Identifying chart patterns

[Mark531]

Hello,

I'm currently training to identify chart patterns in price histories for different assets and I ran into a pattern I can hardly recognize.

Here is a snapshot of a EUR/USD M1 chart in Jan 2018:

The first part of the chart looks like a triangle/wedge, but I fail to understand the last part. For instance, here are possible trend lines:

This does not make it possible to explain the false breakouts (yellow circle and yellow rectangle).

Would you place trend lines differently?

Cheers,
Mark

 

[1nvest]

Hello,

I'm currently training to identify chart patterns in price histories for different assets and I ran into a pattern I can hardly recognize.

Here is a snapshot of a EUR/USD M1 chart in Jan 2018:
View attachment 301921

The first part of the chart looks like a triangle/wedge, but I fail to understand the last part. For instance, here are possible trend lines:

View attachment 301922

This does not make it possible to explain the false breakouts (yellow circle and yellow rectangle).

Would you place trend lines differently?

Cheers,
Mark

you seem to have very conveniently drawn a line right through an earlier high. was it unimportant to you? does that high, or its convenience now change what you see had you connected it. You can't just randomly draw lines THROUGH your highs and then say it didn't work.
your line also only seems to touch one other high (again, why not the earlier high then), what significance would you place to a line that hasn't been reinforced

 

[mpups]

They call it called the Squished-up Candlesticks pattern

 

[Mark531]

@1nvest I'm sorry I don't quite follow your reasoning. I joined highs in the order they appeared. The upper line joins 4 highs, so it seems to be significant, isn't it? At least it was significant until the false break out. And that was precisely the point of my question. Now, if you think I'm doing this wrong, please show me how you would have traced the lines.

@mpups I google-ized that term but didn't find anything, could you please provide a reference?

 

[1nvest]

My black lines, follow the highs, and the lows. you're not
you're bottom line is a straight line, but its not straight, you have a low, then another lower low. you see a straight line, i see something different. and your first highlighted yellow low, is now bouncing off what looks more like a channel, rather than a wedge. price breaks through the channel low, and comes back to retest it. my low channel looks much better
as for your high, if you are keeping to your first high, surely your first high is where i've circled. you haven't drawn it there. you've ignored it. I've ignored it, as the next high has clearly broken it. and there is nothing to suggest that line is any more significant than the others, so i can only leave it as it is.
hope that explains a bit more my rationale. The problem with lines, is that anyone could now draw another set of lines and fit with what they see. Its very subjective
best of luck though

 

[McQuant]

Hello,

I'm currently training to identify chart patterns in price histories for different assets and I ran into a pattern I can hardly recognize.

Here is a snapshot of a EUR/USD M1 chart in Jan 2018:
View attachment 301921

The first part of the chart looks like a triangle/wedge, but I fail to understand the last part. For instance, here are possible trend lines:

View attachment 301922

This does not make it possible to explain the false breakouts (yellow circle and yellow rectangle).

Would you place trend lines differently?

Cheers,
Mark

What you are just looking at is liquidity hunting.
Retail traders draw patterns (wedges, triangles, you named it) and try to trade based on them. Hence once the patterns are pretty obvious to all market participants then market makers, or whoever needs liquidity, can be sure there is a lot of liquidity in form of stop losses around the "lines" that will satisfy the need.

 

[trilobite]

What you are just looking at is liquidity hunting.

What do you mean in your sig. by "Chase value, not price". Are you talking about fundamentals, or something else?

 

[Mark531]

@1nvest Thanks for your proposal. Ok for the support line, but your resistance seems more doubtful in that four highs don't actually reach it. That's what makes me hesitate as for this price chart representing a simple channel.

To explain my logic a bit more, I try to capture the chart pattern during its formation (and not afterwards as you did) for a simple reason: once you wait for the channel to be completely known and broken by the price, you can't take advantage of it anymore, it's just too late. That's why I try to draw the lines after only 2 or 3 touches so that I can anticipate the next price moves and take position when a bounce or a break occur. Do you really think it's so subjective that it can't be anticipated?

@McQuant Do you mean that market makers will initiate positions in the opposite direction to that of other traders?

 

[McQuant]

@McQuant Do you mean that market makers will initiate positions in the opposite direction to that of other traders?

