Patterns that don't work anymore

[Jordan]

I see way too much posted that suggests patterns and indicators are or will be less profitable as time goes on for any number of reasons. Personally I think that idea is riiculous for the simple reason that patterns and indicators reflect emotion and emotions never change.

With that in mind, I'd like to ask which patterns or indicators etc have become less profitable. Just to be sure I'm not losing anyone, please consider such examples as moving averages, gaps, triangles, RSI. Or how about old favorites like Williams%R and OBV, or Chaikins CCI. Can anyone name one and support it with decent discussion?

Given that patterns and indicators manifest the relationship of fear and greed, I submit that as long as humans participate in the markets, so will those emotions; and as such, patterns and indicators will continue to accurately reflect emotional relationships.

 

[cheeks]

Quote from Jordan:

I see way too much posted that suggests patterns and indicators are or will be less profitable as time goes on for any number of reasons. Personally I think that idea is riiculous for the simple reason that patterns and indicators reflect emotion and emotions never change.

For the most part, I agree with you. I certainly do not think human behavior will change.

With that in mind, I'd like to ask which patterns or indicators etc have become less profitable. Just to be sure I'm not losing anyone, please consider such examples as moving averages, gaps, triangles, RSI. Or how about old favorites like Williams%R and OBV, or Chaikins CCI. Can anyone name one and support it with decent discussion?

I do think some patterns and indicators become less effective because there are alot of people trading on the same thing.

For example, using MA crosses(like 4/19 MA cross) in commodity futures can result in alot of slippage. Because alot of traders are doing the exact same thing.

 

[miniTrdr]

since more places use computers to trade wouldnt that take the emotion out of the market? thus the old patterns become less profitable?

 

[dottom]

To say that patterns based on fear & greed should continue to work no mater what fundamental changes occur in the market(s) is a naive approach, IMHO, because fear and greed are very general and complex behaviors. Also, fear & greed are only one component of market behavior. There are many other factors that affect price changes. A good study on complexity theory here would be helpful.

Patterns, systems, methodologies, etc. all attempt to take advantage of a specific element of fear and greed and its relationship to the specific factors that affect that market. Try trading Soybeans the same way you trade the S&P's and you'll see what I mean (perhaps an exception for the long-term trend following approach which is modelling a much more general aspect of fear & greed; trend following has it's pro's and con's).

Let me give you an analogy. Say I've built a robot that can learn to drive a car. It's easy, all you have to do is "stop & go". This is about as general and complex as "fear & greed". But now take that robot (i.e. system/method) and let him drive on a different terrain (i.e. different market), facing new obstacles he has never seen before. Now change the speed limit or weather (i.e. fundamental change to environment). If the changes to the speed limit & weather were very gradual, the robot could be gradually changed to adapt (which is what I am saying is the gradual effect of 24-hr trading). If the change was sudden, the robot would likely crash the car.

 

[Vishnu]

A lot of the patterns you mention won't work in the future because they don't work now.

But, you might say, they work for me now! And the answer I would say is that you work for you now. Once you start adding stops, discipline, filtering on which stocks to apply the patterns, varying the time frame of your charts, etc. you are drastically changing the pattern and basically developing your own interepretation of it.

One thing I rarely say among TA experts are statistically significant backtests proving that TA works. This is why TA is often compared to astrology. Its simple to test but nobody who practices it ever does test.

Many people out there have tested concepts like breakout systems, support/resistance, etc. And usually they stop blindly using those systems at that point.

 

[easyrider]

I think there are an increasing number of traders competing for part of a shrinking pie. The competition for profits causes people to exit earlier which reduces the playable spread on all patterns.

 

[Lobster]

Quote from Jordan:

Given that patterns and indicators manifest the relationship of fear and greed, I submit that as long as humans participate in the markets, so will those emotions; and as such, patterns and indicators will continue to accurately reflect emotional relationships.

As long as computers don't take over too much volume.

 

[Lobster]

Quote from Vishnu:

Many people out there have tested concepts like breakout systems, support/resistance, etc. And usually they stop blindly using those systems at that point.

I tend to agree. I believe that all standard patterns and indicators provide no edge at all. But when you trade one or some of them and you "do it right" you can be profitable. When you look of how much on average you make per trade, you will most likely find out (if you are a good trader) that it is not more than the spread (not necessarilly the inside spread, it might be the liquidity spread).

I have said it before, and I am going to say it again, I believe almost any trader can make only the spread.

Exceptions would be all forms of inside or superior information as well as (maybe) fancy new original systems/programs/indicators.

 

[Jordan]

So except for the reference to the 4/19 crossover, no one has mentioned a specific pattrn that doesn't work anymore and provided a valid discussion supporting their premise. All I see is more of the same opinion that I alluded to in my opening paragraph.

Therefore, the question remains which pattern or indicator no longer works?

dottom - all of the "factors that affect price changes" are factored in to the ultimate emotions motivating one to buy or sell. Greed doesn't effect P/E, P/E effects greed. Fear doesn't effect news, news effects greed, and so on. The factors you speak of, all of them, effect the emotions, not vv.

Vishnu - what do you mean by "work?" I asked for a specific, you gave me "A lot of the patterns..." I see by your very last sentence perhaps you interpret 'works' to mean gives the exact buy and sell signal at the right time every time. Is that what a pattern or indicator is supposed to do? Sounds to me like you are "basically developing your own interpretation" of the function of patterns and indicators.

Computers - a computer is programmed. The parameters by which to buy and sell are programmed. Even in arb scenarios. Is there a "black and white" formula or set of circumstances that everyone accepts as true without emotion that means it's time to buy or sell? No! Someone or a group of someones has said "when this occurs, buy it or sell it." And that collective or individual decision has been motivated by fear or greed. Yet I agree that with computers there is no indecision or confusion or measurable change in sentiment that drives patterns and indicators. For that reason, I qualified my opening thread in the last paragraph by saying 'as long as humans participate in the market...'

Hint:
To answer the question you must first understand what a pattern is telling you - to which there is only one answer.... and you must understand what an indicator was designed to tell you. If you don't know that, then you cannot claim that it no longer works.

 

[DT-waw]

Quote from Jordan:
Therefore, the question remains which pattern or indicator no longer works?

It's not a good question. Markets always change and are always the same (to some degree). There're periods when some patterns/indicators/sets of parameters/systems work well, and there're periods when they aren't profitable.

The opposite question: "Which pattern/indicator will be the best in the future?" is also silly.