Chart Patterns - tosh?

[TheBramble]

Matt, don't get disheartened. Unless I've missed it, nobody has said how you would trade this situation (going forward) given the data provided.

Only how they would/would not have traded it and what the action may or may not be due to.

All very useful and informative I agree, but there's not as much of a gulf between the rank beginner (which you are not) and the 'expert' when it comes to the 'scientific' aspects of TA.

The real difference only shows with experience - consistent and long-term exposure to working with TA, P&V etc. A sense of the probabilities developing. I suppose this is the 'Art' part.

So no, not tosh, but not purely scientific or empirical either.

 

[Glenn]

"the correct way to trade this action"
....will depend on the timeframe in which the trader is operating.
The low could be the entry of a trade lasting a month/year etc for some people.

And of the various 'correct' ways, remember to include the 'do nothing' option.
If in doubt, stay out.

IMO to trade such a small part of a chart in isolation and in only one timeframe is asking for trouble.
It has to be placed in context within the market and this requires different perspectives/timescales.
Glenn

 

[ChartMan]

Salty- The time taken for all 30 to come on line must vary.... I guess a couple of minutes to several minutes.. I really don't actually know.

 

[Mr. Charts]

The first five minute candle of the Dow opening is meaningless.
Most of the Dow 30 have traded by 0945 and only then does the chart become significant.
YM and DIA can be traded in those first few minutes, of course, and it is worth looking simultaneously at S&P and Nasdaq futures for clues as to direction.
Richard

 

[roguetrader]

Salty- The time taken for all 30 to come on line must vary.... I guess a couple of minutes to several minutes.. I really don't actually know.

Usually in my experience all stocks on the DOW should trade within about 3-5 minutes, there are of course exceptions as many people noticed a few weeks back when Pfizer had some bad news pre-market and the DOW showed a gain of about 15pts while the futures were down about -40 having priced in Pfizers expected move. This was due to Pfizer being delayed because of an order imbalance on the open

 

[Salty Gibbon]

Richard

I have taken a hard look at the NVDA chart from yesterday and your trade.

If I had been following that chart yesterday - which I wasn't - by using my own methods of entry, stop and exit, I would have entered at 22.01, stop at 21.90 and exited around 22.37.

My profit ( ignoring commissions and slippage ) would have been 36 points.

My guess is that your profit would have been nearer 50 points or approximately 38% greater than mine.

I would say that your enhanced profit would almost certainly be mostly due to an expert use of both Level II and T&S.

While I would have been pleased with my 36 points in isolation, I would not have been best pleased if I had then done some simple maths.

Let"s say that I could do that 3 times a day ( net after small losses ) for 20 trading days in a month and I would then score 3 *36*20 = 2160 points.

Using average position size of 500 shares I would make around US$ 10,800 before commissions and slippage.

Pretty ok I might think.

But what if I bothered to learn how to use Level II like an expert - assuming that I had the ability to do that - and I enhanced my earnings by 38%.

And what if my newly acquired Level II skills gave me the confidence to trade with an average position size of 1,000 shares ?

My monthly profit of US$ 10,800 would firstly be doubled and then increased by 38% and would equate to something like US$ 30,000 per month.

It therefore seems to me that the difference between using Level II properly and not using it at all would be akin to the difference between sending the wife down to Harrods for a weekend's shopping in a transit van or sending her down in a helicopter.

Of course some purists might say that I should not be thinking about the money. But I am only in this game to make money - nothing more and nothing less and the more and quicker I can make it the better.

Hope the arithmetic is correct.

 

[Mr. Charts]

Richard

I have taken a hard look at the NVDA chart from yesterday and your trade.

If I had been following that chart yesterday - which I wasn't - by using my own methods of entry, stop and exit, I would have entered at 22.01, stop at 21.90 and exited around 22.37.

My profit ( ignoring commissions and slippage ) would have been 36 points.

