Well, let's look more into a specific instance to develop a more comprehensive theory. For example, a failed breakout occurs where a green candle tip breaks through a resistance level, however a full candle does not form and instead price falls back under the resistance level with a full red candle forming below the resistance level. This is a basic failed breakout. Using another indicator one could then have more technical bias to place the short. At this time the reason for price to continue to move in the direction of our trade would be that the longs who were long the break out are now trapped. As they get stopped out, the downside movement is sustained. As you rightly point out we don't know when or where the downside movement will finally come to rest and possibly reverse. However, in most instances it will travel back down to the 1st support level. Now we also know these trades do not have a 100% win ratio. So to control our risk and make a profit over time we can initiate the following trade management rules of your choice depending on your trading plan. Trade Management (note you can pick any one of these to use): 1) You could use a rising stop loss that is brought up while you are in the trade. 2) You could go for a double reward vs risk but tailored to the chart. For example, if price never made it past the low of the day, you may want to decrease your target to stay within that range. 3) Look at %. If your win rate is 65% or higher, then an even risk vs reward is fine. So when using even risk vs reward we can then target the 1st support level and then when hit, we can be done with the trade. 4) You could be using multiple contracts where you take some off or add some to the trade like Ammo does in his ES trading. As the trade goes against him he might average in, and then if it continues to go against him he might take some off to add back on later. For him adding contracts to a losing trade works since his win rate is higher and averaging in maintains his higher win rate. Personally, if I know I got in at the right point and did not make a mistake I don't want to change my stop location or add more contracts. However, if price approaches your stop location and you add another contract, you could still take both off at this location.
All it is, is orders and price; that’s it, nothing more, nothing less.All chart patterns are is a way to attempt to graphically represent this to provide some meaning.
To determine if the market pattern is coincidental or valid, ones need to just conduct statistical analysis over a large enough sample size. To gain an edge (edge = profitable trade setup), a pattern just needs just a 55% win ratio when combined with trade management. As noted I don't just then trade the pattern. We then want to look to determine if the market is currently in range or in a trend and where the pattern is occurring in relationship to these items. If for example, price is moving sideways I would not trade. Also, I normally want confirmation from another indicator before started the trade. If one indicator is suggesting price will go in a different direction then what the pattern predicts, then for optimal risk mitigation, I would suggest skipping the trade.
What I try to achieve is clarify things in exactly the fashion you just presented: do TA patterns only show the past actions of market participants or can they also objectively predict their likely FUTURE actions... The question lies in the explanation of their motives during those past moves. For example if we see someone came to a restaurant, sat at the table and is talking to a waiter, chances are high he will eat something soon, right? Not 100%, but much higher than the opposite outcome. It would be extremely interesting to create the same sort of explanations to market actions.
I have somewhere a paper on the propensity for markets to continue in the current direction, which I posted in reply to Surf a while back. I think we can agree on the likelihood of something happening in the markets, the problem is purely in the timing. Some months ago a question was asked in the ACD thread about USD.JPY and I offered the view that long was the logical direction, given the monetary and fiscal actions happening and planned. At that time it was 103 or so, went down to the 102 level for quite some time, now around the 105. I was right, but you would need deep pockets and strong will to profit from that. I would be surprised if Soros is not profiting from that, but I don't have his deep pockets so I only got the odd nibble.
And this where the skill of trading comes in When wrong: Weak of opinion Accepting of small losers Fleet of foot and able to flip a position – "when" appropriate (and when not.., simply get out and not allow the loss to gnaw at Ya) When right: Stick to yer guns till the move shows signs of ending When nothing showing: Sit on the ole hands and observe till it does All the while: Maintaining a clear.., dispassionate.., level..., and simple - mental state Following a process..., and to hell with the results ============================== And try as one might..., one will never get around this ============================ Easy as pie - it is RN
I use the classic patterns for locating roadworthy vehicles, vehicles that are more likely than not to get me where I want to go. I use the environment in my time frame (intraday pit session) as a roadmap for determining if there's a place worth going and if my vehicle is more likely than not to get there before encountering serious obstacles. Sometimes obstacles arise that weren't on the map and I may decide to stop or reverse the other way to avoid serious damage. When I see a classic pattern in an environment that tells me the road looks well-paved and it's unlikely any obstacles will arise for at least the next N ticks of travel, I go for a drive. I know that in a strong downtrend if the pullback is shallow and there's a key level like that daily lower trend line in CL Friday around 92.90, I can very likely drive a long way without obstacles until that point. And every set of eyes looking at the chart sees the same thing: 92.90 is a great value with low risk for buyers, so if I want to buy I'll wait for that bargain price, if I can't stomach that kind of adverse excursion on my long positions I'll sell long before then, and if I want to make money to the short side, I'll sell every pullback until price gets there.