Why a chart pattern fails?

The problem with threads like this is that it all ends up in a battle of semantics. One man's price action is another man's order flow.

Over time I've gone from 5-min charts with little dots telling me when to go long/short to J16 price action studies to where I am now. I came to the conclusion that all I needed was to define key levels of Support/Resistance and then learn how to play the market around those levels.

During the course of this journey I became a disciple of the 'Trade the Trend' cult to the point where I now sit and watch 100s of retracement pips go by whilst waiting for a chance to go long again. (I trade EURUSD, almost exclusively, on the live account.)

Initially I would only trade J16 price patterns which confirmed - or seemed to confirm - the continuation of the trend I had determined. In that early stage of understanding S/R I've seen Pinbars succeed and fail. I've seen Outside Bars succeed and fail; the same thing with every other pattern that you can imagine. Although, to be honest, I haven't traded H&S, triangles etc to any great extent as I came to the conclusion that nothing is cast in stone and the simpler I can keep my trading the better the chance of taking money off my broker, or whoever is taking the other side.

In the same vein, I have no indicators on my charts other than my horizontal lines and the OHLC bars (no doubt some pedantic folk would class these as indicators, but you know what I mean).

During this most recent period I've slid back into short-term mode and this was as a result of reading the Order Flow thread. At this time I don't have access to L2 information and I'm not sure I want to go back and spend another year re-learning a new facet to my decision-making process. All I try and do on the short-term charts is to see if I can get a feel for how the market reacts to my S/R levels without confusing things by trying to see if there's an ascending triangle, falling wedge etc.

Trading can be as complicated or as simple as you want it to be and once enough people have told me that no pattern is worth diddly-squat as far as where price is going next I take that on board and move on.

No doubt that in the futures market, where you have volume information that has some validity, there are ways of confirming pattern breakouts or failures using volume confirmation but for the vast majority of traders on forums like these patterns have less value.

From all the books I've read, no professional takes a trade simply on the break of a pattern; they will stand aside and look for other signs that the direction has been confirmed. That, I think, is why many new traders (I'm not including the OP in that comment) get stuffed by trying to trade these things. By their nature they haven't developed the ability to stand aside and wait to see what is actually happening; they just jump aboard the first bar that clears the consolidation area. Maybe that was my trouble as well!

Nevertheless, I still feel that all chart patterns can be distilled into one simple fact; price is responding to an earlier S/R area and will eventually break out of it. My job is to try and find the best place for me to get in the trade and I haven't found any pattern that helps me better than my own eyes.

Porkpie and Peter

Excellent posts. I have to agree. When patterns are used successfully in conjunction with "something else', it's probably the "something else" at the root of success. There are too many market participants with too many motives creating the patterns.
Patterns could have a place though. Consistency is important. Testing a method using the same pattern for entry, over and over would create consistency, even if it was only consistently random--like entering on a coin toss.
I encourage novicetrader to continue his quest though. Most of my best discoveries were found while I was looking for something else.


Here is an older post that nicely illustrates patterns coming from nowhere.
http://www.forexfactory.com/showpost...16&postcount=1

I can give you a 100% Holy grail for killing your account and that is---> killed by the spread!

Buy/sell as fast as possible and your done...

you mean programmed trading/ high frequency trading buddy........i understand even a latency of few milliseconds is a loss, but what can a poor individual trader like me can do , only I can try at best to execute as fast as I can. Thanks for the insight, the spreads, slippages etc are big challenges for a trader.

I believe the real question should be "Why do classical chart patterns fail?". I have found that there are certain chart patterns that work well consistently but they can't be placed in a standard chart pattern (cup and handle, ascending/descinding triangle,ABCD). You have to dig deep to find them.

What do you mean by fail? I am amused when traders talk about a "failed" breakout when price only breakouts by a handful of pips. Price did breakout. There was no "failure". Price cannot "fail". Only the trader can fail.

Yes - you need to specify success and failure criteria before being able to answer the question.

I agree the with previous posts that said that the pattern is the result of order flow. Its all about support (areas where there has been more demand than supply) and resistance (the opposite). Whatever happens between these areas is more or less random.

Toss a coin to decide whether to go long or short. Have a stop loss at 5 pips and a take-profit order at 95.

All different patterns have their own criteria for failure and success, lets take a head and shoulders pattern for example, once price goes below neck line of shoulders the target is the distance between the head and neckline , now if the price pulls back again above the neckline, then its failure, again when it breaks out below the neckline its a failed failure .....hope I am clear. Some people are skeptical about why the term "failure" , yes price fails to attain the standard target price of a pattern. So the failure of a chart pattern means negating the price series in time of a particular formation type, when normally it should have satisfied the standard target of a pattern....

