Identifying chart patterns

kevinberry

Junior member
38 6
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

Legendary member
8,378 1,335
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

Newbie
7 4
@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.
 
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tomorton

Legendary member
8,378 1,335
@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

Newbie
7 4
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...
 
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