Article How To Trade & Profit From Pattern Failures

[T2W Bot]

The best trade could be in the opposite direction when a classic price pattern doesn’t behave according to perfect rules outlined in popular books and web sites. In fact, well-known patterns such as the head and shoulders and bull flag have clearly defined levels that can trigger trade entry signals that are contrary to the direction in which they’re naturally leaning. Alex Elder examined this phenomenon with his Hound of the Baskervilles signal in Trading for a Living when he highlighted a head and shoulders neckline that just wouldn’t break, encouraging observant traders to jump into long positions, rather than following the herd and selling short
We’re taught early in our trading careers to buy breakouts and sell breakdowns, but many contrarians attempt to pay the bills doing the exact opposite. Simply stated, they wait for a rally or selloff to fail and sell the breakout or buy the breakdown. Oppositional tactics don’t end there because tacticians employing these...

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[winny]

has anybody practice this theory ?it would be best if more practical review can be provided .anybody agree?

 

[options-george]

theory is good when you can use it correctly. You create theory with past events. I agree with Winny. This needs to be tested to see if it works correctly. We need practical examples.

This could be well tested in ForexTester2 - just decide which instruments you want to test, decide which patterns/failed patterns you want to go for, and then devise a tactic for how to entry/manage/exit.

I have been playing around with the idea suggested in the article a bit as well since I use some common patterns in my trading around key support/resistance levels. I also think the market-maker tactics that Martin Cole discusses relate to this.

Good article!

 

[richieforex]

Failed patterns can offer great opportunities. The key is waiting for confirmation of the failed pattern and not getting in too early assuming the failure as you can easily get caught out.

 

[Brew23]

I haven't practiced it yet but it looks pretty interesting

 

[TechQuant]

Patterns fail as often as they don't. But what makes them interesting if not useful is that they posses self-conscious awareness of focus of interest and intent. If looked at in real time they will more often than not fail, but only after giving sufficient indication of successful pattern completion to lure pattern traders into taking the trade. Unless you're planning on trading the failure of the pattern in which case they will function as per textbook definition of successful pattern formation and completion, but only after giving sufficient indication of failure to lure failed pattern traders into taking the trade. If looked at in retrospect they will more often than not show every indication of predictive capability and those that do not will eventually appear as to not have exhibited all, or any when you look really hard, of the necessary prerequisites of the formation anyway.

 

[timsk]

. . . If looked at in real time they will more often than not fail, but only after giving sufficient indication of successful pattern completion to lure pattern traders into taking the trade. Unless you're planning on trading the failure of the pattern in which case they will function as per textbook definition of successful pattern formation and completion, but only after giving sufficient indication of failure to lure failed pattern traders into taking the trade . . .

Every so often on T2W a member thinks they've had a light bulb moment when they hit upon a variation on this theme which goes something like this: 'Currently I'm losing 60% of my trades, and the losses are greater than the gains made on the 40% of winning trades. If I do the exact polar opposite of what I've been doing I'll instantly switch from being a net losing trader to being a net winning one. Problem solved, oh happy days!' Unfortunately for them, it simply doesn't work and never does. TQ's excellent post explains why.
Tim.

 

[Fugazsy]

All patterns fail, and the failures often fail, but a failed failure is a second
entry in the original direction and has a high probability of success.

 

[TechQuant]

All patterns fail, and the failures often fail, but a failed failure is a second
entry in the original direction and has a high probability of success.

Sounds good in theory. What happens in reality is that the pattern traders walk away to lick their wounds after it fails and don't normally also trade pattern failures. The failed pattern traders walk away to lick their wounds after it fails to fail and don't normally trade patterns. And both classes posses the very human tendency not to get bitten twice. So once this trade, whichever one it was, has let them down, they'll likely not look at it again for a while and miss any opportunity that presents. Unless they fall into the revenge trade category and they immediately enter an opposite position or another one in the original losing direction but with an even tighter stop to ensure they minimise their chances of success, and they they lose on both legs.

Don't forget, the pattern knows your innermost thoughts and plans, even before you do. They'll let you win one now and again just to keep you hooked as they known you'll promote these winners to pride of place in your memory and quietly allow the iceberg of losers to submerge beneath your consciousness.

