Is it a case of the brain seeing what it wants to see? I spent some time this evening quickly skimming through charts looking for examples of head and shoulders - so there is obviously a strong element of selection bias at work. However, some H&S patterns play out quite convincingly - one of my observations is that the H&S really must stand out from the page as "obvious", and "sharp shoulders" bode well. Any comments on H&S in general would be very welcome - chart patterns are a curiosity of mine. http://harryhindsightnews.com/2014/10/26/26-october-2014-head-and-shoulders/
Everything looks good on hindsight. What isn't obvious from hindsight is that the people taking the other side of your trade isn't stupid. If they have to choose between giving you their money or violate the H&S pattern, they will chose the latter. The H&S is good for making lots of demo money. If you were to put real money on it, you are mostly likely coming away blaming yourself for having a bad psychology. Same story you will get for any other magical patterns you will find on charts. Trading isn't about defeating charts. It's about defeating the entity taking the other side of your trade. Such an entity usually have the ability to move prices without money (market maker) or have the money to move the price to wherever they want (banks/institutions). If the entity on the other side of your trade can move prices, would you like to guess where they would move the price to ? Oooops, I just realised you are here to publicise your website. Never mind then.
To follow your logic, perhaps trading contrary to every H&S pattern will yield +ve expectancy? Not everything looks good in hindsight. Some H&S patterns look terrible in hindsight. Others (as pasted above) do look good. Did the entity on the other side of the imaginary trade on those occasions choose to give away their money? Are market makers likely to manipulate price (without money, as you put it) on the daily time-frame? Just open-ended questions for any passer-by to comment on. re: my website. I write bits and pieces for my own interest, and not always about the markets either. I'm not selling anything.
https://www.scribd.com/doc/97919786/Harvard-Study-on-H-S-Patterns For whatever that may be worth. I don't label somebody as stupid for selling to me at the very moment I try to buy due to a H&S signal. There's a million and one reasons the others entities might have for buying X or selling Y at a given moment. Equities have been in a 5 year bull market - has every seller along the way been guilty of stupidity?
No, you are not following my logic. If you go contrary to H&S then the party on the other side of the trade will have to go in the direction of H&S. They are professionals and they have to make a living. They can't afford wasting time going in the wrong direction. If they don't make their monthly targets, they'd get fired. Typically, the market makers should come play with you at 4:30 GMT, after the bank/institution people pack up and go home for the day. Forex is very much a British game. Their working hours matters the most. In after hours, the market belongs to the market maker or their computer programs. The people on the other side of your trade rarely give their money away. Whichever direction they chose to go on any given H&S will be profitable.
The next time a H&S appears, I'll go long, you go short,... the market makers won't know what to do and the universe will implode I guess. 1 of 10 charts pasted above re: Forex 9 of 10 re: stocks
Maybe you go long and short yourself and see if the market maker will make money. In fact, you don't really need a H&S. You can toss a coin for direction and enter the market right this minute and see if you have a 100% chance of losing your money. The market maker is in play as we speak. Their play time continues until the London opening. But monday is more or less always a no news day. So the market maker could play a further 24 hours.
I get that you are commenting on the selection bias trap, but why did you then only display chart patterns with favorable outcomes? Why not post a sample of hundreds of the patterns you find with hs top, regardless of whether the outcome is favorable or not. Then possibly aggregate those statistics and share them. If you haven't already come across his work, Thomas Bulkowski did a lot of that in his books. Andrew Lo did some papers in this area as well. You could expand on that by clarifying what differentiates what you consider to be a 'high quality pattern,' and comparing to typical instances of that pattern (along with the outcome) and see if there is any kind of edge.
This is why I prefer indicators. Whatever their flaws, at least with indicators I don't have to try to pick faces, or in this case, heads and shoulders out of cloud patterns. BTW check out NoDoji's cool avatar.
The head-and-shoulders top is a tenet of classical charting theory, one invented when trading off price action was accomplished using pencils and rulers. It suggests that buying in a bull move is composed of three waves - smart money, dumb money and dumber money. Underneath each of these waves is drawn a 'neck-line', which represents the approximate points at which prices fade off the peak of each wave. Wave 1 consists of smart money and forms the left shoulder. It represents the activity of a syndicate of buyers operating 'in secret', quietly accumulating shares. These buyers have a 'real reason' to pick up shares, one derived from research. These buyers are not momentum investors (as at this point there has not been enough momentum to attract their attention). As such the volume will be higher than normal but not so high that it scares buyers away. In fact, it can't be too high since buyers are only beginning to be attracted to the potential. Wave 2 consists of dumb money and forms the head. These buyers missed the first big move up, the strength of which attracted their attention in the first place. They take advantage of the fade in prices off the peak of the left shoulder and use it to aggressively accumulate shares. This volume is typically the highest. It is during the fade off the top of wave 2 that the syndicates responsible for the first leg up start to unload shares. Since they have been vested in the stock from the beginning, they recognize when things are getting 'frothy' and are scared by the frantic buying of the momentum crowd (who are more concerned with missing 'the next big thing'). It's sort of like the end of a party where all the suits have gone home and you are left with a bunch of milling drunks. Prices fade back to the neckline. Wave 3 consists of dumber money and forms the right shoulder. This last group of buyers missed both waves 1 and 2 and looked at the fade in prices as yet another buying opportunity. These investors consist of both new money and those who entered positions late in the second wave and are thus sitting on paper losses. The volume in wave 3 is typically weaker than that forming the head and the left shoulder. So the rise in prices here is short lived due to the fact that it is even less grounded that the rise that formed the head. Once prices fade off the right shoulder, the formation is confirmed when prices break below the neckline. This is where the short hammer is dropped. Sounds like a lot of work, right? Wrong. This formation is so predictable that when a really good one is found (as you can see, there are a lot of conditions that must prevail for it exist fully) you are looking at a chance to trade with a high degree of success and a low amount of risk.