My guess is that your profit would have been nearer 50 points or approximately 38% greater than mine.

I would say that your enhanced profit would almost certainly be mostly due to an expert use of both Level II and T&S.

While I would have been pleased with my 36 points in isolation, I would not have been best pleased if I had then done some simple maths.

Let"s say that I could do that 3 times a day ( net after small losses ) for 20 trading days in a month and I would then score 3 *36*20 = 2160 points.

Using average position size of 500 shares I would make around US$ 10,800 before commissions and slippage.

Pretty ok I might think.

But what if I bothered to learn how to use Level II like an expert - assuming that I had the ability to do that - and I enhanced my earnings by 38%.

And what if my newly acquired Level II skills gave me the confidence to trade with an average position size of 1,000 shares ?

My monthly profit of US$ 10,800 would firstly be doubled and then increased by 38% and would equate to something like US$ 30,000 per month.

It therefore seems to me that the difference between using Level II properly and not using it at all would be akin to the difference between sending the wife down to Harrods for a weekend's shopping in a transit van or sending her down in a helicopter.

Of course some purists might say that I should not be thinking about the money. But I am only in this game to make money - nothing more and nothing less and the more and quicker I can make it the better.

Hope the arithmetic is correct.

Hi Salty,
I agree with every single word in your post - you are exactly on the button.
I am short of time at the moment but will contact you privately later or tomorrow.
Richard

 

[JumpOff]

rossored, My exit was at the exact high of the day, (so far), at 22.50.
Rossored, if you would like out of curiosity to see the level 2 screen shot I took of the exit at the exact top of the move, I shall email you the image with a full and detailed explanation.
IMHO, TA alone rarely is sufficiently consistent.
Hope that helps,
Richard

How could you tease us like that? Please either tells us all on the forum (which is what I hope you will do), or make offers like this via PM. I haven't felt so snubbed since I was in Junior High 30 years ago!

JO

 

[ducati998]

In response to the original question posed at the start of the thread there would now seem to be opinions that would certainly indicate that charts are a rather inefficient tool to profiting from financial markets.

What it is, happens to be something completely different. Force fitting of triangles does not solve the problem of price action deduction. You can look in a chart and see anything you want to see as a consequence of not looking at it correctly, that is from the correct perspective

So we have a psychological explanation for a charts shortcoming, a perceptual bias.

Matt, don't get disheartened. Unless I've missed it, nobody has said how you would trade this situation (going forward) given the data provided.

The crux of the matter, no-one has proffered an analysis going forward, which of course to profit is rather a necessity, unfortunately hindsight analysis does not pay terribly well.

The mind seeks to impose "pattern" in order to easily understand and sometimes "sees" what isn't there.

Again a perceptual bias, and psychological reason for chart reading failure. But, we now have the additional tool of Level2 and P&S.

IMO, seeing that broader view and then zeroing in on to the micro level of level 2 and T&S tells you if your suspicion of the likely ensuing action is really going to pan out or not.

However, my question would be, if you feel that chart reading is open to perceptual bias, why would Level2 be exempt?
As you presumably use Level2 on a fairly regular basis, I have seen other trades listed on these boards, where the subsequent price moved a much greater distance in your favour, yet you had already exited for $0.17, etc.
My point is of course that Level2 must have indicated to you an exit........but with hindsight, it was proven to be incorrect. Therefore, I would assert that Level2 is open to exactly the same perceptual bias that chart reading is prone to.
This same argument can be applied to Price and Volume analysis.

Technical Analysis as a whole, incorporating all the individual methodologies espoused still shows approximately a 50% expectancy. That is to say, it will either succeed, or fail. Historical patterns are just that historical, they are not predictive, therefore you can not attach a mathematic construct, probability, to the opportunities and expect them to play out as calculated.

There are always exceptions to every generalisation, and there is a trader on an alternate thread returning 700% in 2weeks, but on average, technical traders lose money for many reasons, but a substantial one is that already identified in this thread.

