We sell patterns

Patterns pros and cons.

Before seeking any money in the financial markets at the beginning of the road faced with a choice - a method preferred. The choice is between the technical and fundamental analysis.

It should be noted that the usefulness of technical analysis, and especially its graphic methods, which include the patterns and, as a tool to predict the future direction of prices is constantly challenged.

Opponents of the use of patterns as arguments an accident resulting market price and as a consequence of the impossibility of allocating recurrent price formation, the complexity of quantifying the expression of image theory.

Supporters of the graphical analysis refer to one of the major axioms of technical analysis, the essence of which is that any factor influencing the price - economic, political, psychological - before noting the price, and thus reflected in the chart. Therefore, the study schedule of prices - a prerequisite for the prediction. Indeed, it is difficult not to agree with that. After all, the price is very sensitive to the change of external conditions. Also, do not forget the existence of the market group of insiders who make decisions based on the information until such time as it becomes available to a wide range of people. Given the fact that insiders usually have large financial resources, their activity will certainly take into account the price, and thus will be reflected in the chart.

Also do not forget that if certain types of analysis employed in the past, it will work in the future, because this work is based on the sustainability of human psychology. After all, in fact deals with the history of the graphical analysis of certain events connected with the market, and thus the study of human psychology. Indeed, the main reason for the movement of prices - the mood of market participants.

In its essential features, it is repeated throughout the history of the market and, accordingly, is reflected in the movements of the market graphs.

The schedule of prices provides an unequivocal and immediate reflection of the net impact of all the fundamental and psychological factors. On the contrary, the exact fundamental model, if at all possible to build, would be too complicated. In addition, the basic data for the forecast period will inevitably be estimated, which makes the results based on their prognosis is extremely sensitive to errors.

At the same time is difficult not to agree that sometimes it is difficult to assess the many graphical models quantitatively. And if there is no such mathematical evaluation, argue about the viability of graphical models as an indicator of prices, in general, becomes difficult.

What is the pattern?

In general, patterns can be described as a fairly wide range of repeating with a frequency models, images, setup figures, combinations of candles. This concept is unlikely to suit us, so it must be formalized. We will be interested in some images, the market situation, which in some points in time provide us with some of the possible (!) Statistical advantage, and are the property of repeat in time.

Thus, the trading system using the pattern must have the following characteristics:

1. patterns should have a positive expectation that the price will go in to our side. Otherwise, the meaning of this pattern is not.

2. discrete nature of finding a trader in the market. This is a very important point. Not necessarily trying to be in the market continuously. Waiting for the entrance - it is also attitude. But keep in their arsenal, some quite often applied to the market model to explain the different trading situations, it would be good.

3. trade patterns tend to be short term due to the fact that the pattern over time is typically short-term effects. It follows the special significance of the time when such a trade.

Indeed, judging from the limited validity of patterns over time, our trading plan should take into account the possibility of the position, not only for achieving the objectives of the calculated, but at the end of the pattern.

Consider an example. Suppose a trader has a certain tested model, which with a probability of 95% (dream trader) manage to realize its statistical advantage. Suppose that the average time for implementation of such a pattern (of course proven tests) was 10 days. Trader opened position, put a stop and take profit. The position may close due to trigger a warrant for any 10 days.

The longer the interval of stay in position, the situation becomes uncertain. Why is this happening? Because "normal" during the transaction can be broken any unexpected news or Top prevail, another group of traders ( "bulls" will take dominance over the "Bear" in "bear" pattern, and vice versa). If there is no violation of the "normal" during the transaction and before the end of your pattern of time (in this case 10 days), the objectives were not achieved, it is better to at least secure a position close to stop, or even better to close on time. Because the more we play is not our pattern, and then talk about the future potential statistical advantage does not make sense.

In future articles we will focus on how to look for patterns, look at the tools that will help us to better identify them, and perhaps look at some of them, which I think might be of interest.

Dmitry Melnikov
to Forex Magazine
fxtrade@tomsk.ru