 

[Fugazsy]

Sounds good in theory. What happens in reality is that the pattern traders walk away to lick their wounds after it fails and don't normally also trade pattern failures. The failed pattern traders walk away to lick their wounds after it fails to fail and don't normally trade patterns. And both classes posses the very human tendency not to get bitten twice. So once this trade, whichever one it was, has let them down, they'll likely not look at it again for a while and miss any opportunity that presents. Unless they fall into the revenge trade category and they immediately enter an opposite position or another one in the original losing direction but with an even tighter stop to ensure they minimise their chances of success, and they they lose on both legs.

Don't forget, the pattern knows your innermost thoughts and plans, even before you do. They'll let you win one now and again just to keep you hooked as they known you'll promote these winners to pride of place in your memory and quietly allow the iceberg of losers to submerge beneath your consciousness.

Thank you for your comment but I do not agree, a good trader does not have to enter at the pattern with all its degree of failure, he is not following the market around like a stoned dog, he made his decision prior dictated by the overall market conditions, he is waiting....... lets consider a break out, instead of entering at the break out the trader enters at the break out pull back: the break fails, its failure fails, the trader is still on the side line, if it gets another signal he/she enters, which is also a second entry and a stronger entry compared to the original one.

 

[TechQuant]

Thank you for your comment but I do not agree, a good trader does not have to enter at the pattern with all its degree of failure, he is not following the market around like a stoned dog, he made his decision prior dictated by the overall market conditions, he is waiting....... lets consider a break out, instead of entering at the break out the trader enters at the break out pull back: the break fails, its failure fails, the trader is still on the side line, if it gets another signal he/she enters, which is also a second entry and a stronger entry compared to the original one.

That's not how most traders trade Fugazsy. It may be how you trade. It may well be how most traders would like to trade or even how they think they trade. Textbook trading like textbook anything makes everything look easy and simple. But the facts are your salmon en croute will rarely end up looking like the photo in the recipe book and only a very few of your trades will bear any resemblance to those in whatever trading guru's textbook you care to choose. I'm going to re-quote one of my earlier quotes to make the point.

"The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait."

 

[Fugazsy]

That's not how most traders trade Fugazsy. It may be how you trade. It may well be how most traders would like to trade or even how they think they trade. Textbook trading like textbook anything makes everything look easy and simple. But the facts are your salmon en croute will rarely end up looking like the photo in the recipe book and only a very few of your trades will bear any resemblance to those in whatever trading guru's textbook you care to choose. I'm going to re-quote one of my earlier quotes to make the point.

"The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait."

I express my perception of trading not any others or any text book....wherever I write is the expression of my experience and nobody's else, my posts have the intention to share and I cannot control what others for any reasons would like to perceive...What I posted earlier is my perception the way I trade and nothing more..

I do not think they way I trade is easy and simple, actually I think the opposite is true because I do what the minority does which is to think with my own head......

Regarding the recipe book, I do not care how good spaghetti alla carbonara looks I care how god they taste...:whistling

But I agree with your quote but honestly I think it is more relevant to yourself, myself I never pretended that I hold any truth and as a consequence I doubt I will be trapped by my own concepts, as I explained already above mine is only a perception of my experience and nothing more...if you think it will help you then I am very happy about it...if not...well..... there is nothing I can do about it......

 

[TechQuant]

Ah, I've been had. I thought you were either a philosopher who trades or a trader who philosophises.

 

[Fugazsy]

I like to believe I am both, I am convinced that to be a great trader I need to know a lot about myself..........there is always something to discover....but at least I got to the stage where I feel not fear anymore.....maybe because I accept it and in the presence of my presence emotions just melts away by acknowledgement and at the same time giving me more space for discovery and creativity..... just as in my trading where my attention brings in my focus and my essence into play......and the all becomes effortless........does it happen in every session? No, as it does not happen everyday in life, but I am working on it.....

 

[alexaherself]

That's not how most traders trade Fugazsy.

Of course it isn't: perhaps one need only look at the relative proportion of winning to losing traders (whoever's figures you believe on this matter) to appreciate why? One surely wouldn't want to try to emulate "most traders"?

Ah, I've been had. I thought you were either a philosopher who trades or a trader who philosophises.

From what I've seen of Fugazsy's posts here, I think he's probably a bit of both.