How I Swing Trade the Adam and Eve Pattern

I was swing trading the Adam and Eve pattern before I even knew what it was called.

Honestly, I hate the name.  A bit dumb if you ask me…I think about being naked, hanging out with snakes and apples, not making money.

But you know what?  If you know what to look for, and you see the pattern developing, there is some solid money to make here!  There is a nice predictive quality to this pattern, which is rather unique, because it has 2 parts to it.

The first move called Adam that comes first, and the second move called Eve, coming second.  Just like the the Bible.

So what the hell 🙂 does this Adam and Eve pattern look like?

Here it is:

The Adam part of pattern is a sharp downward move, with a sharp upward move back up.  I highlighted those days in red.

The Eve part is the rounded bottom, which occurs afterwards, that I highlighted in green

I trade positive reversals, so I would potentially be buying the bottom of the Adam section or the bottom of the Eve section.  If you were shorting, you could trade near the top of the Adam pattern, right before Eve starts, if you sense that that upward move is petering out and Eve might indeed form.

I never made money by blindly following patterns though.

I made money when I started to understand the psychology behind the pricing action.

Since no pattern is perfect, and can breakdown at any given time, it is important to know the human emotions behind the move.  So here’s what I think is happening behind the scenes…

What is the psychology behind the Adam and Eve Pattern?

So for whatever reason, a stock has had a very sharp selloff: day after day, large red bars.  The selloff could be because of  bad earnings, good earnings that didn’t meet expectations…doesn’t matter.  I don’t really care.

Each day, gravity takes over and more holders throw in the towel, with each successive day printing a lower low.  Along the way, maybe shorters have entered and taken positions (this accelerates the decline, since selling short is buying low and selling high, but in reverse, which on the decline here, adds to the sell orders of holders) continuing to push the stock lower.

Then, one day we have a higher low.  Buyers sense that the stock is way oversold.  Everyone takes notice.  Buyers enter the market in droves.  That starts the sharp uptrend reversal as the stock snaps back.

Short sellers who entered early on the downtrend close out their positions to protect their profits (more buys).  Short sellers who got in a bit too late on the last leg of the down move who had expected the trend to continue close out at a loss (more buys).

Finally, we reach some sort of top.  The stock hesitates, doesn’t know where to go.

This is the start of the Eve pattern.  Now we have buyers from the bottom of Adam selling for a profit because the stock is declining again and they need to protect their profits.  Short sellers again taking positions, hoping for a decline.  At this point, the initial news (or whatever caused the sharp selloff:Adam) has worn off and sunk in.  The market is now processing what happened and thinking a bit more rationally.  There is less sharply defined fear and greed emotion.

So the stock meanders down, sellers somewhat dominating and then declining towards the bottom of Adam again.  At this point, buyers are now becoming more insistent, feeling confident that this is again reaching a bargain point.  They also have additional confidence that at this is where prior support has shown itself before because that is the bottom of Adam, where buyers came in before.

Over time, the rounded bottom of Eve forms, buyers become more confident, sellers start to dry up and it moves higher towards the price level of the entire move.

Towards the top, the right-hand side of the Eve pattern, the stock could go either way: it could roar back up to new highs, or hit resistance again and head down for good.

Let’s take a look at how I normally trade the Adam part of the pattern:

Sometimes I trade the Adam part of the pattern.

Actually, I don’t trade the Adam part of the pattern because at that time, I don’t even know if Eve will form, right?  You can’t have an Adam without an Eve.  At this point, you are just trading what has been a sharp move down.

Here is what I look for when trading a sharp decline like this (that could be the start of the Adam & Even pattern).

Taking a position at the bottom of a sharp downward move (Adam) is pretty risky.  Essentially, you risk catching a falling knife.  How do you know that the stock won’t continue downward?

After a sharp move down like this, here’s what I look for:

  • Support: If there are horizontal lines from prior trading history in the past where the stock has bounced?
  • Candlestick patterns: has a bullish reversal candlestick pattern occurred?
  • Indicators: Are indicators that you typically use, showing that a reversal is about to occur?

If these conditions are being met, it gives me confidence that we have potentially reached a bottom and I enter the trade, highlighted by Area 1.  Even when these conditions are met, I keep a tight stop-loss, because after all, it is hard to catch a falling knife and sometimes I get stopped out for a loss.