Cheers d998

 

[roguetrader]

Technical Analysis as a whole, incorporating all the individual methodologies espoused still shows approximately a 50% expectancy. That is to say, it will either succeed, or fail.

An interesting simplistic view, by simplistic I mean that in it's simplist view this observation can be applied to everything, for example as I prepared to cross the road this evening, after reading your post it occurred tome that either I would be knocked down or I wouldn't, however it never occurred to me that the probability of this was 50/50 or I might still be on the other side.

 

[Salty Gibbon]

Rogue

Were you crossing the road on the way to the pub or on the way home from the pub ?

 

[roguetrader]

On the way home Salty which possibly skews the probability in favour of being knocked down.

 

[DaveJB]

Bit late for my 2p worth, but I agree with JillyB personally - I can see how triangles might spring to mind, but with a couple of points top and bottom it always reminds me of how I teach my pupils about drawing graphs... if you don't have enough data points you can draw 'best fit' lines pretty well anywhere you like, going in every possible direction. I don't care what anyone says, there ain't enough tops and bottoms there to persuade me that a triangle is the only shape you can turn them into. <g>

On the other hand, even I thought it looked like a 1-2-3 setup.

As for perception - on a 5 min candle chart I might see bullish, on a 1 hour chart bearish, and back to bullish for daily... there's no conflict, and one being 'correct' does not make other views based on other periods or styles wrong - it's quite possible to make a long short term trade and make a profit whilst the daily move is downhill and a longer term trader, trading the opposite direction, also makes a profit. Charting isn't digital, there is not one right and all else is wrong, Ducati - you can be profitable whilst holding to a different view to another equally profitable trader. Where you get your 50% from escapes me - I presume it's a blind guess?

Dave

 

[ducati998]

Rogue,
It is a simplistic view. However, just because of its simplicity it would be a mistake to dismiss it without at least some thought.
If you are a trader utilising technical analysis you have some fixed variables that will dictate your ability to generate a return on your trading capital.

1....Price must trend in your predetermined direction far enough to offset all expenses and return a profit.
2....Within a chosen timeframe
3...Risk must be defined and managed

Because technical analysis uses price levels generated by the market to determine entry and exit points, and assuming discipline of trading plan execution, then your expectancy by definition will come in at 50%, as price staying static, will in a timeframe of the traders choice mandate an exit.
Price, will either move in your favour, or it will move against you, 50/50.

Probability, which becomes the rallying cry of all non-profitable daytraders, will change the 50% expectancy into a trading plan that shows 80% expectancy.
This is data mined for set-ups that show a historical tendancy of doing the wanted and expected. The fallacy is that the better known a set-up becomes, the lower its probability trends, until the final ironic twist and the contra-pattern becomes the set-up.
The problem thus becomes one of guesstimating the level of probability that remains within the set-up that you wish to utilise. For those into backtesting, if you take one pattern and backtest it in enough historical data you will find variable levels of probability.

it's quite possible to make a long short term trade and make a profit whilst the daily move is downhill and a longer term trader, trading the opposite direction, also makes a profit. Charting isn't digital, there is not one right and all else is wrong, Ducati - you can be profitable whilst holding to a different view to another equally profitable trader. Where you get your 50% from escapes me - I presume it's a blind guess?

Yes of course, and I did not mean to imply otherwise. That however does not alter the fact that expectancy for technical traders is 50%

Cheers d998

 

[SOCRATES]

In response to the original question posed at the start of the thread there would now seem to be opinions that would certainly indicate that charts are a rather inefficient tool to profiting from financial markets.


Reply:~ No, your assumption is not correct because you approach the topic with the wrong perception. Charts are not inefficient. Charts display the facts, and only the facts. But in these facts is contained information. The ability to extract the correct conclusion from this information presented is what determines the outcome.