No, and apologies if my comment made such impression.
There are 2 types of traders (I avoid us, the retail herd here)
1. Market Maker - market maker's profit comes from the spread and is not directionally biased; hence the best market for MM is a range-bound market where they make a lot of money; for the same reason trending market is not profitable for them because they are highly short in a bull market and heavy long on the bearish market; hence we can see those big candles when MM withdraw liquidity when the market is strongly biased to either direction; MM loves when the market goes up and down quickly so the best intention for them is rotating market back and forth the fair value because MM makes a fortune in such market environment;
2. Institutional trader on the other hand is a directional trader, so his best intention is to buy at lower prices and sell at higher prices; he tries to manipulate the price in the direction he wants to make a business

MM and Institutional trader will always try to move the market to the areas where they expect a high volume to do "a business", but both have got opposite intentions. These 2 types of traders are fighting every day on the markets. It's hard to say for which type was the liquidity pool favourable but definitely for one of them

 

[1nvest]

@1nvest Thanks for your proposal. Ok for the support line, but your resistance seems more doubtful in that four highs don't actually reach it. That's what makes me hesitate as for this price chart representing a simple channel.

Price isn't supposed to reach it, its there as a guide. If there is a high, you draw a line connecting the highs, until your line is taken out.

To explain my logic a bit more, I try to capture the chart pattern during its formation (and not afterwards as you did)

How dare you..my lines are drawn in real time, unlike yours!! what you don't see are the lines drawn before, because they are largely irrelevant as time moves on. the only significant one, is mine that i've drawn. take a look at how the lines "fan out" as more price action takes place. which is not a line of best fit, such as yours, which bears no resemblance whatsoever to the highs taking place beforehand.

for a simple reason: once you wait for the channel to be completely known and broken by the price, you can't take advantage of it anymore, it's just too late. That's why I try to draw the lines after only 2 or 3 touches so that I can anticipate the next price moves and take position when a bounce or a break occur. Do you really think it's so subjective that it can't be anticipated?

yes it is very subjective. as far as im concerned really there are only two lines you should be thinking of. the high, and the low. because everything in between is merely noise. your "line of best fit" was hit 3 times to up and downside. not a very good indication was it? that was the whole point of this thread
there was only one direction price action was going, it was down which was emphasised by the lower low right at the beginning, and a further push to the downside later on. The horizontal high right at the beginning was not broken, that tells you something, and throughout price is merely pushing more and more to the downside, but then retracing back into the channel. Call it what you will.
your trend lines that you draw is only an indication of the direction of price. looking for breaks of that trend line is not a good idea. price should break below or above, form another (higher) low to the upside or (lower) high to the downside. price should confirm your direction, not the trend line

as for McQuants opinion. I dont necessarily follow. You are looking for an edge, just like everyone else, you are choosing chart patterns. good luck to you.. its not one i use to be honest.
if you are into chart patterns, there is a site

Pattern Index

Provides free access to stock market chart patterns, Elliott waves, busted chart patterns, event patterns, and so on, written by internationally known author and trader Thomas Bulkowski.

thepatternsite.com

run by a guy names bullkowski. worth a look

 

[McQuant]

What do you mean in your sig. by "Chase value, not price". Are you talking about fundamentals, or something else?

Apologies, my English is quite limited so let me reference this article How Divergence In Correlated Assets Can Help You Add An Edge To Your Trading. The first part speaks about correlations, which is quite a known subject to everybody. However, the section How Can One Benefit From These Relationships? roughly speaks about what I mean by Chasing the value.
Simply put, chasing value is a sort of statistical arbitrage where we use other assets or even combinations of several assets as value lines and try to monetize the discount or premium to the value.
It's a vast subject to study, and it's working for all assets classes (FX, Futures, Commodities, Stocks).


I'm not sure if this still belongs to this thread. sorry, @Mark531 for diverging a thread with off topic...

 

[Rufus_Leakey]

if you are into chart patterns, there is a site

Pattern Index

Provides free access to stock market chart patterns, Elliott waves, busted chart patterns, event patterns, and so on, written by internationally known author and trader Thomas Bulkowski.

thepatternsite.com

run by a guy names bullkowski. worth a look

Thomas Bulkowski also provides free software to automatically find patterns.

