Balaji As a trader,speculator and Investor- Balaji have more than a decade of experience trading commodities, stocks and Fixed income securities including as a senior trader with Vexes capital.He also mentors or teaches investors, traders about Financial markets and provide professional training for individuals combining Institutional experience with a technical grasp of seizing market opportunity. Since leaving the Vexes capital and Newyork city,Balaji has been working as Trading coach along with presenting seminars and writing for a number of publications.

The Reason Why Trading Chart Patterns are Useless

1 min read

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Yeah, if you believe that I am good at writing controversial articles, I can’t say no. But while doing so, I try to expose real face of the markets and some of the most used conventional wisdom which is nothing but just a useless trap. Today let me stir a bit on Chart patterns and why the so-called “Patterns” are useless to make money. Before doing so I would like to warn the average reader that chart patterns are useful only if you’re making money out of it or else throw them away.

Actual evidence is against trading chart patterns
Chart patterns are merely illusions created by people’s subconscious. Certain theory of economics hold that if there were a way to predict future stock prices and profit by it then enough people use these techniques they would become ineffective and ceases being profitable.One of the experiment conducted by most reputable statisticians show that chart patterns don’t exist in the marketplace such patterns is created by one’s Mind itself and couple of other experiments show that if lot of market participant play on the same chart patterns they may become a self-fulfilling prophecy but the result may not be profitable for the trader who uses it

There is no objectivity in Trading chart patterns
Whether you believe it or not, trading chart patterns are not objective at all indeed they are more subjective than indicators. Chart pattern analysis can be more subjective when the conclusion reached is based on a mixture of technical factors that may influence future price direction. It can even become a dangerous practice when used selectively to offer support our gut beliefs about the future direction of prices. Of course, there are also those that have devoted time and effort to turn it into an empirical science by analyzing thousands of charts and formations which only ended up in fruitlessness

Chart Pattern rules doesn’t work on real life market
How many of you’ve heard that pundits say, once you see such and such patterns keep your stops here, target here so and so..
But if have applied these ideas on practical trading or willing to apply in the future period, consider this line – They are derived from gut feeling without any logic or reasons and don’t work for real complexity of markets. If you are experienced or obsessed with chart patterns then you know what I’m talking about.

Even, if the pattern works you’ll not be able to profit from it!
Specifically, by the time most chart patterns is confirmed, a good part of the profit has already been realized by those who cause the patterns in the first place, unintentionally or even intentionally, leaving the rest to fight volatility. Once the patterns are visible to the crowd then majority of the profits are already churned leaving it into a kind of random behavior. Remember everyone has the access to the same charts that you use, thus logically if the pattern is visible to you then it is visible to everyone who use the charts and more probability such patterns will be manipulated by bluffers

Balaji As a trader,speculator and Investor- Balaji have more than a decade of experience trading commodities, stocks and Fixed income securities including as a senior trader with Vexes capital.He also mentors or teaches investors, traders about Financial markets and provide professional training for individuals combining Institutional experience with a technical grasp of seizing market opportunity. Since leaving the Vexes capital and Newyork city,Balaji has been working as Trading coach along with presenting seminars and writing for a number of publications.

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20 Replies to “The Reason Why Trading Chart Patterns are Useless”

  1. I cannot quite agree, Arul. Hope you don’t mind.

    I use indicators.on several time frames.

    My entries are correct about 8 times out of 10.

    But there is no indicator which can advice a timely exit. I lose money because if fail to exit in time about 8 times out of 10. This is why I asked you about reversal predictions and I am waiting for an answer.

    1. Lol! It’s not about indicators at all -its about chart patterns! Well if it works then it’s good. I am agnostic about it-Anyway Thanks for your comment mate

    2. Predicting reversals are quite a tough point with indicators as I don’t believe in them I can’t say how with indicator-But with price action, yeah i have lot of techniques to sense a reversal

      1. Thanks Arul!

        ok, I’ll try to get into your course materials to fetch that reversal sensing technique. It is the only thing that’s standing between me and success. I only hope the techniques you mention will be consistent.