So we have a psychological explanation for a charts shortcoming, a perceptual bias.

Reply:~ No, the chart does not have any shortcomings if the information presented in it is correctly structured and clearly displayed. It is the human element that mucks up the excercise. The perceptual bias is in the eye and mind of the observer, and not the other way round.



The crux of the matter, no-one has proffered an analysis going forward, which of course to profit is rather a necessity, unfortunately hindsight analysis does not pay terribly well.




Reply:~ No, you are mistaken. I have in the past done this in a live market with accurate time stamps to punctuate prediction of events before they occurred, ahead of time. I took the precaution of not using my own charts so as not to be accused of doctoring the record.

People do not like to see displayed what they themselves cannot do for whatever reason.

This attracts unjustified and unwarranted abuse. Therefore I now restrict analyses on chart action to commentary, not otherwise, on the wise advice of Chartman the Moderator. But it will dishearten you to hear, that when an absolute bottom is picked twice, for example in sequence in real time with a time stamp to prove it, in the same instrument in the same session, that again, to my wry amusement and quiet contemplation, also stimulates people to become abusive, which causes us those who can, not to.

 

[JumpOff]

Price, will either move in your favour, or it will move against you, 50/50.

Would that this were so! If traders could count on this, then all that would be needed is a mechanical money management system.

I can personally attest to the fact that up to now, my expectancy is closer to 90:10. That is - I enter at the wrong time about 90 percent of the time. Your statement does not take into account the fact that the price goes up, down, (sometimes both in a matter of moments) and can also just poke along sideways for a couple months. And it has no reason to trend sedately in one direction - just because we have decided to open a position and you think there is a 50/50 chance it will go one way or the other .

Because my expectancy is sooo wrong, it gives me great hope. Since my losses are non- random, I expect that with enough study, I will be able to figure out what setups I've been using to to enter, and then define and test the opposite set of signals and see if I can't make my account go up instead of down. Or at least I could get to a 50/50 chance.

JO

 

[DaveJB]

Hi,

the better known a set-up becomes, the lower its probability trends,

this presupposes that all identified patterns or setups are subject to being 'traded against' or manipulated to ensure the setup fails... and as the setup on one timescale can be quite invisible on another it also suggests that this is occurring simultaneously over a huge range of setups/shares/commodites/timescales. Whilst I'm quite happy to accept that some manipulation occurs, and can be seen in the charts, I doubt that it does so quite as universally as this suggests - if I'm clever enough to engineer it, and have the resources to ensure it occurs, I'm probably not stupid enough to do it often enough to stop people playing the setup.

I still don't see how you can state

Price, will either move in your favour, or it will move against you, 50/50

either - if a coin is being tossed at each apparent hesitation in the existing trend then I'd agree, but it isn't.

The reliability of patterns does change over time, and with market conditions, that should not occur if the chance of a correct call is indeed 50/50 except within the normal run of variation (a run of consecutive heads or tails within a chosen number of coin tosses, as an example). There are multi year periods where the reliability of some patterns will hit 80% during bull markets, swap to a bear market and the same pattern will show 50% or less - that doesn't make the pattern or TA a waste of time, it means the sensible TA user is aware that in certain conditions this is not the pattern to trade... although 50% is enough to extract profits with suitable trading.

Dave

 

[DaveJB]

Perhaps I should point out, as Socrates is posting here, that 'pattern' is no necessarily meant to imply 'triangles, catapults' and the like - I mean something more like 'pattern of behaviour' - if I see a bar make a new high on substantial volume, then the next bar is struggling to approach the high and volume is notably absent, then that to me is also a 'pattern of behaviour' inasmuch as I have seen it before and regard it as intimation of a change in direction. Dojis, long shadows... the mind, or those who bring these to our attention might provide names for them but it's just a convenient way to ensure the price (and sometimes volume) activity is easier to recognise next time. We - some of us at least - find it easier to 'memorise' price and volume action of significance by giving those price/volume events names.

