A trading pattern is a price movement pattern in a certain range. Generally, there are 2 types of patterns: candlesticks (shooting star, hammer, bullish or bearish engulfing ) and figures (triangles, channels, flags, head, shoulders, etc.). The number of them is constantly increasing, through the change in the market, but there are up to 50 main patterns.
So why do trading patterns work?
The answer is very simple — because many traders use them in trading. Imagine a traffic light with a red light According to the rules all drivers who have the same signal stand waiting for a green light Here, it lights up and allows all cars to move in the right direction. It’s a clear rule, not only in your country but in all the countries in the world. The situation is the same with trading patterns.
Let’s imagine that a chart is a road, and a pattern is a light. The price rises or falls and a pattern is formed. You have determined that it is a bullish pattern, such as a bullish wedge. Of course, you are waiting for the wedge to move to the upper boundary and break it up, that will be a signal to open a trade (green signal to move). At the same time, all the drivers (read as “traders”) begin buying with you and pushing the price higher and higher.
Why do traders do this? As said in the beginning, patterns, like the rules of the road, are learned by all traders, regardless of nationality, this is the general rule, and that is why these patterns work.
In what cases do they not work?
As you know, most people in the market can’t be right. Conventionally, if everyone opened a long and bought Bitcoins at $50,000 and the price went up to $100,000, then someone should have bought those Bitcoins from you for 100% more. If everyone held a long, there would be no one to sell and no one would make a profit in the end. That’s why there are always 2 sides to trading: buyers and sellers.
With the increasing popularity of patterns, most traders and especially beginners who first studied patterns began to open trades according to these rules, and …. took a loss. Patterns work especially badly in the cryptocurrency market, which shows how young this market is. But why? All because most cannot be right when trading patterns, otherwise no one would make money.
What should I do if I trade only patterns?
Recommend adding more rules to your trading strategy. These can be different trading tools, and filters that will help you to remove “fake” signals and increase your win rate. For example, trade, not the triangle pattern, but its false breakout using a volume indicator:
1️. A false breakout in most cases shows that the price will not go in the direction of the breakout, as there are too many willing to open a trade in the direction of the price movement.
2️. The volume indicator will show the actual number of buy and sell orders. If the volume at a false breakdown of the lower boundary of the triangle has increased — this tells us that the price is more likely not to move down, as there is serious support there.
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