In love with patterns

Simplified / revised thread starter.

The purpose of this thread is to collect and organize repeating chart patterns. I'd like to focus on those less known patterns that still might occur frequently, for example the spike base pattern or the over-under pattern.

Some patterns do have entries/exits, some just tell whether the bulls or bears are in charge. Not all patterns are tradeable but all hold some valuable information. We're collecting both types here.

The patterns collected here might be new ones or just variation of old ones. This is not a trading journal, and yes, it's easy to be clever after the pattern has completed. But what has happened in the past, will happen again, so we can wait prepared.

Anyone is invited to post their patterns, just please remove the spaghetti from the chart. Make sure the pair, timeframe, date, price etc. are visible. If possible, use straight lines only - support, resistance and trendlines. Describe the pattern, how it can be recognized early. Does it have a trade in it, if yes, when to enter, when to close the trade.

An interesting pattern is the "Sign of weakness" described in this document.
I can't tell a clear entry point, but it definitely occurs when the end of an uptrend is near. A big break (1) that is quickly bought back, price even makes a new high (2) but then drops back below the range (3).
Happened on CAD and EG (attached) recently.

A tradeable intraday pattern, called by some "the turtle": (see attachment)
Price takes out former resistance (1) then closes back below the line (2). Go short, stop above the local high. The opposite: Price takes out former support (3) then closes back above the line (4). Go long, stop below the local low.

Patterns. Forget about patterns unless you want to be outsmarted by a rat.


"Look, for example, at this elegant little experiment. A rat was put in a T-shaped maze with a few morsels of food placed on either the far right or left side of the enclosure. The placement of the food is randomly determined, but the dice is rigged: over the long run, the food was placed on the left side sixty per cent of the time. How did the rat respond? It quickly realized that the left side was more rewarding. As a result, it always went to the left, which resulted in a sixty percent success rate. The rat didn't strive for perfection. It didn't search for a Unified Theory of the T-shaped maze, or try to decipher the disorder. Instead, it accepted the inherent uncertainty of the reward and learned to settle for the best possible alternative.

The experiment was then repeated with Yale undergraduates. Unlike the rat, their swollen brains stubbornly searched for the elusive pattern that determined the placement of the reward. They made predictions and then tried to learn from their prediction errors. The problem was that there was nothing to predict: the randomness was real. Because the students refused to settle for a 60 percent success rate, they ended up with a 52 percent success rate. Although most of the students were convinced they were making progress towards identifying the underlying algorithm, they were actually being outsmarted by a rat."

P64 HOW WE DECIDE

"Think about the stock market, which is a classic example of a "random walk," since the past movement of any particular stock cannot be used to predict its future movement. The inherent randomness of the market was first proposed by the economist Eugene Fama, in the early 1960's. Fama looked at decades of stock market data in order to prove that no amount of knowledge or rational analysis could help you figure out what would happen next. All of the esoteric tools used by investors to make sense of the market were pure nonsense. Wall Street was like a slot machine."

P67 HOW WE DECIDE

People trade charts, not randomizing programs. Another view would be from here :
" You may observe head and shoulders and similar patterns in random data, but you will not observe support and resistance levels. Studies of foreign exchange markets have shown that limit orders are not scattered randomly in the market, but are clustered around support and resistance at round numbers: see Currency Orders and Exchange-Rate Dynamics: Explaining the Success of Technical Analysis by C Osler. "
Thus, charts are made of support/resistance and patterns that react to them; Livermore's RSO notes this.

The process of maturing into this realization is if someone gets past
1) learning traditional patterns (such as at Bulkowski's site),
2) making their own patterns,
3) knowing enough patterns to string them along continuously,
4) connecting a special set of patterns for everywhere,
and 5) getting patterns to appear naturally from indicators that shape them.

Think about it this way, Mate, don't you think someone would have figured it out by now if it could be done? The market is PEOPLE (think Soilent Green).

ROFL! Now THAT's pessimism. Give the guy a chance.

My motive is to prevent him from being outsmarted by a rat.

I'd like to warn the newbies here who are putting too big of an emphasis on patterns with a quote from the Zurich Axioms regarding patterns:

"Chaos is not dangerous until it begins to look orderly."


No offense: like gbpip, I'm just trying to save some from making some change and then losing it all.


Kris Matthews

Thanks for the input. I'll try to reflect to all thoughts.

First, let's nail down a couple of things:

1. Many people trade chart patterns (head-shoulders, wedges etc.) I personally trade chart patterns.

2. There are other, profitable and tradeable patterns than those we find in every book. I've given some examples of tradeable patterns - spike base, over-under, turtle. People do trade these with profits.

3. There are other patterns that can be described in more or less exact way, they might not be actually tradeable but hold some valuable information, an example would be the "Sign of weakness" pattern described in the Wyckoff document.

(I just can't argue on the above - and I'd like to add, I haven't invented any of the above. But they exist.)

4. I understand there are other profitable ways of trading, apart from patterns. Eg. box breakout, buy-at-noon-and-sell-at-two, etc. Frankly, I'm not interested in them.

So I really don't get how the rats come here. All I wanted, if you have observed a pattern like the spike base or the turtle, come out with it. Something makes me think, you haven't.

