Technical Patterns

PATTERNS are subjective in nature. No matter how clear the rules of discernment are, the actual implementation in the real life scenarios are prone of guess work. Because of its subjective nature, patterns can rarely be used solely for entering the trade. Though, at first blush, it would seem the patterns are working perfectly, it is pretty dangerous to trade based on patterns alone.

If you were to ask 10 people to decipher a pattern in any particular chart, they would come up with five different variety. This is because a person sees what he wants to see on the chart. If the person is predisposed to see a bullish chart, the visual interpretation of the pattern is going to be bullish, even though there would equally qualified bearish patterns on the same chart.

Having given sufficiently good disclaimer on the failures of pattern for any trading purposes, the patterns - a very few / handful, of them carry substantial value in trading. All most all of these are hindsight patterns i.e. you cannot know about it when it is forming but once it is formed you can reasonably trade or understand the underlying situation. As you may have guessed, these are not the fantastic patterns that retail investors gun for. One of the best patterns to trade, if they are available are the double tops and double bottoms. With sufficient exceptions, triple tops and triple bottoms. 

The common patterns like Triangles or head and shoulders, which are also the most popular, hence the interpretation is all too often, the rates of failures are very high in recent days

Also, another interesting aspect of the patterns is that some of the patterns which most often repeat in some chars , have a very high reliability of succeeding. but the success ratio in other stocks or charts would be far less so. For instance, the flag pattern on the SPX charts have a very high degree of accuracy in terms of success and target posting.

To summarize the problems and features of Patterns

1. Too subjective

2. Prejudiced interpretation

3. Unclear entry and exit segments

4. Precise in hindsight

5. Heavily reliant on the time frame under consideration

6. Some patterns work very well with some specific instruments