Otherwise called a triangle and broadening pattern. These are both patterns that reveal indecision and uncertainty in the market, and may result in a continuation or reversal. I have never read an explanation of the trader mindset that results in diminishing pushes or expanding pushes around a certain level that results in these patterns. Any insight would be appreciated.
You've pretty much explained the phenomena behind the hinge pattern. It is a period of extreme indecision. Prices could break out to the upside or the downside. That's really all there is to it.
Actually that's not quite all there is to it. A trading range is also a period of indecision, as is congestion. A hinge is a manifestation of the particular kinds of efforts made to resolve that indecision. If the trader understands auction market theory, he will understand why buyers and sellers are approaching, perhaps kicking and screaming, a mutually agreed-upon mean and coincidentally forming a "hinge".
1) With the triangle pattern, you expect buy-stop orders to accumulate above the upper trend line. You expect sell-stop orders to accumulate below the lower trend line. 2) Algo-traders can be tempted to "probe" or "sniff out" resting orders that might be outside of the triangle/wedge and then cause a quick reversal back into the triangle/wedge. 3) The broadening pattern can produce "false shakeouts" by trading beyond the low or high of a previous trend while still remaining within the "expanding-wedge/cone/bugle". 4) "Conventional wisdom" says to expect the eventual breakout from the pattern to continue and be in the direction of the trend that preceded the pattern. That's what makes it a continuation pattern.... some of the time
Actually, a trading range and congestion are EQUILIBRIUM. Both buyers and sellers agree current price/price-range is fair. Indecision as you call it, is ANTICIPATION of where prices MAY be heading. Anticipation involves rational or irrational reasoning, or guessing. There is no indecision when anticipating. Price movement (tradable or not) is NOT a requirement for auction. In fact, argument can be rightfully made that all price movement is a means of seeking equilibrium... discovery of an agreed upon fair value to both buyer and seller, no matter what pricing model type. Once equilibrium is found "why" becomes the ultimate actionable to displace and/or negate the existing agreement of value. As far as trading is concerned, why is seen through volume, with or without (tradable) price movement.
Does anyone know what success rate these things have? Once I read a paper that argued the profitability of such patterns cannot cover expenses.
For traders in that particular situation, it should make sense to just "lower their cost (expenses) of trading". Seems like an obvious concept that many none trading related business do to be profitable via making sure their income > expenses