Classical Chart Patterns are a very controversial topic especially in the cryptocurrency trading space. Most new traders and often younger ones seem very skeptical about classical patterns. However, we beg to differ.
Like every strategy, system, indicator or trading tool, chart patterns produce false positive signals. There is no method/tool that is bullet proof or guaranteed to work. We believe the majority of reasons people find chart patterns unreliable is because they don't follow the rules for what constitutes a valid pattern and fail executing the signal they produce when a proper occurs. We have to be frank, over the last several years we have seen an increasing number of what can only be called Qusi-Quasimodo Head and Shoulders patterns being thrown left and right, sometimes even by people who should know better. This leads to people loosing trust in this traditional technical approach.
We consider Technical Analysis to be, if you wish, the Cardiovascular system of trading. Thus, Classical Chart Patterns are a reflection of the overall market psychology. For example, if we take the ever so popular Inverted Head and Shoulders pattern, if we are to try to analyze the market psychology behind it, it can be broken down to :
We first make a shoulder, then a lower low - the Head and then when sellers attempt to push the market to new lows sudden buying power is found that rejects new lows. To be fair, we find Head and Shoulders patterns (Inverted and Standard) to be among the best to trade, especially when all conditions are met.
There are a lot of excellent resources over the internet with regards to classical chart patterns, however, Bulkowski's website is one of the most thorough, often updated. free and informative that we knows of. You can find the website here : http://thepatternsite.com/chartpatterns.html .
On Bulkowski's website you will find the percentage failure rate and conditions required to be met for a Chart Pattern to be valid. Here's an example for an Inverted Head and Shoulders pattern : http://thepatternsite.com/hsb.html - you will find statistics on failure rate, target meets, as well as criteria required to make a pattern valid.
There is a saying among veteran traders that trading on fundamental analysis alone is like a doctor giving a diagnosis to a patient without asking 'what are the symptoms'. We believe Technical Analysis is the crucial tool people need to improve their entry & exit points and have better risk management, as such, chart patterns that require a set of rules to be met before entering a trade can represent a great trading approach for beginners.
We also would like to note there are some excellent Classical Chart Pattern traders on Social Media, the most notable one is Peter Brandt. He is somewhat of a controversial figure, however, he was one of the first and is now famous for it to call the 20k top in BTCUSD in 2017. Here's his now famous tweet :
Link to Peter Brandt's twitter account : https://twitter.com/PeterLBrandt
Overall, we believe, trader's should be open minded of chart patterns and while one might not trade from them we believe having knowledge and being acquainted with them is a sign of excellence.
Disclaimer: Please note, XBTFX and Peter Brandt are no affiliated in any sort of manner. XBTFX, however, feels his content is great for educational purposes. All information here is purely for educational purposes and should not be considered investment advice.
This post has been prepared by XBTFX.
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