Trading Patterns. Advantages and Disadvantages

Every participant of the financial market at the beginning of his way faces up a challenge of which forecasting method to choose in order to achieve success. The choice is usually made between technical and fundamental analysis.

Sometimes the usefulness of technical analysis with its charting methods is contested. Patterns are necessary components of these charting methods used to forecast further trend direction. Pattern opponents state that market price formation is governed by chance violating all the rules, as a result every situation on the market is unique.

Chart as a reflection of market moods
Supporters of charting methods among their arguments mention one of the key provisions of technical analysis implying that every factor of price formation – political, economical or psychological – is taken into account by the price as a result is reflected on the chart. That is why studying the price chart is required to make any kind of forecasts for further developments. Prices tend to consider every factor responding immediately. Besides we always need to take into account the fact that the market is full of so called “insiders” who become informed of certain events before the information becomes publically available. While insiders often possess large financial resources, their activity may influence price actions and the result will be seen on the chart.

Traders are also required to be knowledgeable of the fact that if certain types of analysis brought results in past they will probably do that in future as the psychological nature of human behavior remains stable. The main reason of price fluctuations is changing in moods of market participants.

A chart shows a distinct immediate reflection of influence of all fundamental and psychological factors. A model designed on fundamental data will look too complicated and it will be based on subjective suggestions making it very sensitive for errors. Thus, models built on technical analysis are easy to read and use in taking grounded decision.

Chart pattern types
Generally chart patterns are repeated models, images, figures, candlestick combinations having statistical advantage and they tend to repeat in future. The market is always changing. These changes may be noticed through changes in prices. These price changes often form chart patterns widely considered as signals in trying to define possible further trend development. Chart patterns are not something new for traders. However, chart patterns, their exact meaning, involvement and subsequent applications were overlooked by many traders until recent times. Different researches proved that some patterns are of high forecasting probabilities. The most wide spread patterns are: symmetrical triangles, wedges, ascending triangles and descending triangles, rectangles, flags and pennants, head and shoulders patterns.

Thus, all trading patterns are characterized by the following features:
1. Patterns should involve positive mathematical prediction that the price will move into the right direction. Otherwise there is no need in patterns.
2. It is a definite advantage if a trader has at his disposal some trading models describing certain price actions.
3. Trading patterns are always short term as pattern remains effective during only a short period of time.

Indeed, if the pattern is effective for a certain period of time, a trading plan needs to take into account possibilities of closing position on expiration of the pattern effect. Thus, trading pattern advantages outnumber its disadvantages, but trading patterns requires appropriate skills and level of market education.