Patternz

Patternz: Free automated pattern recognition software that recognizes stock market chart patterns and candlesticks, written by internationally known author and trader Thomas Bulkowski.

thepatternsite.com

 

[trilobite]

Apologies, my English is quite limited so let me reference this article How Divergence In Correlated Assets Can Help You Add An Edge To Your Trading. The first part speaks about correlations, which is quite a known subject to everybody. However, the section How Can One Benefit From These Relationships? roughly speaks about what I mean by Chasing the value.
Simply put, chasing value is a sort of statistical arbitrage where we use other assets or even combinations of several assets as value lines and try to monetize the discount or premium to the value.
It's a vast subject to study, and it's working for all assets classes (FX, Futures, Commodities, Stocks).


I'm not sure if this still belongs to this thread. sorry, @Mark531 for diverging a thread with off topic...

Thank you for the information. It seems I have another area I need to study, but it sounds much more useful than most of the material that is peddled all over the Web.

 

[Mark531]

@1nvest Well, my first assumption when trading a range is that the price will alternatively reach either bound. At least it's the "predictive" edge ranges are credited with. Maybe I just wasn't lucky with that one.

Don't get me wrong, I didn't say your analysis was bad, I just said it was a kind of post-analysis, once the movement is over. My ambition in trading is capturing the trends as early as possible. So, yes, it amounts to drawing lines and updating them constantly as you showed on your last chart! But when you wait for the end of the range (after the 8th peak in that case), you can of course perfectly picture it, but you can't profit from it anymore. The price is likely to have changed regime after the breakout, it is most probably trending now. But ok, I take your advice to only take into account the highest highs and the lowest lows.

If I may ask, which kind of edge are you chasing? To be honest, I've kind of disregarded technical analysis for years, thinking it had no solid grounding. I tried to seek different edges in the markets, to no avail. And lately, I felt like coming back to chart patterns which look repeatedly relevant in hindsight.

@McQuant Thank you for describing the forces that control the market, so what's the best approach to take advantage of this information? You seem to suggest that institutional traders are likely to follow these channels bounces, so this would be a good argument in favor of range trading.

 

[1nvest]

@1nvest Well, my first assumption when trading a range is that the price will alternatively reach either bound. At least it's the "predictive" edge ranges are credited with. Maybe I just wasn't lucky with that one.

Don't get me wrong, I didn't say your analysis was bad, I just said it was a kind of post-analysis, once the movement is over. My ambition in trading is capturing the trends as early as possible. So, yes, it amounts to drawing lines and updating them constantly as you showed on your last chart! But when you wait for the end of the range (after the 8th peak in that case), you can of course perfectly picture it, but you can't profit from it anymore. The price is likely to have changed regime after the breakout, it is most probably trending now. But ok, I take your advice to only take into account the highest highs and the lowest lows.

Its ok mate, i didn't take any offence. You could easily have carried on trading trend lines after my lines, but again how this started was what could you done to have avoided the "whipsaw".

If I may ask, which kind of edge are you chasing? To be honest, I've kind of disregarded technical analysis for years, thinking it had no solid grounding. I tried to seek different edges in the markets, to no avail. And lately, I felt like coming back to chart patterns which look repeatedly relevant in hindsight.

I'm in two camps. Both of which work extremely well in any market.
1) The break of highs and lows (complimented by price action and using much longer time frames than yours)
2) momentum
and a combination of both. Technical Analysis works perfectly well Mark. If you didn't find your edge initially, don't stop. However do perhaps consider looking at higher time frames, but this is down to you. I can't look at screen for hours on end, i'd go crazy.

 

[kevinberry]

I believe I need to take some more time to understand using these chart patterns because this is something that comes as a challenge every time I am trading.

 

[tomorton]

I'm coming into this a bit late and I'm going to tackle it from an old-school perspective. This won't go down well.

The knowledge behind chart patterns was built up from D1 charts, and D1 charts that were from markets which had a closed session overnight, not forex. There is plenty of good research to help identify and trade off daily chart patterns - but where is the equivalent research for intra-day chart patterns and forex chart patterns on any time frame?

