Patterns in Short-term v Long-term

Hey folks,

I've been pondering about the validity of patterns on charts in the shorter terms views of say... 5 mins-1 day, compared to patterns in the longer term view of weekly-monthly charts.

Is there anything to this? Or has anyone any strong evidence-based opinions on it?

For example:
If price reaches and level on the 1hr timeframe and then retraces a bit, I will be looking to see if price is going to retest that level again. Which happens quite a lot in my experience.

But is price just as likely to retest that level if we are talking about the weekly/monthly timeframes?

I generally give more weight to TA patterns on longer timeframes than the shorter but when I took on this point of view, I was only trading in the 15min -1 day TF's.

What immediately comes to mind when I think about the example I gave above is fundamentals getting in the way. Obviously fundamentals have more opportunity to interfere in longer term setups than on shorter.

The "patterns" are valid but only to those who are trading them. Those who are trading weekly and monthly charts aren't even going to see the hourly activity. Therefore, they won't be participating in whatever it is you are trading.

There is also the matter of Who’s Got The Money to consider. Scalpers are undeniably busy, but they don’t move markets. They’re not the ones who are attempting to support price as it falls. They are not the ones with the power to engineer sustained breakouts. They are not the ones who are creating those trend channels. If one then wants to trade with the flow of bigtime money, which is arguably a more efficient and profitable method of trading than swinging at shadows, then he needs to understand what bigtime money is looking at. If he can also acquire an understanding of what bigtime money is most likely to do with it, he’ll be in a far more secure position that just about every trader out there, including some of those who have bigtime money but don’t know quite what to do with it.

One must remember that the more obvious the movement, however it is displayed, the more people there are who will see it. Therefore, if one trades EOD using daily bars, he's going to have an awful lot of company. Everybody sees that. Everybody. But if he's trading 5-second bars, not so much. Therefore, he's more likely to take quick profits because the trading crowd he hangs around with is generally not in this for the long haul. This is NOT to suggest that each and every trade should – much less must – be taken off a long-interval chart: daily, weekly, whatever. The point is to be aware of what all the various players are focusing on and use that awareness to one’s advantage. Whether one is trading off a 5m chart, or a 15m, or an hourly, it pays to know what everyone else is looking at and enter at those points and levels where the larger group or groups is/are mostly likely to join in and propel the trader into profit. Trading in a vacuum is not only inefficient but generally unprofitable.

Thanks for the input mate!

So tell me this (if possible),
Is there a way for me to build up a mental representation of where the money is?

Personally, if I had to make a call on such a thing, I would say the money in a given market is going to be:
- Institutions (95%?)
- Retail traders (5%?)

What is everyone thought on that percentage split?
Can we further break down who is in the category of "institutions"? To better understand where/who has the money, and therefore the power to move and support markets.

Also,what time frames do institutions trade on? Or is that even a valid question? I realise that there are firm funds out there who scalp, funds who take up longer-term trades and firms that take up long term positions etc.. So does this make my question invalid? or too difficult to answer with significant accuracy?

Perhaps the biggest of the big boys dont even trades with charts. Perhaps they just know the level they want or don't want and then throw money at it to get what they want?

NOTE: I am talking in terms of Forex trading...bit of oil too

Hi Nowler,

Nowler said:

I've been pondering about the validity of patterns on charts in the shorter terms views of say... 5 mins-1 day, compared to patterns in the longer term view of weekly-monthly charts. . .

Click to expand...

Just to add to dbp's comments, it's worth looking out for a confluence of levels across different time frames - especially if price is at a major round number or testing an all time high.

Nowler said:

. . .What immediately comes to mind when I think about the example I gave above is fundamentals getting in the way. Obviously fundamentals have more opportunity to interfere in longer term setups than on shorter.

Click to expand...

In broad terms, I would agree with this, but it does rather depend on the market. For example, arguably forex is driven by fundamentals and there are numerous announcements throughout the day which impact this market. A frown or half smile at a key moment in a speech by Mark Carney and Mario Draghi et al trumps TA patterns every time. Ditto for the equities markets when it's earnings season or news breaks that the CFO of a major blue chip has just absconded with $50 million and was last spotted on a tropical island with no extradition treaty.
Tim.

http://www.trade2win.com/articles/7...es/754-day-life-forex-spot-desk-trader-part-2
http://www.trade2win.com/articles/750-forex-market-participants

Have a read of these articles by gamma jammer

timsk said:

Hi Nowler,

Just to add to dbp's comments, it's worth looking out for a confluence of levels across different time frames - especially if price is at a major round number or testing an all time high.


