Pattern Failure or judgement Failure

There are many times when a well known pattern legitimately fails to do what it is supposed to do. But more often than not it is the failure of our judgment on the current situation or pattern that fails.

This happens many times due to our wanting the pattern to form in a certain way and that call is taken before market tells us what is happening on the ground. This disposition of presupposing and assuming what we want to happen is a real kill joy. One must have patience to let the market decide what it wants to do and letting it tell us like an omen about its path of action. In my case at least most of my failures happen because I try to dictate what the market must do.

It mainly happens when there is a long time of inactivity and one craves for the adrenalin rush. Some action needs to be taken to justify the value of my existence as a trader. It is is easy to tell some one to be patient, try it when you watch the market for days with out getting a single trade to execute!

So next time a pattern fails ask your self – was it the pattern or your judgement that is to blame.

Reversal Patterns- Failures

Some of the patterns that are supposed to be quite good at predicting a reversal, e.g. Head and Shoulders, occasionally fail and one starts scratching one’s head with disbelief. (Almost always lots of bets are placed on such patterns, and scratching head is the only entertainment left due to the empty purse.) One of the main reasons for such failures is often simple, the averages are not aligned for the pattern to succeed. So while there are many ways of ensuring supporting evidence – such as volumes etc.:- averages confirming the pattern is a very important criterion to look for.

Trading Breakouts

While trading breakouts it is necessary to see that the breakouts confirm moves in multiple time frames. e.g. a breakout in 4 hrly time frame must be possible. Also such breakouts need to be supported by alignment of averages in a time frame lower. If the averages are not stacked along with the breakout then one needs to wait for the alignment. Else a wide, sharp and fast price fluctuation can make a false breakout and subsequently the price can reverse substantially leading to sorrow.

Congestion Patterns

Congestion patterns make a trader get in to a lull as not much activity may happen. But the direction of the breakout from congestion pattern can be judged from the way the pattern develops. This can aid a trader to be prepared to take advantage of the breakout. So congestion pattern is not the time to stop analysis though one may stop trading during the pattern formation.

Trend Following method

One simple way of trading, ignoring all kinds of indicators is follow the trend. Take classic Dow signals. i.e. on higher top/higher bottom one can buy. On lower top/lower bottom one can sell.

Play with a given time frame in mind. i.e. if you are using the method in a given time frame keep profit/loss expectations in the same time frame.

Patterns

Repeating patterns happen in the charts of most heavily traded stocks, futures,
forex and commodities. These patterns are not same or simillar but can be called
‘on similar lines’. Depending on the contex of the trend they gain certain
significance. Being able to read the pattern without missing out the context is
very important for consistent results.

Simple methods – support / resistance

Another example of simple methods of trading is looking for breaks of support, resistance levels. The break of such levels in the direction of the trend in a higher time frame can be very good profit generating trades.

Some times such breaks even in opposite directions of the next higher trend can be very productive.

The main things to remember are:

1.  Let these moves before the break be of wide enough degree to ensure that one is not playing with noise but with real moves where enough trader’s participation has happened.

2.  That such breaks need time to happen. It is like a start a long jumper takes to gain the momentum to make it. So will a break happen after enough work is done in terms of consolidation etc.

So patiently wait for such breaks, they take longer time than one wishes. So keeping the powder dry till it happens is required.

Patience – the main virtue

Funny that one tends to plunge in a transaction in a hurry and then
wait for ages for it to mature. I have noticed that the signal takes a
long time to mature and gives enough hints of its taking shape. There
is no need to rush in. Wait for the signal to happen, it some times
takes days to do so. Then get  in and the maturing happens that much
faster.

So it is really a question of sitting on sidelines for long and in the
transaction for lesser time versus
the other way!

Take your pick!!

Handling almost right setups

There are times when you get near all right setups. It happens to me
many times, particularly when I am looking for a signal, some how,
now. That needs to be avoided. But there are times when an on the face
of it good looking signal later reveals it was not so good after all,
when it fails. It particularly happens at the shorter time frames.

In shorter time frames the noise levels seem to clutter one’s clarity
of thought and the eye starts deceiving. So when such setups are
traded and they fail then what?

Best is to take the loss as it happens, if one is wrong one is wrong.
That loss will be smallest loss than if one had held on.

Other option of course is to stay away from short term trends!

If it was easy to avoid that temptation!!

Anticipation vs. Happening

Einstein is said to have said :

we see what we want to see and not what ‘is’.

Many times i have made the mistake of anticipating a signal. Only to be
stopped out again and again. Funny thing is my anticipation is not bad – it
does happen that way in a day or two. But by the time one gets tired of
being proved wrong so when it really happens one is sitting out of the
market!

So it is preferable on the whole to not anticipate but to react.