I believe short-term chart patterns off a 1M chart are meaningless - trades off such a short-time frame are random or at best just follow momentum. Longer-term charts using tiny time-frames are unhelpful: its like looking at a famous photograph by studying the pixels.

In the end resort, trades outside of trends are self-limiting and one-off opportunities. Are they really worth the effort and risk? If you have a long journey to drive today, why take the most bendy road?

 

[Mark531]

@1nvest Thanks for sharing your strategies. Well, the break of highs and lows is precisely what I'd like to achieve here.

@tomorton I found several technical analysis books asserting that chart patterns (or even candlestick patterns) could be traded on any timeframe. It's also true for Ichimoku. About trading outside of trends, the literature pretends that markets are ranging about 70% of the time. In other words, it's sticking to trends that is self-limiting! That being said, I care to admit that trading ranges is harder than trading trends.

Well, I will answer both of you as for why I prefer intraday trading:

• there are far more movements hence more opportunities in a day. A single trend in a daily timeframe will be decomposed into several sub-trends in lower timeframes that could be traded independently.
• since intraday variations are smaller, it's less risky than higher timeframes. For instance, if you trade Forex in a daily fashion, chances are your stops will be around 50-100 pips below your entry points, which is considerable! Even if you trade mini-lots, you'll have to commit much more capital than you would do in intraday trading.
• trading in a smaller timeframe also means more frequent trades in general and that helps building a steadier equity curve. Closing a trade after one hour also appears to be less stressful than holding a position for several weeks.

Now you're right on that markets are noisier on smaller timeframes. For that reason they may be more difficult to trade.

 

[tomorton]

@1nvest Thanks for sharing your strategies. Well, the break of highs and lows is precisely what I'd like to achieve here.

@tomorton I found several technical analysis books asserting that chart patterns (or even candlestick patterns) could be traded on any timeframe. It's also true for Ichimoku. About trading outside of trends, the literature pretends that markets are ranging about 70% of the time. In other words, it's sticking to trends that is self-limiting! That being said, I care to admit that trading ranges is harder than trading trends.

Well, I will answer both of you as for why I prefer intraday trading:

• there are far more movements hence more opportunities in a day. A single trend in a daily timeframe will be decomposed into several sub-trends in lower timeframes that could be traded independently.
• since intraday variations are smaller, it's less risky than higher timeframes. For instance, if you trade Forex in a daily fashion, chances are your stops will be around 50-100 pips below your entry points, which is considerable! Even if you trade mini-lots, you'll have to commit much more capital than you would do in intraday trading.
• trading in a smaller timeframe also means more frequent trades in general and that helps building a steadier equity curve. Closing a trade after one hour also appears to be less stressful than holding a position for several weeks.

Now you're right on that markets are noisier on smaller timeframes. For that reason they may be more difficult to trade.

Sure, a lot of people day a lot of things about TA but very few have done hard research to back them up with data.

Sure, most markets do not trend the majority of the time, but when an instrument is trending, its strongest immediate tendency is to continue. While it does that its very possible to take additional trades in the same direction, in series or as pyramid positions. While uptrending it is even worth ignoring resistance, while downtrending it is worth ignoring support.

When I said most markets do not trend the majority of the time, there is at least one glaring outperformer and it happens to be one of the most important - the Dow. Look at the Dow from March 2020. I only trade the Dow on the long side but it is a predominantly trending market.

Even forex pairs trend reliably at times and when they're established they just keep going. See how many opportunities the USD/CAD presented from March last year, or what the USD/JPY has done sine the start of the year, or GBP/JPY and EUR/JPY since November, AUD/JPY since even earlier.

 

[Mark531]

I've just read a TA book that presents such research with concrete statistics about the percentage of reliability of patterns, the probability of pullbacks, etc. The author pretends that chart patterns can be exploited and profitable on any timeframe, provided that the asset are liquid enough. He even shows an ascending triangle on a 2-minute graph.

I agree with you about trending markets, I like the idea of reinforcing positions. The difficulty remains to detect the new trends as early as possible.

I believe you about the Dow. But to be honest, I've always avoided trading indices for the mere reason that they're an aggregation of many individual assets and I expect their global behavior to be less rational or predictable than each of these assets. Though, I know that most indices react very well to Ichimoku lines for instance, I just can't figure out why...