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Technical Analysis - Finding Patterns!!


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Hello all,

 

I am new to trading and having spent a month learning as much as I can and writing up a trading strategy I am now starting on my Demo Account.

 

I am mainly trading around patterns with indicators to help confirm trades. I am looking at typical NASDAQ & FTSE companies. When I do my TA I only seem to see lots and lots of channels, upward, sideways and downwards. Occasionally on the hourly there is a flag or two. I just don't seem to come across Head and Shoulders, Double Tops/Bottoms etc. 


Does this sounds correct or am I just not seeing it?

 

Thanks for any help.

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Hi @rachelbarnes,  sounds correct, H&S and double tops/bottoms are major reversal patterns and they don't come along every day. Flags and pennants need a pole and they also don't happen every day.

As @elle points out they do happen but suspect you were hoping for a greater frequency than once a year so as elle is suggesting you may need to scan many charts to find them on a regular basis. Or you may also want to consider adding a strategy that finds a way of getting in on the move between the major reversal points. 

 

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Hi @rachelbarnes, a month to learn doesn't sound very long to me but I see you are now testing on demo, very good!

What sources did you use for your study?

As others have noted, all the patterns you mentioned do exist but not all the time and it depends on what time frame you are looking at.  The problem with chart pattern techniques is that people can start seeing the patterns everywhere if they are really pre-disposed to want them.  The trick is to sort out all the false signals vs the true ones and that takes practise.  

A few thoughts from my experience that may help:

  • Get a really good source publication or two and in particular not just a text book but something that real traders have used (In addition to a good technical publication I would suggest Trading for a Living by Alexander Elder - old but still on the money for me)
  • Don't just dive in on today's market.  Test your learnings by analysing a variety of market types back as far as you can get data.  Compare different and similar types of markets and note that some work more consistently than others and some patters are more reliable than others
  • It is not just about recognising the pattern but figuring out the likely next direction from this pattern (i.e. what it is telling you).  To do this you have to (in my opinion) put the charting in context of wider Fundamentals, historic price action and current day environment (this includes, crucially, sentiment)
  • Some charting, technical analysis, price action analysis etc works better in longer term time-frames than others.  For instance there is a school of thought, which I subscribe to, that Head & Shoulders and double tops only work well on Daily and Weekly charts not so well on 1 hour or lower charts.  In addition the turning points need to be well spaced (several months apart) to be relevant.  Too close and it is just not statistically significant, in fact you often get short term double tops in consolidation phases (so-called steps) before prices move on beyond the alleged double.
  • Many of the great old time traders used charting and many people still do.  Is it a self fulfilling prophesy or something more intrinsic?  Does it matter if it works?  Recently @Caseynotes posted a great video from RealVision, an interview with one of these old timers.  In it he noted that the impact of algo trading has muddied the waters for him in terms of trading signals.  Although he is principally and News and Fundamentals trader rather than a technical trader I think the observation is equally relevant for traditional technical trading.  My solution has been to blend a number of techniques and require all of them to signal in the same direction.  This has improved things for me but the waters are still a bit murky.  However that may be bout to change if we the great Bull stock market comes to an end...

Stick with it and spend a good longtime practising and refining you method before you trade live but expect to lose when you do go live, because trading real money has a completely different psychological impact than demo.  My final piece of advice is to learn as much as you can about this psychological side and come up with mechanisms in your trading methodology to combat the market influences on you.  This is one thing I really wish I had known when I started...

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On 21/11/2018 at 14:31, Mercury said:

Hi @rachelbarnes, a month to learn doesn't sound very long to me but I see you are now testing on demo, very good!

What sources did you use for your study?

As others have noted, all the patterns you mentioned do exist but not all the time and it depends on what time frame you are looking at.  The problem with chart pattern techniques is that people can start seeing the patterns everywhere if they are really pre-disposed to want them.  The trick is to sort out all the false signals vs the true ones and that takes practise.  

A few thoughts from my experience that may help:

  • Get a really good source publication or two and in particular not just a text book but something that real traders have used (In addition to a good technical publication I would suggest Trading for a Living by Alexander Elder - old but still on the money for me)
  • Don't just dive in on today's market.  Test your learnings by analysing a variety of market types back as far as you can get data.  Compare different and similar types of markets and note that some work more consistently than others and some patters are more reliable than others
  • It is not just about recognising the pattern but figuring out the likely next direction from this pattern (i.e. what it is telling you).  To do this you have to (in my opinion) put the charting in context of wider Fundamentals, historic price action and current day environment (this includes, crucially, sentiment)
  • Some charting, technical analysis, price action analysis etc works better in longer term time-frames than others.  For instance there is a school of thought, which I subscribe to, that Head & Shoulders and double tops only work well on Daily and Weekly charts not so well on 1 hour or lower charts.  In addition the turning points need to be well spaced (several months apart) to be relevant.  Too close and it is just not statistically significant, in fact you often get short term double tops in consolidation phases (so-called steps) before prices move on beyond the alleged double.
  • Many of the great old time traders used charting and many people still do.  Is it a self fulfilling prophesy or something more intrinsic?  Does it matter if it works?  Recently @Caseynotes posted a great video from RealVision, an interview with one of these old timers.  In it he noted that the impact of algo trading has muddied the waters for him in terms of trading signals.  Although he is principally and News and Fundamentals trader rather than a technical trader I think the observation is equally relevant for traditional technical trading.  My solution has been to blend a number of techniques and require all of them to signal in the same direction.  This has improved things for me but the waters are still a bit murky.  However that may be bout to change if we the great Bull stock market comes to an end...

Stick with it and spend a good longtime practising and refining you method before you trade live but expect to lose when you do go live, because trading real money has a completely different psychological impact than demo.  My final piece of advice is to learn as much as you can about this psychological side and come up with mechanisms in your trading methodology to combat the market influences on you.  This is one thing I really wish I had known when I started...

thankyou so much!

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  • 1 month later...
Guest @ rachel barnes + Mercury

Looking at patterns ! They do NOT work and never have. Its been proven through academic study that they do not work, even the Fed done a study a few years ago on things like the head and shoulders pattern and there was no statistical advantage of it. Its all 'educators' talk to try to get retail traders to 'like' something that is easy to learn (till you lose all your money). Bit like looking at the clouds all day....you see something nice up there - the other person does not and the MAIN players in the market, the huge funds running algos, do not buy on the basis of a 'bullish pendant head and shoulder - pin bar, reversal, MACD' candle ! Its ridiculous....good luck - I will stick to cloud formation. 

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