In broad terms, I would agree with this, but it does rather depend on the market. For example, arguably forex is driven by fundamentals and there are numerous announcements throughout the day which impact this market. A frown or half smile at a key moment in a speech by Mark Carney and Mario Draghi et al trumps TA patterns every time. Ditto for the equities markets when it's earnings season or news breaks that the CFO of a major blue chip has just absconded with $50 million and was last spotted on a tropical island with no extradition treaty.
Tim.

Click to expand...

Hello timsk, thanks for the info!

I understand. I certainly do value fundamentals when it comes to forex trading. I am considering trying to trade with only fundamentals for a few weeks. Just to hone my skills in that aspect of trading. Might be good for me to come off of the nipple of TA for a while

barjon said:

http://www.trade2win.com/articles/7...es/754-day-life-forex-spot-desk-trader-part-2
http://www.trade2win.com/articles/750-forex-market-participants

Have a read of these articles by gamma jammer

Click to expand...

Gold!

And to think...I was intending to avoid online trading forums like the plague
I'm after getting some quality info!

I'll read this after I make a cup o' tea.

Thanks mate

Nowler said:

I've been pondering about the validity of patterns on charts in the shorter terms views of say... 5 mins-1 day, compared to patterns in the longer term view of weekly-monthly charts.

Is there anything to this? Or has anyone any strong evidence-based opinions on it?

Click to expand...

I would suggest that before you embark on your pondering you should consider the most basic question, does it help you to become a better trader? In trading, you can't escape the most basic tenet - what is your trading time frame. If your trading TF is 15 min, what purpose does it serve knowing what is happening in the weekly TF? The challenge in trading is not to add but to reduce.

Pattern recognition works best after the fact and that itself is the source of most problems for traders attempting to trade using patterns. We put on our TA hat and pick up all the patterns formed on a historical basis and assume we can just apply that approach to trade the right side of the chart. Some traders even look at planetary alignments and connect it to market turning points. I have yet to see someone actually explain the nexus that connects planets to markets. The problem is we have a bias to look for evidence to support what we wish to look for and that can be a dangerous thing in trading.

Patterns are basically fractals of price movements. I use Elliott Wave and have been doing so for 15 years. Elliott Wave is sometimes refer to as Idiot Wave. There is a saying that you make all your money trading impulse waves and give it all back trading corrective waves. The point is, the objective is not about pattern recognition but knowing when to trade the odds. There are 13 corrective wave structures in EW and is best determined after the fact. Typically it is account damaging when prices are transitioning.

Sorry about the late reply.
I had seen that you posted, just never got around to reading it properly.

Brumby said:

I would suggest that before you embark on your pondering you should consider the most basic question, does it help you to become a better trader? In trading, you can't escape the most basic tenet - what is your trading time frame. If your trading TF is 15 min, what purpose does it serve knowing what is happening in the weekly TF? The challenge in trading is not to add but to reduce.

Pattern recognition works best after the fact and that itself is the source of most problems for traders attempting to trade using patterns. We put on our TA hat and pick up all the patterns formed on a historical basis and assume we can just apply that approach to trade the right side of the chart. Some traders even look at planetary alignments and connect it to market turning points. I have yet to see someone actually explain the nexus that connects planets to markets. The problem is we have a bias to look for evidence to support what we wish to look for and that can be a dangerous thing in trading.

Patterns are basically fractals of price movements. I use Elliott Wave and have been doing so for 15 years. Elliott Wave is sometimes refer to as Idiot Wave. There is a saying that you make all your money trading impulse waves and give it all back trading corrective waves. The point is, the objective is not about pattern recognition but knowing when to trade the odds. There are 13 corrective wave structures in EW and is best determined after the fact. Typically it is account damaging when prices are transitioning.

Click to expand...

It certainly does make me a better trader.
I understand what you are saying but I haven't decided what TF I am going to trade on yet. I have been spending the last few months trying different things. Most recently I have been attempting to see if I can consistently extract money on the 1min TF. Before that it was 15min-1hr, before that it was 4hr-1 day. Trading each TF has a different nuance to the others... different things to be aware of. I am just processing what I can and also asking questions in order to better understand what opportunities I may or may not have.

