Why a chart pattern fails? | Forex Factory

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Why a chart pattern fails?

  • #1
  • First Post: Nov 3, 2009 9:39pm Nov 3, 2009 9:39pm
Please leave your opinion on why a chart pattern fails?
Also please suggest a system with a consistent failure rate of above 95%.
luv to loose.....
  • #2
  • Nov 3, 2009 10:45pm Nov 3, 2009 10:45pm
a better question is probably 'why do chart patterns work'... if, in fact they even ever do.

systems that fail? i'd take a guess that you could pick any system posted anywhere and you would find it would fail, even if it's working for it's creator.

i'm no guru so this is just another noobs take on things.
Congratulations ScalaFX for coming out of the closet!
  • #3
  • Nov 3, 2009 11:00pm Nov 3, 2009 11:00pm
If all patterns fail , then we need to do the exactly opposite to what the system signals to be profitable consistently, but IMO a successful failure system is a rare commodity. Views and Counter views are welcome.
luv to loose.....
  • #4
  • Nov 3, 2009 11:17pm Nov 3, 2009 11:17pm
Quoting novicetrader
Please leave your opinion on why a chart pattern fails?
Also please suggest a system with a consistent failure rate of above 95%.
chart patterns fail because they are supposed to fail sometimes. If they did not, then the holy grail would exist. Chart patterns in and of themselves would be lucky to give more than 50% probability of one direction over the other. They are usefull in context of price action and market sentiment They require trader discretion in trading them. You need to think in terms of probabilities and gather all the information you can that supports a better probability of one direction over the other. That is why trading is difficult - its actually hard work. Show me a chart pattern that wins even just 60% of the time and Ill show you an easy way to make money trading. Unfortunately I haven't found anything as reliable as that in my 4 years of searching.
BTC Return This Year: na
  • #5
  • Nov 3, 2009 11:34pm Nov 3, 2009 11:34pm
Quoting nubcake
a better question is probably 'why do chart patterns work'... if, in fact they even ever do.
The one and only correct answer.
The breaking of a wave cannot explain the whole sea.
  • #6
  • Edited 11:58pm Nov 3, 2009 11:48pm | Edited 11:58pm
Chart patterns fail because the professionals realize most people are looking at the same charts, with the same basic settings (RSI - 14, MACD - 12,26,9).

Most importantly, it's about net order flow that determines whether price moves up or not, within the timeframe the trader is looking at.

If only there is a system that produces 95% losers with a high negative expectancy. Perhaps only brokers will have this advantage from their consistently losing clients?
  • #7
  • Nov 4, 2009 12:03am Nov 4, 2009 12:03am
Quoting novicetrader
Please leave your opinion on why a chart pattern fails?
Also please suggest a system with a consistent failure rate of above 95%.
You want to trade the opposite to the signals from the chart pattern?
  • #8
  • Nov 4, 2009 12:29am Nov 4, 2009 12:29am
always be fading.....this nugget means a lot for pros......I am just trying to understand why they fade the novices like me? also if a pattern is there, its there for all to see, and act accordingly, say a double top, everyone would short sell, then why it fails.....again there are failed failures, and so on...

say a triangle in geometry, even a kindergarten kid would able to identify a triangle, but try to find a triangle in a price chart, the kid will laugh his heart out......
luv to loose.....
  • #9
  • Nov 4, 2009 12:33am Nov 4, 2009 12:33am
Quoting M.A.C.Doug
chart patterns fail because they are supposed to fail sometimes. If they did not, then the holy grail would exist. Chart patterns in and of themselves would be lucky to give more than 50% probability of one direction over the other. They are usefull in context of price action and market sentiment They...
Thanks, good one.......so it seems the failure to success ratio is regressing to the mean....ok, then patterns are supposed to fail.....why? the mechanism behind it, even a single bar is enough to give a pattern a tailspin....
luv to loose.....
  • #10
  • Nov 4, 2009 12:35am Nov 4, 2009 12:35am
The pattern doesn't fail, after 10000 occurences usually 50% gave good signals and the other 50% failed. Not better than a coin toss.
  • #11
  • Nov 4, 2009 1:01am Nov 4, 2009 1:01am
Quoting novicetrader
always be fading.....this nugget means a lot for pros......I am just trying to understand why they fade the novices like me? also if a pattern is there, its there for all to see, and act accordingly, say a double top, everyone would short sell, then why it fails.....again there are failed failures, and so on...

say a triangle in geometry, even a kindergarten kid would able to identify a triangle, but try to find a triangle in a price chart, the kid will laugh his heart out......
Professionals don't fade novices. They just trade differently without watching what novices are doing.

A chart pattern only shows what price has done up to the present moment. There are a lot of massive currency moves that aren't based on speculation. If a company needs to repatriate funds, it won't matter if a double top might be forming. In other words, there are many factors driving the market besides short term speculators watching for patterns on short term charts.

Even if the market was made up entirely of speculators, they would have different goals and time horizons. If someone is building a position over a period of months, or years, they won't be paying much attention to hammer on a one hour chart.

