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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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@rachelbarnes,

I would like to add something different to this thread but keeping it relevant. 

@Caseynotes and @Mercury may well comment.

Algorithmic 'Black Box' trading has taken over in recent times. They have emerged and changes the so called rules of the game. They did not exist in the 1920's or even the 1970's. Therefore any trends and historical patterns in those time periods are kind of just historical. Large institutions and Hedge Funds who use such 'techniques' if you can call them that can move very large sums of capital and very quickly too. They can be in and out of an asset with basically total automated risk control. As they are in effect a machine they have no fear or emotion to contend with. 

Such 'bots' as I call them which are controlled by these large financial institutions and large Hedge Funds can really exploit lots of traditional technical analysis. They can analyse all these past historical trends and patterns over the last 100 years and create strategies that take into account what 'technical traders' will do and they can counter such moves. They can force false breakouts on both the long and short side. They can manipulate and 'play' with trend-line traders and can really manipulate volume and price with off-exchange 'dark pool' trades. 

I know someone who I shall not name who traded currencies at an institutional interbank for well over a decade. He traded around $100 million a day and provided liquidity to the biggest banks and Hedge Funds in the world. He advised me that he ran back tests with years or price data to find the most 'optimal' moving average combination for any time frame. He stated that he tried and tried but there was no combination that was constantly better than any other. He stressed to me that there were no magic numbers of Fibonacci sequences which made any more difference. 

The point I am trying to articulate is that in most cases just keeping things simple with price action and volume does work as in my personal experience the most important factors are your research process, execution, discipline and risk management. I am not against technical analysis but I do not believe that past patterns necessarily correlate into future patterns. Some may do but how would one know in which asset this is going to occur as a lot of them just simply do not.

I just thought I would offer different thoughts on this thread. These are my personal opinions and I could be just as easily be wrong and totally misguided so I am not trying to force my views upon anyone else. I am just offering a slightly different viewpoint that others in the IG Community may wish to consider. 

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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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