Pattern trading theory suggests that candlestick formations have a psychological basis. For example, a breakdown of a triangle or a parallelogram is a sharp surge in sales or purchases after consolidation. However, many patterns do not work. And by the way, this is often written in the comments under the reviews. Why patterns don’t work and how to “make” them work – in this review.
Examples of non-working patterns
There is a clear reversal in a relatively strong uptrend: small candles after a long candle, doji and a bearish engulfing pattern. Nevertheless, the reversal turned out to be a small correction, after which the uptrend resumed.
A strong support level at which a doji appears, a breakout of a trend line by a large candlestick upwards is a clear signal for an uptrend. However, after the breakdown, a new pattern appears, crossing out the signal of the previous one. The support level is eventually broken by an ongoing downtrend.
Why don’t patterns work? Why should they work in principle if a trader should work? It’s like being offended by a hammer that doesn’t hammer nails on its own. A classic mistake is to assume that the appearance of a pattern is guaranteed to be a signal, ignoring other factors.
A pattern is something visual that should provoke a trader into analysis, but not the signal itself, which determines the entry point. The pattern theory itself is misleading. Instead of analyzing the situation when a pattern is found, the theory gives the trader a hard line: “Such a pattern has formed – buy, and if such a pattern is formed – sell.” This is a gross mistake: a pattern is an accumulation of historical data built in a certain form, which does not predict the price movement in any way.
Why trading patterns don’t work:
- Identification error. If you are familiar with at least 15 most popular patterns, then you have probably paid attention to the following points. Firstly, in theoretical reviews, pictures are inserted, not screenshots. And this is logical – you need to try hard to catch a “butterfly” or a “cup with a handle” (or have a rich imagination, or review several years of the schedule). Secondly, the patterns turn into one another: a pin bar turns into three crows or soldiers. And it happens that patterns contradict each other.
- wishful thinking. For example, an attempt to see a pattern where there is none. How the eye “trains” is well illustrated by the example of a private trader, described in the article: “Should I trust trading signals:. Trader’s History.
- Stronger effect of other factors. Particularly the fundamentals.
Have you noticed that there are practically no studies on the effectiveness of patterns? Cause: It is not possible to accurately identify the presence of a signal. A pattern is just a candlestick formation that formed just like that and nothing else. But it does not guarantee price movement. The indicator has a clear interpretation: the moving price has crossed – a signal, the oscillator has entered the overbought / oversold zone – a preliminary signal. The appearance of a doji is only a balance. And it is not always a signal. Patterns cannot be accurately tested as indicators precisely because their signals are ambiguous.
But it is not all that bad. What to do to make the patterns work:
- It is not the pattern that determines the trend or reversal. And the trend determines the pattern. If a “triangle” appeared in a flat, this does not mean that a trend will begin.
- Patterns work for 1-2-3 candles, while indicators show an average value, albeit less accurate, but longer in impact. In other words, after a reversal pattern, the opposite pattern may appear in 2-3 candles. If the indicator shows a strong deviation from the average price value, then the probability of a return to the middle will still remain. It is good to find corrections by patterns, but you need to be careful with reversals.
Conclusion. Why don’t patterns work? There is only one reason – because you do not know how to work with them. Any tool is just a tool. And its effectiveness depends on the professionalism of the one who holds it in his hands. There are no ideal tools, but there is experience that allows you to quickly find a solution in any situation.