It's safe to say Steve Nison is the "Candlestick King". Even he doesn't endorse trading candle patterns alone and teaches how to use them in conjunction with other analysis.
  • #12
  • Nov 4, 2009 4:37am Nov 4, 2009 4:37am
Here is a link to a old article, its about a research done by MIT on common chart patterns. Anybody has the actual research paper ? pleas share with me.

http://www.businessweek.com/2000/00_16/b3677113.htm

I have come across many papers discrediting TA, this one offers a different light.
  • #13
  • Nov 4, 2009 9:54am Nov 4, 2009 9:54am
Quoting billflet
Professionals don't fade novices....
IMO, that differently encompasses the whole arena of fading, etc...

Candlesticks are just another way of representation of price behavior, so also bars etc....moreover Nison only made the candlesticks more popular in west, which was in existence long before in the east, Japan.
Trading is not based on only chart patterns , as u rightly said it had to be used in conjunction with many others like the oscillators, volume, etc etc....but still if one knows the psychology behind a failed pattern he can trade better, thats why I asked the question, with so many pros around I am sure they will share their real trading experience....
Regards
trade better.
luv to loose.....
  • #14
  • Nov 4, 2009 10:21am Nov 4, 2009 10:21am
Quoting novicetrader
If all patterns fail , then we need to do the exactly opposite to what the system signals to be profitable consistently, but IMO a successful failure system is a rare commodity. Views and Counter views are welcome.
Only if the system is purely based on signals and does nothing else, if it is also doing stoplosses etc it is hard to reverse signals and be profitable.

For example, if i build a system that hase a take profit of 100Pips and set a stoploss at 1 pip, it will fail, however if you reverse the signal (going long instead of short) it will still fail.
  • #15
  • Nov 4, 2009 10:25am Nov 4, 2009 10:25am
This may sound like semantics but patterns don't "fail". Rather, your preconceived expectations aren't met. The distinction is subtle but it underscores the crucial role that psychology and human biases play in the markets.

My answer to the original question is one word...chaos.
  • #16
  • Nov 4, 2009 10:53am Nov 4, 2009 10:53am
the market doesn't give a hoot about patterns, its pure illusion. Like any market its about demand and supply - not patterns.

This is the best thread to learn patterns on FF:
http://www.forexfactory.com/showthread.php?t=185027
  • #17
  • Nov 4, 2009 10:58am Nov 4, 2009 10:58am
Quoting novicetrader
IMO, that differently encompasses the whole arena of fading, etc...

Candlesticks are just another way of representation of price behavior, so also bars etc....moreover Nison only made the candlesticks more popular in west, which was in existence long before in the east, Japan.
Trading is not based on only chart patterns , as u rightly said it had to be used in conjunction with many others like the oscillators, volume, etc etc....but still if one knows the psychology behind a failed pattern he can trade better, thats why I asked the question,...



True enough. But Nison not only made them "more popular" in the west, he introduced them to the west and is considered to be the western authority on them.
I'm not sure what you mean by the "psychology behind a failed pattern". I was merely responding to your original question. Can you give an example of it?

For one thing, everybody sees and quantifies patterns differently. Throw a few charts up and ask us all to pick out flags, triangles,double tops and bottoms, etc. Watch the debate that ensues. We would argue over most patterns and agree on a few. But even on the few we agreed on, we would have varying levels of faith in the pattern depending on our overall bias and faith in patterns in general. Judging from some of the responses so far, many who could identify the patterns, still wouldn't trade them.

95% failure system: I could invent one in a few seconds, but it wouldn't be something you could reverse and profit from. You would be hard pressed to find such a thing. That type of consistency is rare in an unpredictable situation, even if the goal is failure. Of course you could open and close trades immediately and lose the spread each time. I know that's not what you're looking for, though, there is a lesson in it.

All the best
Bill
  • #18
  • Nov 4, 2009 11:12am Nov 4, 2009 11:12am
Quoting novicetrader
If all patterns fail , then we need to do the exactly opposite.
Even if that was the case, most traders will still find a way to loose money. You can still be profitable with patters that only work 20-30% of the time... As Mr. Soros has said before "It doesn't matter how often you are right or wrong - it only matters how much you make when you are right"
That's the reason why patterns have to fail.
  • #19
  • Nov 4, 2009 11:17am Nov 4, 2009 11:17am
Quoting Porkpie
http://www.forexfactory.com/showthread.php?t=185027
  • #20
  • Nov 4, 2009 12:26pm Nov 4, 2009 12:26pm
Focusing on patterns and why they work or why they fail is generally the wrong path for a novice trader. All I will say is that the more obvious the pattern the more traders with real money (to create order flow) will see them too, thus the more successful they are. Patterns fail because trading is a probabilities game. There are no certainties in this arena.

My suggestion is that you focus on risk/reward, money management and understanding your per trade expectancy. When you get all that in order, you'll realize that your edge has less to do with which patterns fail and which ones work, and more to do with your systematic approach to trading your system and your personal psychology. That's where the true edge is.
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