I have never really took up a position and then added to it over time. Now that I am looking at longer TF's of a weekly/monthly this certainly lends itself to building into a position, as opposed to trading on a 1-5min TF.

As I said before, I have no intentions of pigeon holing myself. I want to be as capable as I can, not just a specialist in 1 thing. I realize that it may be impossible to be a specialist in all areas of trading, but that certainly doesn't mean I can't be a specialist in multiple areas. How can I know what I am best at if I dont try different things out? If I was to live my life like that then I would not be trading now...i'd probably still be a volatile pleb with no prospects.

I don't understand how planetary alignment can inform trades... I have heard of people say this but I never bothered looking into it. A mate of mine said that the moon can cause people to behave in different ways...and that can be somehow used to inform trades... :| I'll leave them to that and if I see some evidence for it, I may look further into it.

I completely agree with you when you say we have a bias to look for evidence to support what we wish to look for... I still catch myself doing that at times. I still remember the modules we did in uni on facial and pattern recognition. I am well aware of our hardwiring to identify patterns, even when none exist. That added with somewhat noisy markets where locating patterns can be more subjective and less objective... can be dangerous! Especially when good money management is not in play!

So do you suggest Elliott Wave?
It seemed far too complicated when I briefly looked into it. Not too complicated for me to learn, but rather making a mountain out of a molehill. Aka Overkill.
I guess it'll do no harm for me to familiarise myself better with it.

Brumby said:

Pattern recognition works best after the fact and that itself is the source of most problems for traders attempting to trade using patterns. We put on our TA hat and pick up all the patterns formed on a historical basis and assume we can just apply that approach to trade the right side of the chart...

Patterns are basically fractals of price movements. I use Elliott Wave and have been doing so for 15 years....

Click to expand...

Elliot Wave is another pattern though isn't it? just one that floated your boat more than the likes of cup n biscuit or slice of cake :cheesy:

Kaeso said:

Elliot Wave is another pattern though isn't it? just one that floated your boat more than the likes of cup n biscuit or slice of cake :cheesy:

Click to expand...

I don't have the experience to talk about Elliott Wave but when I briefly looked at it, it seemed more complicated and longer to work with than other sets ups I have seen. I just thought to myself...why make things more complicated??
Again...this is coming from someone with very limited understanding of EW

I just use support and resistance. Simple and effective

FXX said:

I just use support and resistance. Simple and effective

Click to expand...

Solid strategy.
Simple and effective, as you say.

Nowler said:

I don't have the experience to talk about Elliott Wave but when I briefly looked at it, it seemed more complicated and longer to work with than other sets ups I have seen. I just thought to myself...why make things more complicated??
Again...this is coming from someone with very limited understanding of EW

Click to expand...

I only know the basic idea too, I've never tried it. I don't see it as more complicated, more that it doesn't interest me (to look for "the waves") but that's just my personality and I have to go with that. Elliot Wave is as good as any other method if it works for you

Nowler said:

So do you suggest Elliott Wave?
It seemed far too complicated when I briefly looked into it. Not too complicated for me to learn, but rather making a mountain out of a molehill. Aka Overkill.
I guess it'll do no harm for me to familiarise myself better with it.

Click to expand...

The problem with price patterns e.g. EW is that when the pattern develops as planned then it is very useful but conversely we can be blind sided by it. It is just a tool and like any tool the important thing is to understand its limitation and usefulness.

It is best illustrated in how it might be used in trading by taking an example of the EURUSD pair. Below is taken from a recent example of an EW count by Elliott Wave International. The left chart is of a higher TF and the count suggest that the a-b-c correction of wave 2 may be close to completion. The reason is the terminus of an a-b-c correction of wave 2 is typically at wave iv of a lower degree. The right chart is of a lower TF EW structure of wave c which indicates that wave c is incomplete with a remaining wave iv correction of a 5 wave structure.



In addition below is an EW count done by Elliott Wave Forecast highlighting an incomplete a-b-c correction of wave iv. This example best illustrates the difficulty attempting to define corrective structures in real time because wave iv can be a simple correction, a complex correction or a triangle.



The challenge in trading is not about identifying the correct pattern in real time but whether the developing price action presents a trade opportunity with the right RR.

Below is my interpretation of a trade opportunity based on probabilities and the trade plan associated with it.