Perceptual bias might then easily creep in, as we try to fit the chart to what we want the pattern to be - randomly scattered bars leave us unsure of what is to come, we are happier knowing what to expect, so sometimes we make the bars into a pattern that isn't really there to 'force' the chart to inform us. It may be that better chart readers can make sense of the jumble already, and do not therefore try to fit the chart into an uncomfortable alignment with something it doesn't actually match. Better to learn to analyse without the names perhaps, I wonder how many TA users take this path - starting out spending long hours learning to spot the patterns, then somewhere down the line decide that to develop they need to learn to read the individual bars and try to forget the patterns?

Dave

 

[Splitlink]

Would that this were so! If traders could count on this, then all that would be needed is a mechanical money management system.

I can personally attest to the fact that up to now, my expectancy is closer to 90:10. That is - I enter at the wrong time about 90 percent of the time. Your statement does not take into account the fact that the price goes up, down, (sometimes both in a matter of moments) and can also just poke along sideways for a couple months. And it has no reason to trend sedately in one direction - just because we have decided to open a position and you think there is a 50/50 chance it will go one way or the other .

Because my expectancy is sooo wrong, it gives me great hope. Since my losses are non- random, I expect that with enough study, I will be able to figure out what setups I've been using to to enter, and then define and test the opposite set of signals and see if I can't make my account go up instead of down. Or at least I could get to a 50/50 chance.

JO

I think that you underestimate yourself- the toss of a coin, surely, will give a better expectancy than 90:10.

I tend to consider triangles, especially the ones plotted against a nice double bottom like the one in the chart Rossered offers , as more of a confirmer than a buy signal. If I had been watching that one and interested in trading it, I think that I would have entered a few days earlier than the triangle's completion with a stop under the low. TA being a statistical game, don't you think that DB's have the same level of success as triangles? If you did trade the triangle where would you place your stop, below the low? So isn't it better to get in earlier trading the DB?

Split

 

[Mr. Charts]

I think what you need is an integrated approach of patterns, reading bar behaviour, sometimes volume, and level 2, T&S and the behaviour of some participants. I'm talking here about stocks, but most also apply to futures.
And all in the context of the overall market and sector.
With such an approach you are "reading" the big picture and the detailed one and see what is going on and can act accordingly.
I really don't think you can look only at one or two factors in a multi-factorial and dynamic situation and believe you can successfully trade long term by concentrating on some things and knowingly ignoring influential others.
A reasonable analogy is driving, it seems difficult in theory before you start if you consider everything you have to remember and do in a constantly dynamic situation. Once you've learnt and are experienced it becomes routine. All analogies break down at some point and the psychological aspects of trading make it totally unlike driving, of course. Also many people decide not to pursue trading as it is difficult to master, whereas driving is often a necessity and the fact that millions do it acts as an incentive to persist.
Some comments suggest too mechanical a view, a search for the non-existent Holy Grail which will only lead to a long and winding road which goes nowhere.
I agree different patterns work with different success in different market conditions which is why you need a range of methods to cope.
There is also a belief that a breakout of say a well known classical TA pattern like an ascending triangle,
fails a certain %age of the time and whether it is going to succeed or fail is random.
Not so. How many people actually consider the overall market and sector environment at the time?
How many look at the micro level of level2 and T&S and the behaviour of certain market participants at the break out price level ?
If all those things are negative to the anticipated chart movement - I for one might well be shorting what many view as a probable long breakout. So yes, I and other professionals might appear to be fading the move and spoiling your party.
Yet all I am doing is reading all the evidence available to me and employing my own methods and seeing the "patterns" of trading behaviour......not just part of a mosaic.
Obviously large investment banks etc may have other motives in moving price which might be unknowable - although often the footprints are there to tell you in advance.
And for those things that really are unknowable - that is what fast exits are for.............
Richard