Using chart patterns

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Old Oct 23, 2009, 9:47pm   #1
 
Joe Ross's Avatar
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Using chart patterns

Hey Joe! Im looking for consistency. Are the classical chart patterns sufficiently consistent for trading? Can you make a few comments about reliable chart patterns and how to use them?

Chart analysis, which some people include in technical analysis, and short-term trading are truly partners. The understanding that you can make huge profits by looking for reliable chart patterns that repeat with unfailing regularity has raised many traders' outlook from hopeless desperation to excited optimism. To many beginning traders, chart patterns seem to be the elusive Holy Grail.

But the excitement soon fades as they discover that identifying chart patterns is often subjective and difficult, and that history rarely repeats itself with complete accuracy.

Chart patterns give a picture of human behavior in the market. They are not a guarantee of winning trades. Once in a trade, the meaning of the chart pattern that brought you into the trade may entirely disappear and you are left almost entirely with trade management.

Traders search for winning strategies. If a lot of books are written about chart patters, then just as with indicators, traders think they must surely bring about winning trades. And chart patterns do work to the extent that they reveal human behavior, but you must not engage in trading chart patterns in mechanically, unless you have expert management and the discipline to carry it out. It's important to fully understand how chart patterns work and how to trade them. For example, some traders place too much faith in chart patterns: They believe that if A occurs, and B occurs, then C must occur. Consider the classic head-and-shoulders pattern, for example.

The typical head-and-shoulders pattern which occurs in an advancing trend consists of a final rally of prices (the head) separated by two smaller rallies (the right and left shoulders) that occur before and after the final rally. The line joining the lows of the two rallies is called the neckline. Most trading books suggest entering a short trade at the break of the neckline, since it's at this point where the trend should start declining. If this trading pattern recurred with unfailing regularity, trading would be easy. If A occurs (left shoulder), and B occurs (head), then C would occur (right shoulder) right? And wed all be billionaires. If only it were that simple. Some traders make the mistake of entering prematurely. They enter after B on the assumption that C will indeed occur. That is, they forecast a bearish trend based on an incomplete head-and-shoulders pattern. They impose their expectations on the market before seeing what actually happens. Yet it is vital that you trade what you see, not what you think. The right shoulder, or C, may not happen, however. A better trading strategy is to wait for C to actually occur, and possibly signal a declining trend. But it's still not that easy. The truth of the matter is that the existing trend is assumed to be in force until the weight of evidence proves it is not. An incomplete head-and-shoulders is not evidence, it is only a possibility. It's important to realize that a chart pattern may not always work out the way you expect. You must fully understand all forces that contribute to its formation. For example, it is useful to also consider volume. Volume is critical for the verification of the head-and-shoulders chart pattern. Activity is usually heaviest during the formation of the left shoulder and also tends to be heavy as prices form the head. But the strongest confirmation comes if the formation of the left shoulder is accompanied by lower volume.
It is important to fully understand the dynamics of the market forces that underlie the pattern.

Developing trading strategies based on chart patterns is useful, but it's crucial to think critically and not oversimplify. Technical analysis still requires a mastery of one's discipline, management, and personal psychology.

Chart patterns merely describe past market behavior. They summarize in a descriptive statistical sense only. There is no scientific or statistical reason to believe they forecast the markets with precision. It's important to remember that it's more art than science (not science at all actually), and that, in turn, means you must develop an intuitive feel for the markets and learn to trust that feeling. The development of intuition only comes with experience. You've got to build up your trading skills, experience a variety of market conditions, and learn the "conventional wisdom." But at the same time, cultivate healthy skepticism. Remember to question "conventional wisdom." The astute trader asks, "How is the chart pattern supposed to work," yet also asks, "Is it working under the market conditions I'm seeing right now?" In the end, it's still about developing the proper mental edge, even when studying a seemingly objective method of trading, such as classic chart patterns.
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Old Oct 24, 2009, 1:05am   #2
 
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Oi lads! Joe is here! Welcome to the Old Blighty!
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Old Oct 24, 2009, 5:39pm   #3
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Joe,

I think your post is correct, especially your comment about, 'developing a proper mental edge'. To me, a proper mental edge is purely confidence...end of story. Too many jokers talk about 'easy trading', trading is easy when using 10 cents/pip in a hundred dollar alpari acc., that's not trading though, that's just f*cking about. 'Doing it' for a laugh is one thing, doing it to pay the mortgage and bills is another.
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Old Oct 24, 2009, 6:05pm   #4
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Originally Posted by Paul71 View Post
Joe,

I think your post is correct, especially your comment about, 'developing a proper mental edge'. To me, a proper mental edge is purely confidence...end of story. Too many jokers talk about 'easy trading', trading is easy when using 10 cents/pip in a hundred dollar alpari acc., that's not trading though, that's just f*cking about. 'Doing it' for a laugh is one thing, doing it to pay the mortgage and bills is another.


Amen to that Brother...
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Old Oct 24, 2009, 6:53pm   #5
Joined Oct 2007
Hi Joe, Black Swan, Paul and Maxima,
This is going to be a very intresting thread.
Computors that auto trade the index's use such paterns on a daily basis.
The main activity is when the Markets open in the USA.
Cirtain senarios are all ready mapped out and should a, b and c come in to play that is a good signal to enter and exit postions.
Now the a, b and c for me,
A, is to do with trin and tick data,
B, is when there is sudden movement on the open and a continuouse move in the first 3-5 mins of trade.
C, Is when the first levels fo support/resistence has been broken.

I have been using chart patterns of every type to trade from for decades, the reason for this is patterns repeate them selfs in the same way us humans do.

This type of trading is exausting as ne needs to keep ones eye on all the index's seeking a leader and which one in making the pattern, once this is obtained ( NDX is the main pattern chart now ) its a case of picking an index that is lagging.

Watch how this index reacts to other index's and soon the pattern will become apparent.

Indeed who ever said the chart/quotes you need to watch is the intrument your trading is correct, however it is the other index's that that particular one takes its direction/lead from.

Soon I will have my website up and running with webinars ( free to T2Win custermers )
The main revenue from this site will come from corportate activity as I will give signals to fund managers baised on my expierance.

Good luck, every one.
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Old Oct 24, 2009, 7:36pm   #6
 
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Originally Posted by Paul71 View Post
'Doing it' for a laugh is one thing, doing it to pay the mortgage and bills is another.
Absolutely!!!



About patterns... I finally gave up that path. Patterns evolve over time, as the market do.

Continuous surveillance and tracking of these changes and their correspondent underlying reasons can't be called "pattern trading" imho.

Support/resistance (i don't call it 'pattern') and close tracking of market conditions seems to work better for me.

From my little experience.
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Old Oct 24, 2009, 9:57pm   #7
 
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So, to put what Joes saying in a few words, do the work and work out what distribution actually is...
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