I am now in middle school in the school of pipsology. I have a good head on with the candlesticks and indicators for technical analysis. Right now, I am reading on chart patterns and my question is: Is it worth it concentrating on chart patterns? I know chart patterns are a cheat sheet but if one has a good grasp of his oscillators and momentum indicators, should he still spend the time on chart patterns? I really need an answer so I will know if I can concentrate on it or just have a head knowledge of it.
the link to chart patterns is here: Learn Forex Chart Patterns - BabyPips.com
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Yes, you should be aware of them even if you donāt trade patterns as such. They demonstrate price action, support & resistance and simple chart dynamics like trends, and they are useful guides to market participantsā psychology and buying/selling preferences.
Iām not recommending that you always look for head-and-shoulders or double tops and always sell when you see them, but recognising them helps. Start with the simplest pattern - trend - although the simplest this one creates more dispute than any other and is potentially the most profitable.
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To my mind, chart patterns is the most interesting thing in the whole technical analysis. Actually, they are more useful than any other tools like indicators or candlestick patterns. The will help you to understand the situation and sometimes even to make relatively accurate assumtions on the upcoming price changes. You can easily find detailed information on the most popular chart patterns. It would be interesting to save templates and then try to find them on charts. You can also create your own collection of chart patterns - this will give you better understanding of instruments you are trading.
Of course, indicators are important too, but in most of the cases they just provide additional confirmation for the signals provided by chart patterns, and the situation with candlestick patterns is neraly the same.
Another important point is that one can use the same chart patterns at any market, so this approach is very flexible. By the way, if you will find some books dedicated to chart patterns in commodities or stocks, you can use them too. This is very important advantage of chart patterns.
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Chart patterns are great. After reading books by Steve Nison on Japanese candlesticks (e.g. Beyond Candlesticks), I use candlesticks and major patterns on a daily basis. I believe, this kind of analysis must be included within any trading strategy.
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If you understand the patterns and why they happen then you can use them. But you must use them consistently and take the trade everytime it happens. If not, then leave them. The fact that there everywhere on the internet, you tube etc makes it unlikely they will work by themselves without a hefty drawdown. Might require a tweak by yourself.
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Really? But I have different experience on it; I see; this guy is not talking about market context; just focus on pattern!
@Emekadavid Iām not sure this is true āI know chart patterns are a cheat sheetā
A cheat sheet implies that you have the answers, when certainly, in trading there are no answers. Charts and patterns are historical by definition. All we can do is use our analysis to predict the future. Or at least stack the odds in our favor.
Either way, nothing will tell you what is going to happen, only what might happen.
Hope it helps.
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Iām going to take a slightly controversial stand on this. I believe that one should know the major chart patterns and how they are used. However, I would caution against using them yourself because you are being led to the slaughter house if you do.
Liquidity moves markets. Knowing where most of the retail traders might have placed their orders or stops is one of the keys to predicting what price might do next. Market makers salivate when we use chart patterns or non-horizontal support and resistance lines. They will allow a certain number of wins just to keep the interest of the retail traders but they will eventually get you. So, be very judicious in their use.
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i agree with @QuadPip here. Learn how chart patterns work but BE MINDFUL AND AVOID POPULAR ENTRIES AND EXITS. Market Makers know chart patterns as much as the average joe or even more. They can eventually use that against you. Search up the Euro Swissy 2015 crash. What happened? Well, news broke out that the market wont drop below 1.2 so everybody took a long on that one. the banks saw all that free money thus they got rid of the peg and the market dropped over 2200 pips in one day. It happened so hard and fast that peopleās stop losses didnt get triggered and they now OWE money and platforms went out of business. This is just a severe case. It actually happens very subtly day by day in different markets but concepts like this is something you need to be mindful about.
Easy to believe that market makers play around with quotes on the minute by minute time-scale. Just another good reason to get out of intra-day trading and go long-term off the dailies.
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I do agree with your sentiments on charts but would honestly urge you to change your attitude from TA predicts what the market will do to TA predicts what you will do. It sounds an unimportant thing, like Iām splitting hairs, but this is not trivial. Switching the responsibility from the markets to yourself is such a powerful change in attitude that it has a positive effect on every trader who goes through this.
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In a nutshell, price drives everything. Price leads indicators, price forms chart patterns. Price should drive our trading decisions.
Every other tools should be used as hints and confirmations, including what we think may resemble a chart pattern. But letās be well aware when using indicators as hints, that we are taking a riskier bet on the market! Our trading decisions should not be driven by technicals if we want better probabilities on our side.
With all humility, I am ever struggling to remain a price slave, as a permanent victim of markets viciousnessā¦
Hi,
Interesting post with some excellent replies. I trade using Chart Pattern Recognition and Fibonacci ratios. They donāt work every time obviously, but when they do, offer very good reward to risk
They can highlight important turning points in the markets with amazing accuracy! They work in all markets and on all time frames too.