Please see that the outcome of tossing a coin has the probability of .5 ( getting either a head or tail ), not .95 unless the coin is biased.....I hope I am not wrong...

Although chaos is often thought to refer to randomness and lack of order, it is more accurate to think of it as an apparent randomness that results from complex systems and interactions among systems.

Its not preconceived expectations, but well calculated values for different patterns, if not a point at least an area. Yes bias will be there but with the framework of a method in hand it can be minimized.And patterns do fail, thats another question that - was there a pattern in the first place?

I agree with opie999 on this. Chaos is the operative word. Having fought with the forex market off and on for more than three years and trying one strategy after another in search of something that worked, the only thing that emerged from the effort was the realization that all technical trading systems were subject to chaos and therefore unable to predict future market movement reliably. Therefore all purely technical strategies fail more or less equally.

All technical strategies are based on chart history--patterns and such--and as a result can only chase the market. Patterns "fail" often because they don't emerge the way you want them to. What may look like an emerging chart pattern may at the last moment turn into an altogether different pattern and only after the market has moved definitively is the pattern set in stone. Of course that usually happens too late to be of any use to a trader.

I can't count how many times I thought a reversal was going to occur only for the price to continue moving. Suddenly I was staring at a whole different chart pattern--and one that was usually at odds with what I was expecting.

There are ways to try to deal with chaos, but it generally means reducing risk exposure to the point that overall gains are small if there are any at all. Believe me, I've tried just about everything you can try and all roads lead back to the same place. Try different strategies, different time frames--you'll eventually know what I'm talking about. The only exception might be the influence of fundamental information (which may be entirely valid) ... or luck. If you rely on luck, though, then forex trading is equal to gambling, and the same as with gambling, the house always wins. You might get lucky once or twice, but if you keep gambling the odds will catch up. Sooner or later the house will eventually win.

Experience is an ongoing process, its dynamic in nature......thanks for sharing your real life trading experience.....

Right, but the failure rate would be significantly higher than 50% because of market noise, i.e. getting constantly stopped out with a 5 pip stop. If you flipped a coin and took a position and then the market immediately moved 95 pips in one direction, your failure rate would be 50%.

A common fallacy is to say "If I have a failing strategy I should do the opposite when I get a trade signal." The reality is that the opposite thing is TO NOT ENTER A TRADE AT ALL. The real point of opposition in this is entering a trade versus not entering a trade. This is because of chaos. It doesn't matter what choice you make once you enter a trade; just the very act of entering a trade subjects you to chaos. In essence, once you enter a trade the odds are 50/50 that the market will go up or down from your entry point. Some might say "oh, that's not true. if the market is trending it is more likely to go one way or the other." That may be true to a point, but you cannot know if the trend will hold. And then this begs the question of what the target is and how long the trade should remain open.

What becomes crucial now is the chaos not only of the market movement, but chaos with respect to profit and loss targets. The one thing that all traders would probably consider to be the biggest problem with trading is this: when to get in and when to get out. Many trades fail to reach sought after profit targets and then turn into a loss. Some trades that you give up on for a loss could have turned profitable if you'd waited a little longer. This is the bane of a trader's existence--a cosmic constant seemingly set up to push emotional buttons and taunt you into doing something stupid.

I believe it's all part of chaos--the same thing observed in the chaotic movement of a flock of birds or the movement of cars on a congested freeway. In other words, there may be no way around it. And when it comes to trading, the only escape may be help of some kind from fundamental market information.

Or you could try your hand at luck.

If your intention is to predict the future then all systems FAIL. TA won't predict future. It's a mistake to believe it can. Our minds are designed to see patterns and we lock into an 'emerging' refusing to see what is really happening. Being in the 'Here and Now' is the only way to attempt interpretation of a chart. As Johnedoe says'
Left is history. Right is mystery

It's not a trading book, but read Eckhart Tolle's "The Power of Now". An enlightening read.

I love threads like this and all this "patterns doesn't work". I would be scared to death if the majority of fx participants could actually apply patterns correctly and profit from them, especially here on FF.

Kudos to all for sharing their opinions, it opens the door to new insights for me...thank you all.........

........here comes the application part where few only tread......entry by invitation only......

If this discussion is of any help for us in trading in the real world, then continue posting in the thread, else I request moderators/Admin to close the thread....