I will exit around Area 2, when the candlesticks start to show signs that the sharp move up is dissapating and running out of steam.  Sometimes the move back up goes to right near the start of the sharp downward move, in this case that would be in the $57-$58 range.

Look more closely at this middle peak.  It stopped around $52.  Why?  Look at the prior trading history.

I have a red arrow near the beginning of February where the stock found support and moved higher.  Prior support is current resistance if you are below it.  Sellers come out of the woodwork here.

You can see that this is right around where the stock was pushed back down into what turned out to be the Eve pattern.  Sometimes though, you can find the Adam to be highly profitable, as it rips back up to the start of the downtrend.

Swing trading Adam is risky, but has a potential high reward, in a short period of time.

How I trade the Eve part of the pattern:

With Eve, I wait for the slower decline, day after day, until it reaches the bottom of Adam.  I feel much more comfortable taking a position at this part of the pattern because we now have a proven area of prior support.

Here’s another chart:

At this point, I’ll typically take a position at area 3 and plan to exit around area 4.

As with Adam, here is what I now look for with Eve:

  • Support: If there are horizontal lines from prior trading history in the past where the stock has bounced?
  • Candlestick patterns: has a bullish reversal candlestick pattern occurred?
  • Indicators: Are indicators that you typically use showing that a reversal is about to occur?

The key with Eve is the support.

When trading this stock, for the Adam part of the pattern, we didn’t have support, did we?  This time with Eve, we do!

Look at how Eve’s bottom occurred right at the bottom of Adam.  We had proven support at the bottom of Adam and it was there for us with Eve.  If I start to see that in addition to support, we have reversal candlestick patterns occurring, along with indicators adding additional evidence that a double bottom has occurred, I enter the trade.

Notice how it takes longer to show a profit.  I have found Eve to take much longer to show a profit, but the win percentage is much higher.  It’s also less stressful.

I have much more confidence in taking a trade at the bottom of Eve than I do with Adam.

I love this part of the pattern!  A bit more boring, not as much adrenaline, but I trade to make money, not for excitement.  If I wanted excitement, I would gamble or bob and weave through rush-hour traffic like a demon.  You get my point.

When trading the Adam and Eve pattern (or any pattern), I take a look at different time frames.  The prior 2 charts showed this stock over a period of 3 months.  What is the context though?

Taking a longer term look at where the pattern sits is important.  It pays to have some perspective…

A further look at support and resistance lines with Adam and Eve

Here is the same pattern, but I’ve zoomed out to a 6 month chart below:

Look at where the double bottom of Adam and Eve occurred within the larger context!

For much of 2018, this stock has been in a downtrend…take a look at the resistance from Line A.

Look at Line B: Remember how the peak from Adam died out at 52 and didn’t go up to the initial start of the sharp downtrend at about $57?  Now you can see more weight of evidence about why.

I had the red arrow showing the prior support level in February, right?  Looking even further back, you can see at this same level, we had more support at that exact same level back in December 2017.  There are holders who bought at that level, and if the stock is below that level now, are showing a loss.  They want off of the roller coaster and would be happy to break even and move on.  They are saying to themselves, “If only I could get my money back and break even, I’m out of here!”  That is why prior support becomes resistance when you are below it.

Before I enter a swing trade, I not only look at where to put a stop loss, but what my expected profit would be to come up with a risk/reward for the trade.  I would mark point B as a level where the stock would hit resistance.  That is exactly what happened if you took the trade at the bottom of Adam.

Look at what happened after Eve!  Clearly, this stock has broken out of the downtrend resistance shown by Line A.  Double bottoms can be powerful.  This one certainly was!

If you took the trade at the bottom of Eve, near support line C, you could keep moving up your stops to protect a profit, giving the trade some breathing room and watched as it broke the long term downtrend of Line A and kept moving higher.

Notice the hesitation of small candlesticks around that point, then confidence kicked in as the stock didn’t sell off and then moved sharply higher!

Do you ever trade this pattern?  Have a different opinion or have anything to add that I might have missed?  Let me know, leave a comment!

I trade this pattern all the time and find them by setting up stock screens and filters using some go-to tools.  Some of my best trading tools that I use are available for free.

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