Hereās an example on the long term DOW Weekly Chart from Jan 2000
Hereās what happened nextā¦
Hereās the DOW Weekly chart right now, July 2019ā¦
Will it work this time? Iāve no idea, but Iām watching it very closely for sure. This pattern is one of the most reliable reversal patterns I have come across. If they fail, they can fail big however, so always protect any position with stop losses, as you know.
Yes, but donāt spend too much time on these things and the different names they have.
Know what a Doji, Shooting Star, or Hammer candle is. Know what a Head and Shoulders is. And otherwise, you are looking for āMā or āWā structure to give signs of reversals and/or continuations. āMā structure is obviously bearish - Highest High - higher low - lower high - lower low, and W structure is bullish. Lowest low - Lower high - Higher Low, Higher high.
Know what a pennant is, a descending triangle, and an ascending triangle, and the way that price usually (although not always) breaks from these formations. But know that textbook examples of these are rare in modern markets (at least on the lower timeframes).
Know how to recognise what a trend is. Ignore those who say a trendline is invalid if it doesnāt match price precisely, but NEVER hit trades on a simple breach or hold of a trendline. Biggest n00b mistake in the book, that for some reason I see written in all āthe booksā. Always wait for more solid confirmation.
Other than that, I will give you a little tip, that nobody taught me, and when I finally learned it (the hard way), it totally transformed my trading.
Market structure, trade location, Oscillator momentum and/or divergences, all mean NOTHING if you donāt first treat trend analysis as your primary consideration in deciding on a trade.
Simply putā¦
If you are trading on the 30 minute charts on an intraday basis, taking the 4hr chart as a reference chart, and the 5 min chart to hunt for trade entries, and the Moving Averages are bearish across all of these charts then the one trade you simply cannot allow yourself to hunt, is a long.
Even if you have solid reversal candle structure
Even if you have confirmed bull divergences on whatever oscillators you are using
Even the momentum on your oscillators is about to register as bullish.
This doesnāt mean that a Long trade might not be a killer trade in this situation. It does mean however that the probability of it being a killer trade is not in your favour!
In the situation I describe, the only trade you can hunt, is a short, and the time when you can optimally hit that short, will be on some retrace, where the 5 min MAs may be a screaming bull, but moving into the 30 minute MAs, which will still be a raging bearā¦
ā¦it is called, ābuying the dipā, or in this case, āselling the retraceā, and it is the most simple and profitable trading strategy out there, period. As the old adage goesā¦Trend is Your Friend.
Learn to focus on trend first and foremost, as everything else comes secondary to thatā¦I really have no idea, why so many traders (myself included) are so into trying to pick tops and bottoms. But you look at so many of the publicly posted trades on the internet, including the bearish harmonic on the Dow posted in this thread above, and picking tops n bottoms is precisely what so many traders try and doā¦those harmonic tradesā¦pretty slick when they workā¦except they usually donāt work.
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Have you ever felt that the universe is trying to communicate with you by sending several warning signs? Sometimes these signals from unknown sources help you escape serious problems or prevent irreparable damage to your belongings. Not all people have a gift to decode the cryptic messages that the universe is sending. Not necessarily because of its nihilistic and non-superstitious nature, but because of the ālanguage barrierā that stands between him / her and the universe. Once you learn the language of the universe, you will be better armed against the potential pitfalls that await you on your life journey.
The Forex market also has its own language. Operators who refuse to learn suffer substantial financial losses by not being able to recognize their warning signs. One of the key elements of the Forex language is graphic patterns.
Charts are really important if you chose to use technical analysis. There is no two ways about it.
Of course; having a chart reading skill is very much important! In my trading; I focus on the full chart instead of any specific pattern!
That is inaccurate. No news broke out about that level. The Swiss central bank pegged the CHF to the EUR for years. That level became unsustainable for them and they removed it. The market reacted to the information. If the majority of large market participants are bearish, there is virtually no one to buy to close a stop loss and price keeps going down until buyers step in.
Central banks are not in the retail game; their policies are meant to stear economies in a positive direction. Please refrain from making untrue statements. If you donāt know what happened, donāt guess. Youāre teaching novices bad things.
Totally agree with @tonmor here. The markets will do whatever they please. It only matters what you will do. That split hair makes all the difference in the world.
If you wish to become a forex trader, especially a technical analysis trader, then you should use chart patterns in your trading. Why is that?
Because in technical analysis, all of our trading decisions are based on probabilities. So how we determine the probability in the forex market?
This is where chart patterns come in to play. Every chart pattern in the world forex trading has a hidden message. Let take head and shoulders pattern as an example.
The head and shoulders pattern is recognizable for its reversals characteristic. Therefore to get maximum out of this pattern we should use this pattern to trade reversals, right.
Letās say you see an uptrend in EURUSD and eventually price start to form a head and shoulders pattern in the top of the trend. What does this say to you?
Since the head and shoulders pattern is recognized for the trend reversal, we can anticipate a trend reversal in EURUSD.
Like that, you can use any forex chart patterns to determine the market direction based on the probability. That is why the chart pattern is very important when it comes to forex trading.
Read this article, This ultimate guild will teach you about how to trade head and shoulders pattern to capture trend reversals.