        Thanks again!

        🙂

  2. Hi

    nice discussion dude!conventional chart patterns most cases leads to a confusion for starters.need years of practice with virtual/demo trading with large capital fund.i skipped it switched FA stuffs.

      1. hi

        whats wrong in wyckoff – vsa’s ?it is also derived from s/d effort etc.
        is PA derived from wyckoff ?
        is tape reading with PA important part of day trade ?
        I found good trader who uses chart patterns with MP to get proper directions of trade.is it possible to get an edge from PA/modern wyckoff?

        FA fails many cases so longer term cycles came out . why does not cycles work in lower tf also?Hurst introduced and discussed about cycles in lower tf also like 9 min etc.

        then why only PA ?

        looking for more explanations…

        thanks and regards

        1. Hi Sayantan,
          The answers to your questions can’t be described in short para’s. But In my case PA- I am using is different and very objective to trade which doesn’t have any implications with Wyckoff. I will write a short article regarding your concerns on cycle soon enough.. Of-course you may get an edge from any technique if you know how to use it according to market activity.PA is the only way as per my experience by which we can make probabilistic trades with high advantage so I believe in it…
          Thanks for your reply and comments

          1. Hi

            I am impatiently waiting for your new article if it cover all my question one by one.

            thanks in advance
            sayantan

  3. You raise a red flag when you make blanket claims that something or other is not good and that you have THE answer.

    Based on your discussion the error that you are making is in thinking about chart patterns by themselves in a “vacuum”. Chart patterns are just another indicator and NO indicator should be used by itself. Combining chart pattern analysis (e.g., conventional, Elliott Wave, harmonic patterns, etc.) with standard indicators (e.g., RSI, MACD, Stochastic, etc.) and charting tools (e.g., trend lines, pitchforks, etc.) is a winning combinatilon that can be used for mechanical or discretionary trading. Undoubtely, your approach (unless you are trading on the basis of fundamental analysis) incorporates these tools in a system(s) (most likely mechanical) which as with all trading systems (mechanical or discretionary) attempts to increase the probability of success.

    From what you have written you apparently have not had good luck using patterns (although without knowing more what you call “price action” is most probably a pattern) and perhaps did not use them correctly as there are many successful traders who can demonstrate that it is a valid approach with bottom line results that equal or exceed mechanical systems (and perhaps without the subsequent maintenance that many mechanical systems reqjuire). However, I’m sure that your approach is also successful (or you would not be selling it) but that does not mean it is the only way or the right way as you suggest. In fact, there are many ways and no right way. Each has to find an approach that is comfortable for them in terms of profit, trading frequency, drawdown, etc. That is the right way.

    1. Well First of all thanks for your comment and criticism as they are always welcome!
      If you have noticed in my article, I have already covered about mixing up chart patterns with so called indicators always leads to paralysis.For ex: If double top is formed along with stochastic oversold signal what would you do? No ways we can objectively trade such ideas,Of course no where in the article, I have mentioned saying that my technique is powerful amd others are useless.If it works and if you’re making money then I will give 5 stars no problem.. If it’s not then time to roll the pack and look for something else which can be consistent. Take for example Supertrend it’s an indicator which can be used for consistent trading approach, I am not against indicators buddy. I am against conventional nonsense- Hope you understand-Thanks a lot for your comment ..

      1. You focus on “objective” trading but fail to realize that objective trading is by definition nothing more than the individual’s total approach to the market. It is not a set of mechanical rules and metrics and cannot be dismissed by your claim that trading a double top in conjuntion with a stochastic (or anything else) is not objective trading when it may or may not be. Objective trading encompasses everything from entry to exit and can be effected by both discretionary and mechanical traders. I think this is the key factor that you are missing and why you think that a chart pattern cannot be traded objectively when of course it can. To make your point you would have to envoke a definition of objective trading that is outside of normal usage.

