Recognizable patterns, validity?

A

arky

I have read contradictory statements regarding the traditional technical analysis patterns. Some people say that if a pattern is easily recognizable, such as bear/bull flags, that they will fail. Others have stated that these patterns are self-fulfilling prophecies since everyone is watching for them and playing them by the book. I would love to hear the opinions of others regarding this issue.

Good luck and good trading!

--arky
 
I think well known patterns are often used by Mr. Volume to dupe the inexperienced trader. Take the cup and handle pattern for example. Price has been rising, then a beautiful round bottomed retrace lasting a half an hour or so tracing right up to the previous high, and then BLAM, the price plummets. This well known pattern seems to fail 9 out of ten times. It used to mean a good long opportunity but now it would probably be better for shorting, but high risk though. Once it triggers the price moves fast.
 
I've learned that within financial instruments (stocks, options, futures, index, etc) that many behave differently (price bactesting) to different indicators or chart patterns.

Simply, for example only...if the MACD works for the QQQ on 65min interval charts...it doesn't mean it will work for the currencies or it doesn't mean it will work on 5min interval charts.

The only way to know is to select whatever indicator or chart pattern your interested in and apply it (backtest) it on the financial instrument your interested in accordingly to your trading style (everybody has a different style).

Then...if your happy with the backtesting results...I guess you can then say your trading method is "valid".

After such a "validity process" then you can test it with REAL money to see if real market conditions allows you to still remain happy with the results.

Personally, I think too many traders do not backtest what they plan on using nor do they understand that what works for you may not work for me.
 
I reckon the higher the time frame the pattern is in the more likelyhood of the pattern succeeding.
Alot of these patterns we're using are measuring physcology and views can change pretty quick on a 1 min chart when a mm or specialist starts screwing everyone just before breakout time.
...take that to a daily or weekly chart where the patterns origanated from i believe its maybe not so easily done.
It would be interesting to compare the success rate of the same pattern over varying time times.
Guess it depends on how the market is at the time too..
 
No matter how strong a pattern looks, it will ultimately fail more often than not if it is counter to the overall market/sector trend. You may get a slight movement in the correct direction but this will normally reverse, or at best, consolidate, if you are going against the market/sector trend.
I think a lot of people play familiar patterns without regard to the overall trend (I'm as guilty as anyone)and then lose faith in the patterns when they don't seem to work. The familiar patterns will, I believe, give a statistical advantage if traded selectively on the side of the trend.
 
Technical analysis works. That is the bottom line, the thing that most traders overlook are other factors involved in the decision making process. Just buying or selling based solely on a chart pattern is a recipe for suicide, one must weigh in other factors. Technical analysis is the process of using charts to HELP in decision making and is not a stand alone indicator. At least this is the way I look at it. When taking into account a pattern you must also take into account the following:

1. Volume
2. Wider timeframes, always look at more than one as a bullish pattern on the 5min may be inside a bearish pattern on the 15 or 60min.
3. Moving averages, often a great pattern is stopped by a moving ave on one side or another.
4. Overall trend of the market and stock/sector
5. Time of day, many traders miss the fact that some patterns fail at certain times of day.

There could be a few I left out but you get the idea. Use charts and TA as one of the factors indecision making and not as the sole reason for exit and entry.

PS. Recognizing when a patter will fail can be even more lucrative than recognizing when it will cause a continuation.

Allen
 
"I reckon the higher the time frame the pattern is in the more likelyhood of the pattern succeeding."
This has got to be true. It's a simple matter for someone with a large account to paint the chart over a 15 minute time period. It's nearly impossible to paint it over many hours or several days. I agree. The patterns are more reliable in a longer timeframe.
Here's another example. A stock has been trending up all day, so it's likely to continue the following day. Its value has increased 5%. One minute before the close it is at or near HOD and then someone comes in with 5 minutes selling volume and knocks the price down 2%. Nobody looking at timeframes of 1 hour or greater would be able to see the real trend.
 
"5. Time of day, many traders miss the fact that some patterns fail at certain times of day. "

Can you please give us more details of this phenomenon.
 
I'm with Allen on this one. Technical analysis does work. Not 100% of the time...yes, MM's or specialist can manipulate some thin issues , but I don't think it would be possible for anyone to manipulate the qqq's or something similar...

For me...I have John Murphy's book Technical Analysis of the Financial Markets on my desk at all times
 
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