I think the correction is over and the ongoing price structure is an ending diagonal pattern that is close to completion probably by latest Tuesday of next week. Should it develop as per likely count, it also mean that wave 2 of a higher degree is complete and signalling a potential wave 3 developing on the downside for EURUSD.

Let's see how this develops in real time.

Brumby said:

The problem with price patterns e.g. EW is that when the pattern develops as planned then it is very useful but conversely we can be blind sided by it. It is just a tool and like any tool the important thing is to understand its limitation and usefulness.

It is best illustrated in how it might be used in trading by taking an example of the EURUSD pair. Below is taken from a recent example of an EW count by Elliott Wave International. The left chart is of a higher TF and the count suggest that the a-b-c correction of wave 2 may be close to completion. The reason is the terminus of an a-b-c correction of wave 2 is typically at wave iv of a lower degree. The right chart is of a lower TF EW structure of wave c which indicates that wave c is incomplete with a remaining wave iv correction of a 5 wave structure.

*Image*

In addition below is an EW count done by Elliott Wave Forecast highlighting an incomplete a-b-c correction of wave iv. This example best illustrates the difficulty attempting to define corrective structures in real time because wave iv can be a simple correction, a complex correction or a triangle.

*Image*

The challenge in trading is not about identifying the correct pattern in real time but whether the developing price action presents a trade opportunity with the right RR.

Below is my interpretation of a trade opportunity based on probabilities and the trade plan associated with it.

*Image*

I think the correction is over and the ongoing price structure is an ending diagonal pattern that is close to completion probably by latest Tuesday of next week. Should it develop as per likely count, it also mean that wave 2 of a higher degree is complete and signalling a potential wave 3 developing on the downside for EURUSD.

Let's see how this develops in real time.

Click to expand...

Interesting...
I will need to educate myself on EW in order to understand what you said
I am a little lost if i'm honest I understand some of it of course but i'll spend the next few hours reading up on EW, then I'll come back and hopefully be able to understand fully.

Good luck with the trade by the way! I had to step back from the EUR/USD. After getting stopped out twice going short

@Brumby

Any decent video tutorials for EW?
I cannot stomach the clowns I have come across in the last hour... I wouldn't ask them for directions! Never mind to explain a market pattern to me


Edit:
I've found a few examples that don't repel me

Nowler said:

. . .I will need to educate myself on EW in order to understand what you said
I am a little lost if i'm honest I understand some of it of course but i'll spend the next few hours reading up on EW, then I'll come back and hopefully be able to understand fully. . .

Click to expand...

Hi Nowler,
There are increasing numbers of traders who believe that all TA is complete bunkum. As a default position for the novice trader, I think this is a sensible starting point. I, like many others, started from the polar opposite end of the spectrum, assuming that all TA 'works' and that all I had to do was find the branch of it that best suited my personality and trading style. With the benefit of hindsight, this was a mistake.

I'd recommend novice traders start from the viewpoint that all TA is pretty much worthless unless and until their knowledge and market analysis convinces them otherwise. Then and only then is it worth delving into specific facets of TA, be it the various different chart types, Elliot Wave, Cumulative Delta, Market Profile - and so on.

To save yourself masses of time (many months and possibly even years) going from pillar to post - I suggest therefore that before you immerse yourself too much into any one facet of TA that you take a step back and ask yourself these questions:
1. Does TA complement your view and understanding of how the markets function? (It's better to work out now that actually you think TA is worthless than in two, five or more years down the road.)
2. If it does, then what is its function - what will TA do for you? Most novices (and a fair few not so novice traders) - look at TA to provide a simple cookie cutter solution of when to buy and when to sell. If that's what you want / need, you must satisfy yourself that TA can deliver this. Where's the evidence? Prove it for yourself; don't rely on what others tell you on T2W or elsewhere.
3. Lastly, is there a facet of TA that will serve your needs better than any other? If you're 100% certain of the merits of TA and you know what you want it to do for you, then you can start to drill down and work out that P&F charts will suit you best or Elliot Wave - or whatever else takes your fancy.
Tim.

timsk said:

Hi Nowler,
There are increasing numbers of traders who believe that all TA is complete bunkum. As a default position for the novice trader, I think this is a sensible starting point. I, like many others, started from the polar opposite end of the spectrum, assuming that all TA 'works' and that all I had to do was find the branch of it that best suited my personality and trading style. With the benefit of hindsight, this was a mistake.

