Real Reasons Behind Market Patterns

[cornix]

I placed this thread in Psychology sub-forum, because reasons I'd like to discuss are just that: human actions behind what we call patterns of the markets. Ultimately they are defined by psychology and it would be interesting to talk about different theories of what exactly behavior causes some classic patterns (doesn't matter if everyone believes some of them "work" or not).

Would appreciate all contributions to the thread in the form of samples and theories of explanation of those samples from behavioral finance point of view.

 

[AfterLOS]

I placed this thread in Psychology sub-forum, because reasons I'd like to discuss are just that: human actions behind what we call patterns of the markets. Ultimately they are defined by psychology and it would be interesting to talk about different theories of what exactly behavior causes some classic patterns (doesn't matter if everyone believes some of them "work" or not).

Would appreciate all contributions to the thread in the form of samples and theories of explanation of those samples from behavioral finance point of view.

Same as the reason for what's shown in the link - subconscious express train to "create death = destroy life" = Earth = Land of one giant f--k up after another - get your kicks before the whole sh*thouse goes up in flames is my advice
http://en.wikipedia.org/wiki/List_of_ongoing_armed_conflicts

 

[Redneck]

I posted in another thread; patterns are context…

Unfortunately my remark was not understood


=================


Patterns (price movements) are the manifestation of behavior – hence the context of behavior


Majority trade price – majority also lose (from what I gather)

The real intent of price movement (patterns if you will) lies in the behavior exhibited while they’re being created

Learn to trade that


------------------------------

And before someone spouts off;

Price begets behavior and dictates trader’s actions – hence behavior follows / reinforces price / patterns


Remember this;

Big boys control movement – when they’re present… when they’re not – the MM (for lack of a better term) controls movement (HFT is simply horseshit (noise) imo)


Neither give into emotion – rather…, they create it…, for other’s to suffer - while they benefit


How.., or even if - this ties into behavioral finance - I haven't a clue - its only about trading imo

RN

 

[KDASFTG]

Greeting C,

In this case, rather than speculate with the random experiences of ET trader’s on Classic Patterns, I do believe that it would be worthwhile to check out the book; The Encyclopedia of Chart Patterns by Thomas N. Bulkowski.

In this book you will find that Bulkowski has done a rather extensive and masterful job of codifying, not only the psychology behind each Classical Pattern, but he has also compiled an extensive database of statistical research, to include the tactics for trading each pattern.

In most cases he has even gone the extra mile to describe the chart context within which the pattern was researched. This work probes far beyond the typical academic fare generated by university financial scholars who don’t trade. There are also ample annotated charts of actual stocks provided for a visual perspective.

His work once served as a baseline for some of my own ongoing statistical data, on the four (4) patterns that I trade everyday. I’ve invested a lot of my time and my life into this work, and its results continue to pay handsome dividends. I’m not so sure that I would be willing to provide this hard won data to an open forum like ET.

However, since Bulkowski’s book was written in 2000, as a suggestion, rather than reinvent the wheel on his excellent pattern work; I would personally be interested in hearing about how the Classical Pattern psychology has changed, altered, or been pertubated, as a result of the pervasive impact of Algos, Bots, and HFT’s, in today’s Daily and Intraday markets. I believe that these changes are likely the future of trading and markets.

What do you think about this notion? I’m always open to hear other views.

KDASFTG

 

[oraclewizard77]

What was hurting my trading is reading fundamental news in the morning thinking it provides me the correct direction and then immediately going market long or short based on news bias instead of trusting my TA patterns. Other issue is that when I am right in trade direction not holding my winning trades a little longer. I did better today did not read news, but still killed trade 2 ticks earlier than I should have even though I made a profit. I just wanted a win today after my stupid loss yesterday where I went short based on news against 2 TA patterns. For intraday trading, best to just rely on patterns based on the chart not on reading the news. Obviously, if you know a Fed report is coming out right before you are going to place a trade, you can wait till after that otherwise the information is contained in the chart for you to analyze and make a decision from with some patience to get into the trade. Also, I don't mind the market moving a little in my direction if I am not sure before placing the trade.

 

[eurusdzn]

This is a 4 year weekly chart that nets four positions. Long both SPY and FXE(euro) and short both QQQ and FXI(china market). Another way to look at it is to buy the spread FXE/QQQ and sell the
spread FXI/SPY. Or, simple diversification with two longs and two shorts.

it is somewhat intuitive that being long euro and short china and US tech are all bad at this time hence the chart breakdown.

the chart data begins April 1 , 2010. i find it interesting in terms of TA that global macro events
would support a level four times in the past before this recent breakdown.
Or , its random. I cant say.

 

[cornix]

Thanks everyone for replies. My point in this thread is: if we can somehow logically explain the causes of TA patterns, it would be equal to the proof of TA "working" (or not). After all every sane TA trader thinks I believe that TA patterns don't miraculously predict the future, rather they demonstrate certain kind of human actions which provide odds of majority of market participants committing certain trading decisions...

 

[justrading]

Cornix, sorry but I think you are mixing things up a bit.

TA, as in charts, patterns, indicators, has one undeniable quality - it speaks to the past. It records what has happened. The closest analogy I can think of is animal (or human) tracks in the bush and the huge amount of information expert trackers in Africa and Australia can gather from that. But it is information about what has happened.

Whether TA or FA works or not is defined by people as the ability to predict what WILL happen in future. In that respect, nothing works. I know for (almost) a fact that the USD will strengthen and Euro and EM currencies will weaken in the medium term. I could go broke long before that because the journey will not be linear.

You mentioned "odds of majority of market participants.....". The problem is there is not a clearly defined pool that determines majority at any particular time. It is not as simple as 10 people and 80% of available capital is committed to 1 direction. It is a record of an unknown percentage of available capital moving the market in a certain direction. That direction could change with injection of additional capital or simply existing large positions leaving/reversing.

Short answer - TA works for those who use it and profit. It doesn't work for those who can't use it and profit.

 

[DR.BOUYE]

"...rather they demonstrate certain kind of human actions which provide odds of majority of market participants committing certain trading decisions...

"


Only in hindsight. The crux of the matter, is that one must commit to an underdeveloped pattern (extrapolate), in order to extract the maximum benefit (R:R).

Besides, chart patterns are not the essence of any given market, so why bother?

 

[Redneck]

The purpose of trading is to make money (well duh )

Money cannot be made – by anyone – if price moves about randomly (truly randomly – not perceived).., or allowed to stagnate for prolonged periods


Remove the randomness / stagnation – patterns are formed

How…, when…, to the extent.., or duration these patterns are formed / followed through on – is uncertain – hence unknowable (unless one a mind reader.., or has knowledge of the big boy orders coming in)


Neither the uncertain…, nor unknowable.., can be explained – logically or otherwise – nor obviously predicted


Get past the pattern(s) – and trade the behavior(s) that create the same – knowing this behavior could continue.., or cease – on the very next tick


=========================


Btw.., in case it sounds as if I’m not.., allow me to be clear – I am a proponent of TA… but not a hostage of it


RN