In the forex trading world, chart patterns are likely to catch your eye right away if you are new to the game. This is because the trader community is full of praise for this type of trading. They will almost definitely appear appealing as a result of habits formed at an early age when our parents employed various shapes and forms to keep us occupied and delighted while we were growing up. Contemporary toy manufacturing and children’s video games are centred on the shapes and forms that are utilised to provide preschool instruction for toddlers and children. No matter what abstract form we look at, our minds are inherently programmed to look for patterns, whether it’s star constellations or currency charts. We add meaning to the seemingly meaningless. Because of this, who could blame you if you hop on the chart pattern bandwagon as soon as you step foot into the world of forex trading?
Indeed, the names of some patterns will quickly elicit childhood memories that will compel you to learn more about pattern trading: the triangle, wedge, rectangle, flag, and pennant are just a few examples. Some of them, such as the head-and-shoulders and the cup-and-handle, are sufficiently attractive. It all seems like fun and games, and why not indulge in a little of it while you’re at it? More seriously, most traders will tell you that it works and will supply you with a large number of instances to back up their claims. But the real issue is: did you learn to accept defeat in activities you enjoyed as a child?
The topic is asked since there is limited information available on the occasions when chart patterns do not function properly. In truth, proponents of chart patterns will offer you examples of when chart patterns have already worked, but they will seldom reveal experiences of when chart patterns have failed to work and they have been utterly deceived by them. It goes without saying that the first scenario would help to establish them as a famous merchant, whilst the latter would disgrace them and depict them as a showoff. Since the availability of successful instances of chart pattern trading goes hand in hand with a trader’s desire and capacity to enhance self-confidence, psychology plays an important part in chart pattern trading. Overconfidence will ultimately result from a reliance on the limited knowledge that is accessible to a small group of traders, as well as a strong conviction in one’s ability to get an advantage over the competitors. Such a frame of mind provides an ideal environment for the unquestionable application of chart patterns, since successful instances that are only evident after the fact are regarded as an actual proof of self-confidence and perceived cleverness. This is the first red sign to look out for when adopting chart patterns as a primary trading technique in forex trading.
It is also crucial to remember that the vast majority of traders are captivated by chart patterns, which is one of the reasons that novice traders are drawn to this type of investment. Observing and mimicking the conduct of others in a group is an example of social learning theory, and it may be described as “the acquisition of new behaviours through observing and copying the behaviour of others in a group.” In social experiments, this same theory is demonstrated by the fact that a random person who is not aware of the experiment behaves in the same manner as the group participating in the experiment, without even being aware of the reasons for such behaviour and regardless of how ridiculous that behaviour may appear to be. Just put, contrary to popular belief, chart patterns should not be blindly followed simply because the vast majority of traders are doing so, according to the contrarian traders’ viewpoint. This strikes me as the second warning sign, especially when you consider the fact that the vast majority of forex traders are on the losing end of the deal.
When looking at charts for the first time, it might be difficult to identify a developing shape. The truth of the matter is that you must draw it yourself, and there are no clear instructions on how to go about it. Line sketching may be quite frustrating, it can occupy a significant amount of valuable time, and it demands a great deal of imagination. It is certain that you will make mistakes and that you will need to redraft several lines and forms, but this does not ensure success. Sketching trend lines is an excellent illustration of how drawing patterns may be a source of irritation rather than efficiency, as demonstrated by the author. As you may already be aware, traders examine charts in a variety of ways, and as a result, trend lines appear at various locations on the chart. As a result, your decisions on breakouts and entry locations will differ from those of other traders, and it is likely that the same will be true of your decisions on drawing chart patterns. There is just no consistency in the designs that are drawn. Adding the first red flag to the equation, we begin to doubt our own skills as a result of the fact that other people’s chart patterns function wonderfully for them. We immediately begin to blame ourselves when the drawn patterns do not produce results.
Finally, it is not the shapes and forms that influence the pricing, but rather the reaction of the major banks to the actions of the retail traders. None of them is putting out any effort to draw triangles and wedges on the graphs and charts. On the contrary, they are inescapably formed through time as a result of the natural process of market movements. Despite the amount of time and effort put into finding the pattern, their natural development does not provide a conclusive indication that prices will move in the direction suggested by the chart pattern. It is still possible for the prices to move in any direction, and there are more methodical techniques to connect the dots that offer us a better chance of success than chart patterns to do this.
Forex trading is not a universal science, and traders can employ a wide range of methods and approaches, some of which have even been designed specifically for them. Those that build distinctive trading methods based on data that demonstrates consistent outcomes are more likely to achieve success, simply because they come to trust the process as time progresses and their confidence grows. Traders have a better grasp of emergent difficulties as they create their exclusive trading system, and they employ distinctive reasoning to deal with market obscurities more successfully as they progress through the process of developing their private trading system. As a result, such traders do not spend time discovering and sketching shapes, nor do they adapt their abilities and expertise to a chart pattern method that has not been validated scientifically.
Although the chart patterns discussed in this page are not backed up by empirical facts that would justify their (in)famous reputation, the red flags raised in this article reflect only one school of thought on the subject. There is no reason to modify the strategy that is largely reliant on chart patterns that generate profits since it is unquestionably a strong instrument for those traders who have discovered the winning recipe for success. Such traders may have a compelling case for the use of chart patterns; nevertheless, they are unable to draw the lines and shapes for all of the traders who are unable to get it right on their own. And it should come as no surprise that the overwhelming majority of people have difficulty using chart patterns, given the growing body of data demonstrating why chart patterns do not function in practise. It is difficult for traders to break free from the habit of recognising forms on the chart once they have become entangled in its web. Furthermore, when they notice a form on the horizon, they have a tendency to change their systems and overthink the situation. In an effort to avoid falling into this trap, each trader who finds himself or herself becoming lost with chart patterns should ultimately ask themselves the same question: would I rather trust my own work and judgement or would I rather follow the signals along the way?