Chart patterns are special tools used for analyses in order to determine potentially emerging tendencies. Since patterns are considered the most commonly-used technical instruments, many traders are concerned about whether they are as efficient as advertised.
Doubting the accuracy and reliability of patterns is a reasonable thought if you want your work to bring your profits and success. There are patterns that are more accurate in certain markets. Nevertheless, the general tendency is that you can rely on patterns. Although they aren’t 100% reliable, they increase your chances of making a good prediction by 70%.
In this guide, we will review the most common issues traders might have with patterns during online trading. We will also reveal factors that make them less efficient and explain why it’s better to rely on them. Let’s get down to business!
Which to Choose?
Chart patterns aren’t new tools for traders. The very first chart patterns appeared several centuries ago. Since trading went online, it has become much easier to classify and identify them. The most popular signals are:
- Head and Shoulder
- Triple Top & Triple Bottom Patterns
- Rounding Bottom Pattern
- Pennant or Flag Patterns
- Ascending & Descending Triangle
- Patterns Candlestick Patterns
- Hanging Man Pattern
Aspects That Impact the Validity
Chart patterns aren’t 100% relevant. We assume this is because of several factors, including the following ones:
Don’t start trading if you don’t understand how different charts work in different timeframes and you are not informed through people magazine news. Actually, their results can be very different depending on the time zone of time of the day. For instance, patterns efficient for daily trading might be less reliable on weekly charts.
The Type of Pattern
Above, we’ve listed only the most commonly used types of patterns. There are numerous signals, and they can be utilized on different graphs. Every pattern has its own specific features, both visual and functional. So, we suggest that you should examine different types in order to make sure that your technical analysis will produce efficient results.
Conditions on the Market
Every market has its own distinctive features. Obviously, the same patterns won’t work identically if market conditions are changing. Extreme volatility and quick changes between bear and bull market conditions can make chart patterns quite irrelevant.
Chart patterns aren’t new tools for traders. The very first chart patterns appeared several centuries ago. Since trading went online, it has become much easier to classify and identify them.
Type of the Market
As a rule, patterns are just technical tools that work equally on different charts regardless of the market and assets. However, actually, chart patterns appear to be less relevant in markets that are heavily affected by non-market conditions driven by external sources such as governments.
The main function of a chart pattern is to suggest the direction in which the price of an asset is moving at the moment. Whilst the suggestion might be right and relevant, asset prices are often affected by unexpected announcements. In the stock market, for example, chart patterns might turn out to be irrelevant if a company issues an earning report with unexpected results.
What Are the Benefits of Using Them?
Chart patterns are used by many traders. But why should you follow them and consider using these tools as well? We have several reasons:
- Chart patterns are designed to help traders detect and spot potential changes in their trading opportunities.
- Chart patterns are quite user-friendly as these are convenient visual elements that suggest the direction of the anticipated price movement.
- Chart patterns can be used to identify potential support and resistance levels.
- Chart patterns help traders to measure the strength and momentum of a trend.
The Bottom Line
Do patterns work in trading? Our answer is yes. Despite the positive answer, you should consider that 100% accuracy shouldn’t be anticipated from a technical instrument such as a chart pattern. It’s just a helpful instrument that is designed to provide signals on potential price movements.