        1. Hi Thanks again for your reply,

          As you said may or maynot be depending upon the trader and how they feel whether a method is subjective or objective-I agree. But Such a premise cannot be applied to real life markets for most of the traders. If you combine both chart patterns and indicators all we get is a complex picture of paradox. we cannot trade such paradox. I have absolute evidence to back up my claim why chart patterns will not work for an active trader in real life it is tested and proved by data scientist’s again and again. Objectivity is a necessary part in trading you cannot have a subjective gut feeling to enter and exit a market such a subjective method might work for selected few people but fails for most of the traders.As I have observed again and again chart patterns lead to heavy subjectivity and patterns themselves are useless for trading purposes with or without indicators..As with everything else if it works then absolutely fine- but I have never seen a successful trader making money based on chart patterns and conventional indicators such as moving average etc.. Thanks for your valuable criticism.

          1. As for objectivity, I repeat from above:

            “Objective trading encompasses everything from entry to exit and can be effected by both discretionary and mechanical traders. I think this is the key factor that you are missing and why you think that a chart pattern cannot be traded objectively when of course it can.”

            So, what is your definition of objective trading?

          2. There is few never ending discussion over the internet:

            1.Discretion or Mechanical
            2.Chart reading Or indicator Or PA with Market Profile
            3.KISS or complex thing
            4.Datafeed: esignal or GFDL or Local DF
            5.TA Or FA Or EA Or QA Or etc.
            6.LTF or HTF Or EOD or < 2hr or positional / HFT
            7.effective method Or New method Or repairing an old method
            8.where is the edge?what is edge?
            9.puzzle of cube vs Stock Market
            10. EW or WW or wyckoff-vsa Or MP
            11. Speculation or Scientific trading
            12.OFA or Simple raw Tape Reading
            13.which Trading Platform Ami or NT
            14. NT7 or NT8
            15. why Which when how what are always used to make questions but answers are not written in simplest way as it was never simple.
            16.price derive price movement or volume or sellers / buyers
            17.if Supply/demand make the price movement if yes which one is the exactly specific way to track them.why only S/d?
            18.Hidden Gems or SIP
            19. backfill / bulk order data / internet connection / Ethernet card / hardware
            20.etc.

  4. Get real!

    I have over 15 years of experience of such platforms. When I say I know, then believe me that I know what I am talking about.

    What you think how the system of these programs work?

    Your confidence is the biggest problem when you began manipulating the reality.

    Little bit of an insight for all:

    Real game is played in a fraction not in minutes.
    Traders don’t care about such patterns.
    Custom made programs with ultra low latency are in place.
    Best of all – It’s automated!

    My advise:

    Become an investor and learn a company’s fundamentals.
    In finance, the term “Technical” is not that straightforward.

    1. Hi

      Fundamental Analysis is also changed if catalyst ie. company management reacts different way.
      cheap buying and expensive selling do not always helps people out in the market. Fundamental valuations failed many aspects so cyclical investment came out for longer term. say u bought few banks and bank got few corrupted managers or director then what will you do buy more ? Then market trends reversed out due to lack in economy then what u will do ? exit with huge loss ! Or buy more ! ?

      Decision need to be taken with proper logic in case of fundamental.

      somebody bought $2 stocks in wall street and got $100 at the end of a war is a story for today’s market.i would rather call it market myth.

      thanks and regards
      sayantan

  5. Chart patterns work only when one knows how to use them, if the pattern formed is correct, if one can distinguish between a correct pattern and a wrong one.

    Correct pattern analysis along with skill to understand the trend & momentum can help a trader to make money in markets..

    If the pattern is not correct ignore it. like one can see side ways movements or range in stocks and trade when a breakout of range happens or find the stocks which are trending.

    Mastering the technique takes time and when one do it constantly over and over only then can develop the sense and the edge to maximize the rewards.

    Technical Analysis has various tools one can use to react and act to the market and use that to one’s favor.

  6. The above pics lines is nor a double bottom or a triangle.! and the trendline u have drawn (thou i would even draw it differently without considering the noise of the (1) candle) shows the lower top lower bottom was in place and then price breaks through the downward trendline.

    Thou i personally if would trade this very chart i would use the bigger chart, previous trend of the scrip/index and along with volume analysis and time frame for trading.

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