"the past movement of any particular stock cannot be used to predict its future movement"

I think many on these forums would disagree with this sentence. Me too. But as said before, I haven't started this thread to discuss market theory or who thinks what makes prices move. Let's talk chart patterns.

Hmm, that rat with the 60 % made me think. What if I have ~62 % success rate on 1.1k trades this year? Not 25 trades, not 100 trades but eleven hundred trades. More than a dozen of them every week. But again, let's talk patterns...

I see patterns as a sub-set to pivots and S/R levels.

If you look at a pattern, one such as the famous "head n shoulder pattern" it conforms itself to S/R levels if the chart has been lined for Pivots and S/R levels.

Just because you've obviously been outsmarted by a rat, doesn't mean we all have. Try telling Igrok that's he been outsmarted by a rat with his (high probability) pattern trading. Now that I'd like to see

And yet another rant on the "randomness" argument without first defining random

Each to their own, just don't push your beliefs on others like a Jehovah's Witness banging on my door first thing on a Sunday morning...

The market is the collective actions of people.

I say forget about set patterns. Focus on the strength/weakness of a move. Ask yourself, "What does the weakness of this move mean (where should it go at a minimum, where should it NOT go at a maximum)? Have I been patient and let this move play out yet?". If your right about a turning point you will be in the green in no time. Give it a little room to get away from your entry and look to set stop to b/e. Its that simple and that hard.

I don't understand how the rat analogy applies to trading. The rat identified the bias, didn't get too cute and maximised his reward by sticking with the higher probability left side. The humans tried to find a pattern that was not there and as a result failed to maximise the reward. That's fair enough, trying to find a pattern where none exists obviously isn't going to benefit you as a trader - but just the same as the rat, you can maximise your reward by identifying the statistical tendencies and trading with them. As Spekitox was trying to point out before the efficient market theorists gatecrashed the party, some patterns do have a statistical tendency and it is possible to profit from them in the long run if you play them intelligently and consistently.

Here's an analogy right back at the Random Walk cultists - A market efficiency theorist is walking down the street and sees a hundred dollar bill lying on the pavement. The market efficiency theorist however doesn't pick it up, in fact he doesn't even believe it exists because according to his world view, if it did, it would already be gone.

I especially take umbrage to the notion that tendencies in markets don't exist because 'the market is people' (whatever that means). The world (which is inhabited by lots of people) is full of an infinite amount of inefficiencies and opportunities and the financial markets are absolutely no different. You trade what you feel by all means, but don't try to force your world view down the throats of others in the name of education.

Not pushing, Mate. Take 'em or leave 'em.

There's a difference between sharing one's views and forcing them upon someone. You are free to worship at the alter of your choice, Mate.

Thought that only happened in Canada.

Thanks for the comments. Will update the thread starter to avoid unnecessary dancing around market theory, ways of trading etc. Birdt thanks for putting it so simple:

"some patterns do have a statistical tendency and it is possible to profit from them in the long run if you play them intelligently and consistently"

Bebop I agree dynamics of price movements do have significance, just not alone but in connection with PA.

Jhig if you could please upload a chart to show what you mean (HS and SR)

Gbppip I absolutely respect your views, your ways of trading, your knowledge etc. Question is, whether you admit there are a million (or more) profitable ways of trading - if you do, you won't try to convince anyone that PA is random walk, will you. If you don't find any use in naked chart patterns, I kindly ask you to frequent other threads that might be of more interest for you.

From now on, I'll concentrate on patterns, unlikely to reflect to any other subject. Thanks for understanding.

Nice thread, I enjoy it.

There is a pattern I learned from Don Miller, it's called "morning after the trend"(maybe a lot of people have known it): if the overnight market is in trend, then the morning most probably in a shake mode" so it's better to fade the extreme price action during this session." He is a ES guy, but I found it can also be applied in forex market. Esp those pairs with high correlation with equity market.

Looking forward to your further findings, and wish you luck!

regards,
z

I am very fond of trading patterns, I cherish them with great affection. I trade them daily. Have studied them for years in stocks and FX. I prefer to find the pattern for each "today". Patterns are constants. They are also magnetic, mind loves to find them and they love to find the mind. I love it when they go long term.

You might enjoy a visit to my blog and see the magic of FX patterns.

Nice to see some pattern maniac fellows.
Finding patterns is a very slow process (at least for me), need many time and need to see them a couple of times to be able to recognize & describe.

So this won't be the most updated thread I guess, but hey Rome wasn't built in a day.

Here is another one codenamed the bullish G
Observed mostly on GBP, H1 and H4.

http://tozsde.hu.tl/pic/chart0514guh1.jpg

http://tozsde.hu.tl/pic/chart0514ujm15.jpg

http://tozsde.hu.tl/pic/chart0627guh1.jpg

http://tozsde.hu.tl/pic/chart0611guh4.jpg

http://tozsde.hu.tl/pic/folytat2.jpg

It's still work in progress, but I reckon breakout of the upper horizontal line can be bought, with stop under the lower horz. line.

The "G" looks valid if there is a decline in prices, then a very sharp rise followed by a horz. channel.

Problem: patterns come and patterns go, like habits of the market. I've not seen bullish G-s recently.