Using Chart Patterns: When is a pattern a 'pattern'?
Bitcoin is going to be used as an example today to explore a couple of strategies for using chart patterns.
First, let me personally dismiss the idea that a pattern can only be traded once it's complete. A pattern is just that, something that repeats itself in the endlessly fluid price action and nothing more. Any given part of a pattern can be broken down [fractalized], and in the explanations people draw up for why these patterns exist often convey this as well. Luckily, BTC was kind enough to generate a potential inverse 'Head & Shoulders' [iH&S], a 'complex' pattern with three distinct phases.
The upside down twin of the H&S functions the same way, the market finds a level and staggers, then falls pushes through without much follow up. Then, after a relatively short bit of ranging at the lower level the price curves back to where it came from; ultimately completing when it goes past the highest price in the range of the pattern (typically made when the support is first encountered).
Each one of these events is tradeable in itself, regardless of whether or not you're "trading" the iH&S. For example the first phase, when the price finds a barrier of some sort it's a simple support/resistance trade. Given that the H&S is a reversal pattern, simply trading with the trend initially would be profitable. As the trend weakened with Phase 2 of the iH&S, that would be a signal to take profit to some extent. Even if the trader stays in the trade, Phase 3 would take them back to break even range as the reversal began.
As well, the Head 'n Shoulders is, in my opinion [note: NONE OF THIS is financial advice, make your own choices] just an overhyped rounded top or bottom. Price weakens, consolidates/accumulates a little bit, and then gradually turns around and walks back home. Volume is an important aspect of the H&S pattern, essentially forming a divergence as it reaches Phase 3; and then increasing with a breakout. Which is another example of how entries and setups can exist intra-pattern, this could be simplified and traded as a divergence alone when only 2/3rd's of the pattern is complete.
A complex pattern like the H&S or the Adam & Eve, or the Cup & Handle is almost like a living thing that 'grows' to completion. However, just like anything in Nature there are underlying routines that create the foundation for more emergent, complex patterns that manifest. As a trader, (much like anything else alive) risk is a necessity for success, and while it may feel safer to wait for a pattern to 'complete', the completion of that complex pattern is the completion of several other patterns that are all just as tradeable as the complex.
This however, is where it comes down to strategy and personality; the main point that's being made here is thus: Fuck the boutique pattern bullshit and just trade what you see.
First, let me personally dismiss the idea that a pattern can only be traded once it's complete. A pattern is just that, something that repeats itself in the endlessly fluid price action and nothing more. Any given part of a pattern can be broken down [fractalized], and in the explanations people draw up for why these patterns exist often convey this as well. Luckily, BTC was kind enough to generate a potential inverse 'Head & Shoulders' [iH&S], a 'complex' pattern with three distinct phases.
The upside down twin of the H&S functions the same way, the market finds a level and staggers, then falls pushes through without much follow up. Then, after a relatively short bit of ranging at the lower level the price curves back to where it came from; ultimately completing when it goes past the highest price in the range of the pattern (typically made when the support is first encountered).
Each one of these events is tradeable in itself, regardless of whether or not you're "trading" the iH&S. For example the first phase, when the price finds a barrier of some sort it's a simple support/resistance trade. Given that the H&S is a reversal pattern, simply trading with the trend initially would be profitable. As the trend weakened with Phase 2 of the iH&S, that would be a signal to take profit to some extent. Even if the trader stays in the trade, Phase 3 would take them back to break even range as the reversal began.
As well, the Head 'n Shoulders is, in my opinion [note: NONE OF THIS is financial advice, make your own choices] just an overhyped rounded top or bottom. Price weakens, consolidates/accumulates a little bit, and then gradually turns around and walks back home. Volume is an important aspect of the H&S pattern, essentially forming a divergence as it reaches Phase 3; and then increasing with a breakout. Which is another example of how entries and setups can exist intra-pattern, this could be simplified and traded as a divergence alone when only 2/3rd's of the pattern is complete.
A complex pattern like the H&S or the Adam & Eve, or the Cup & Handle is almost like a living thing that 'grows' to completion. However, just like anything in Nature there are underlying routines that create the foundation for more emergent, complex patterns that manifest. As a trader, (much like anything else alive) risk is a necessity for success, and while it may feel safer to wait for a pattern to 'complete', the completion of that complex pattern is the completion of several other patterns that are all just as tradeable as the complex.
This however, is where it comes down to strategy and personality; the main point that's being made here is thus: Fuck the boutique pattern bullshit and just trade what you see.
Penafian
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