Tuesday September 5, 2017 - 11:25:32 GMT
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Price Patterns are Missing Link in Failing Trade Systems. Learn Why Price Patterns are Critical Part of all Trading Systems
Did you ever wonder whether a trend will continue or reverse? Or whether the support or resistance level will hold or whether it will break this time?
The missing piece of the puzzle is a concept called price patterns, which will explain how price swings move and how the larger market structure behaves.
Trading systems that are built without patterns in mind are limited in their potential. Price patterns dramatically increase the ability of traders to read the charts.
Why Most Forex Trading Systems Fail
Simple entry methods might seem appealing but in reality they do not provide traders with a coherent approach. It’s even worse for the “signal hunters” that are looking for an immediate trade and are not willing to put any effort into analysing the charts.
Is there a solution? Yes, by analysing the charts and using a robust trading system.
But even then, many trading systems eventually fail because the pattern behind the price movement breaks down. This often occurs when trends start to reverse or when support and resistance levels break down.
For instance, an entry at a Fibonacci level could work out fine sometimes but fail miserably the next. A reversal pinbar could fail and then work out well. Simply put, it seems like a 50-50% chance.
Sure, some traders using technical analysis can manage to squeeze out enough wins to be profitable. But ultimately they are trading pieces of the puzzle without understanding the larger picture.
Is there a way to improve those odds? Is there a way to see the bigger picture? Luckily the answers are yes, with the help of patterns.
Why Patterns Explain the Big Picture, aka Market Structure
Patterns are the missing link to fully understand the price chart regardless whether the market is Forex, CFD, commodities, stock indices, shares, bonds or cryptocurrencies. All markets move in patterns.
The price patterns explain how price will most likely unfold. They are providing traders with key information about how price has moved in the past and how it could move in the future.
Price patterns will add the balance needed for your Forex trading system. Here is how:
1) Understand whether trends will continue or reverse.
2) Be aware when ranges will end and trends might start.
3) Estimate what support or resistance levels will break or hold.
Simple said, price patterns show the bigger context and explain how price movements will probably behave.
Because patterns behave in the same way and repeat themselves. Choose any chart and you will see patterns unfold everywhere. That is why all Forex trading systems should add price patterns in their mix, because it allows traders to see the bigger picture and market structure.
The next question we must address is: which patterns are the most effective and useful?
The Top 6 Most Effective Price Patterns
This part is a bit subjective because each trader will have their own personal favourites based on their own trading psychology. That said, I do believe that there are couple of patterns that most traders will probably end up using because they are the most effective and most tested.
1. Impulse and correction patterns
The number one pattern that traders should know is impulse and correction. Price will move either quick (momentum/impulsive) or slow and choppy (corrective). This is the heartbeat and rhythm of the market.
2. Chart patterns
Chart patterns are extremely useful because they provide information about the expected direction. Chart patterns consist of reversal patterns and continuation patterns. Reversal patterns are double top and bottom and head and shoulders. Continuation patterns are for instance bear flags and bull flags.
3. Wave patterns
The market moves in waves. Look at any chart and you will see it moves up and down. Analysing those wave patterns will help traders understand how impulse and correction interact with each other and offer guidance what the next price swing could be.
4. Divergence patterns
Divergence appears when comparing two price tops and two oscillator tops. Price is in a trend but the oscillator does not confirm the trend strength. This could lead to a higher chance of a either a price range or reversal of the trend.
5. Candlestick patterns
Candlestick patterns provide detailed information of how price action responds at certain price levels. For instance, a bullish engulfing twin candlestick pattern explains that price was bearish at first but the next bullish candle fully engulfed the bearish one, which changes the market dynamics and could indicate a new direction (up rather then down).
6. Fractal patterns
The market is fractal in nature, which means that price repeats itself and makes the same patterns regardless of scale or time frames. The first 5 patterns mentioned above are therefore not only useful on a daily chart but should be mostly valid for all time frames and financial instruments including Forex, CFD, commodities, stock indices, shares, bonds or cryptocurrencies.
How Price Patterns Help Trading Systems
As you can imagine, traders can use these patterns in multiple ways. As mentioned before, patterns can be used for analysing the charts in a more robust way.
Patterns are also a tool that can be used for other parts of trading such as:
- Avoiding weak trade setups
- Estimating where to take entries
- Deciding how and when to enter
- Establishing exit points
- Managing the open trade
Unfortunately, this article cannot dive into all of these details. But hopefully our main point is very clear: patterns are essential for your Forex trading system.
Price patterns offer the missing link that is needed to understand the charts and market structure. Patterns unlock the potential each trader and system really has and they show how the pieces of the price puzzle connect within the larger picture.
Many green pips,
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