Howdy! One thing ive been struggling to grasp the concept of - PATTERNS ans more specifically the psychology behind them. Lets take slim-jim breakout or a triangle breakout doesnt matter. Its nearing its top, ADX low, volume low, narrow range... Now, internet, software, knowledge etc have become widely available and more and more people are watching that situation I described above. What I dont understand is if that many people are waiting to jump in and they DO start jumping in, how is it possible for the pattern to fail? The more people that watch, the more people jump in. The more people that jump in, the more the stock will break out. How can it then fail? Also one other thing Ive noticed in the last couple of months, you cant put stpops in any of the "rational" laces anymore as the stocks seem to break out just enough to trigger stops and fall back into range. Also HOW CAN THAT BE? If it triggers stops (say on the upper end) doesnt that mean BUYING and thus beginning of an UPTREND? As small as it is but still an upmove... Its kinda hard to realize that... or is it just me ?! THX for your replys, Alex
Perhaps the assumption that *everyone* is watching your intraday charts is wrong. Another assumption is that even if *everyone* is watching, they may not all have the same strategy. If all of us do have the same (simple) strategy, the stock prices will not move at all, or trend towards 0 or infinity. There are some that calculate the value of a company, for example, and trade when the market price is far the their calculation.
Thats is exactly the reason why patterns fail: when a lot of people jump in, who is left to buy? When there is no more buyer, the stock/index etc. will fall. Techniques and markets are always changing, when a technique, such as patterns, becomes widely known and widely watched, it will start to fail. Another reason is that - especially intraday - stopps will be triggered by large speculators: when a stock rises, they will push it down until a lot of sell orders(stopp losses) is triggered. They buy and the stock will continue to rise. This will be done only if the stock has potential to rise. Regards Bernd Kuerbs
Unfortuneately we traders, (myself included) fail to realize that there is a segment of traders who "fade" all these commonly recognized signals.i.e.- they fade the crowd. Alan Farley commonly talks about using this technique
If someone has some volume to sell they can wait until one of the upside patterns triggers and then unload their shares on all the pattern followers without causing the price to fall (thereby getting less for their shares). As soon as the buyers give up on the pattern and the selling pressure from their volume starts driving the price down they can stop selling, wait for another apparent breakout to occur, and then start selling again. I suspect that if there are no large sellers waiting, then the pattern will work. Don't know how to tell though, maybe a volume surge at the breakpoint with little or no corresponding price increase would indicate the presence of a large seller.
i agree with all of the posted responses and will try to add some helpful info: one thing to consider is time frame. different traders use different time frames. even in our daytrader world, we have 1 min, 5min and 30min chart readers...so what might appear to be an upside breakout on a 5min...could be hitting resistance on a 30minute chart. also, here's more about volume. this comes from a manual given to rookie traders at a very large global firm. "Volume is also an important signal as to when a reversal pattern or a continuation(consolidation) pattern has been completed. You will note that volume increases as the pattern breaks out." The manual goes on with specific chart examples. One charting tool that has helped me was plotting the moving average of volume. I typically trade of a 5minute chart, checking the daily, and on the 5min chart I have a Mov avg on volume...when looking at a pattern breakout, I watch for significant break of volume to confirm. Peace
One reason that I think patterns are failing is that the expectation of profit has decreased therefor forcing more traders to sell earlier into the breakout. A few years ago traders would be expecting a .50 clip on an AMAT breakout. However, some traders decided that they would ensure that they got out while there was still buying to sell into and therefor took a sure .40 profit. This meant that there was some selling pressure at .40 and .50 profit was harder to obtain. The people that were looking for a .50 profit realized that it was harder to obtain and also moved there exit down to .40. The people that were the first to move to .40 now realize that .40 is harder to get and move down to a sure .30 and so on until the profit margin is so low that the only people that make money are the ones with size that will sell with a .10 profit. Therefor the breakouts are failing as the selling pressure is starting at .10 and causing panic selling from the traders who are looking for a larger breakout. This is just my humble opinion and has no scientific proof.
You have to be careful about that, just look at the picture: Since yesterday there was forming a triangle, might be a continuation pattern (descending triangle in an uptrend) or a top-formation. Volume has been comparatively low today, so the market went for the stops of the longs just below the lower limit of the triangle. This triggered a lot of stop-loss sells, which generated high tickvolume and high volume. Not the time to initiate a short position: the market then went up rapidly because the guys causing the downmove bought back their contracts and some. Some bars later the upper limit of the trading range has been passed (not shown) and the stop-loss orders of the shorts been triggered. not the time to initiate a long position because right now the market is aiming for the lower limit of the trading range (it is obvious now that it is a trading range, but how long?). Someone who only position-trades in a daily timeframe may ignore all this, but they have difficult times too. regards Bernd Kuerbs
The explanations provided are good, ie not enough buyers, sellers waiting to unload, more profit-taking, but they miss the real issue. Daytraders flourished during the bubble market when they could get in front of massive mutual fund buy campaigns. The whole point of these buys was to drive the market up so their existing holdings would show appreciated prices, so the funds didn't care how sloppy the buying was. Now they are selling and you can bet they do care what prices they are getting so they are more careful.