long on pullback to 50-day MA after strong uptrend. Tight stops. Exit on violation.

Win rate: ~60-70% in strong trending markets. Lowest risk setup.

sizing by setup

Not all setups have equal edge:

• Trend continuation: Full size (highest probability)
• Breakout: 75% size (good but some false breaks)
• Mean reversion: 50% size (moderate win rate, small wins)
• Failed breakout: 50% size (requires discipline, fade setup can feel wrong)
• Double bottom: 75% size (confirmation of second test increases probability)

my take

I backtest every setup I trade to know its historical win rate on my specific market/timeframe. Then I size according to win rate and R:R. A 40% win rate setup is fine if your reward:risk is 3:1 (EV = 0.4×3 - 0.6×1 = 0.6, positive). A 60% win rate setup is terrible if your R:R is 1:2.

The key insight: you don’t need a 90% win rate to be profitable. You need positive expected value. A 40% win rate with 3:1 payoff beats a 60% win rate with 1:1 payoff.

Most traders never test this. They rely on feeling and confirmation bias. The ones who backtest and size by edge consistently outperform.

linkage

• [[gn23-game-theory-markets]]
• [[gn29-regime-identification]]
• [[gn24-donchian-turtle-system]]
• [[gn20-expected-value-edge-variance]]

ending questions

which of these five patterns do you trade most often? have you tested its actual win rate, or are you estimating?