I'd recommend novice traders start from the viewpoint that all TA is pretty much worthless unless and until their knowledge and market analysis convinces them otherwise. Then and only then is it worth delving into specific facets of TA, be it the various different chart types, Elliot Wave, Cumulative Delta, Market Profile - and so on.

To save yourself masses of time (many months and possibly even years) going from pillar to post - I suggest therefore that before you immerse yourself too much into any one facet of TA that you take a step back and ask yourself these questions:
1. Does TA complement your view and understanding of how the markets function? (It's better to work out now that actually you think TA is worthless than in two, five or more years down the road.)
2. If it does, then what is its function - what will TA do for you? Most novices (and a fair few not so novice traders) - look at TA to provide a simple cookie cutter solution of when to buy and when to sell. If that's what you want / need, you must satisfy yourself that TA can deliver this. Where's the evidence? Prove it for yourself; don't rely on what others tell you on T2W or elsewhere.
3. Lastly, is there a facet of TA that will serve your needs better than any other? If you're 100% certain of the merits of TA and you know what you want it to do for you, then you can start to drill down and work out that P&F charts will suit you best or Elliot Wave - or whatever else takes your fancy.
Tim.

Click to expand...

Sound advice!
I agree with pretty much all of it. Would tweak some but all in all, spot on mate!

I see what you are getting at in regards to TA, but I wouldn't necessarily suggest to novices to treat it as complete codswallop (I love this word). As far as I am concerned, candle chart TA is an indicator. Probably one of the most useful indicators I have found and a great way for me to visualise what the rest of you are doing. I would however be attempting to instill the same critical qualities that you are trying to drum home, just from an alternative angle.

Personally, I find TA to be a phenomenal tool in my belt but too many people are looking for something that isn't there. The holy grail. Though one could certainly argue that there is a holy grail... but instead of looking outward, people should be looking inward :smart:

Any holy grail in trading, as far as I am concerned is an optimal level of qualities; being analytical, critical, creative, be willing and ready to work hard, and to thoroughly enjoy it. Whether they use fundamentals or TA, ultimately it doesn't matter as long as they realise the limitations of what ever lens they wish to look at the market through. If they can find an area where their tool works, then great but one must be aware that while a hammer is great for putting nails in wood, it's not so great at opening a carton of milk. Same goes for tools/indicators used in trading.

If one possess those qualities, then they can pick up any tool or indicator and make a sound logical judgment on whether there might be something to it, or whether they should invest anymore time into it. Which from my understanding is the same goal that you are conveying. No blind faith! Have reason and results for everything!

timsk said:

Hi Nowler,
There are increasing numbers of traders who believe that all TA is complete bunkum. As a default position for the novice trader, I think this is a sensible starting point. I, like many others, started from the polar opposite end of the spectrum, assuming that all TA 'works' and that all I had to do was find the branch of it that best suited my personality and trading style. With the benefit of hindsight, this was a mistake.

I'd recommend novice traders start from the viewpoint that all TA is pretty much worthless unless and until their knowledge and market analysis convinces them otherwise. Then and only then is it worth delving into specific facets of TA, be it the various different chart types, Elliot Wave, Cumulative Delta, Market Profile - and so on.

To save yourself masses of time (many months and possibly even years) going from pillar to post - I suggest therefore that before you immerse yourself too much into any one facet of TA that you take a step back and ask yourself these questions:
1. Does TA complement your view and understanding of how the markets function? (It's better to work out now that actually you think TA is worthless than in two, five or more years down the road.)
2. If it does, then what is its function - what will TA do for you? Most novices (and a fair few not so novice traders) - look at TA to provide a simple cookie cutter solution of when to buy and when to sell. If that's what you want / need, you must satisfy yourself that TA can deliver this. Where's the evidence? Prove it for yourself; don't rely on what others tell you on T2W or elsewhere.
3. Lastly, is there a facet of TA that will serve your needs better than any other? If you're 100% certain of the merits of TA and you know what you want it to do for you, then you can start to drill down and work out that P&F charts will suit you best or Elliot Wave - or whatever else takes your fancy.
Tim.

Click to expand...

This is a very good advice! Thanks for posting it and hope more new traders will read and try to understand it...

Nowler said:

Hey folks

Click to expand...

Whens alls said and done, unless you find a way to be buying on the left side of the line along with the very very few, youll likely get similar results to just about every one else buying the right side of the line.

I might have just saved you 5 years.