There are times when a chart pattern or price pattern “catches” a big trading move. Meaning that there was a chart pattern or price pattern that formed, and for the people watching those patterns and took the trade, then they take the signal and profit from it.
The chart pattern or price pattern didn’t “cause” the market to move. The move happened, and the battle between the bulls and bears just happened to form those specific patterns in those specific areas.
In other words, chart patterns and price patterns do not catch every huge trading move. The reason is because they do not fire patterns off at the start or end of every trading move. They can’t because they are not the perfect system. They can’t because they do not generate order flow. They can’t because they are not the foundation of every market. Order Flow and liquidity are the foundation of every market.
Now some traders will say that they don’t have to catch every move to make a lot of money. That is very true. You don’t have to catch every move. If the market is showing conflicting signals, chart patterns, or price patterns, then the traders wisely choose to stay out of the market until a nice clean signal forms. Nothing wrong with that. All prudent traders do that, even order flow traders.
Market Movements With No Chart Patterns?
But now think for a moment.
Think of all the times when a huge market movement occurred of hundreds of pips or thousands of pips where there was no chart pattern or price pattern to tip you off. And there was no chart pattern or price pattern to get you into a continuation move.
Even chart pattern traders and price pattern traders admit that their systems cannot catch every move, nor will their systems always provide an entry point in a strong trend. Sometimes they do, other time they do not. There are after all times when chart patterns or price patterns can be confusing and conflicting, and thus causes you to stay out of the market while you await a cleaner signal.
There exists massive profit potential in those trading moves where there is no chart pattern or price pattern signal, but yet the market still magically makes an explosion of volatility. The market makes an explosion of volatility because the market is moved by order flow. The market doesn’t need to wait to form a perfect chart or price pattern in order for it to move. If the aggressive and billion dollar order flow is there, it just moves! The market isn’t going to say “hey I want to form this head and shoulders pattern first, with nicely defined shoulders and then make a clean breakout.” Nor is the market going to say ” hey I want to form this nice engulfing pattern at a key retracement level, with fib support and price pivot support, then move in a certain direction.”
The market doesn’t have any of those rules. If there are aggressive market orders to consume the liquidity at a certain price it just moves.
Now of course sometimes the market forms the nice patterns, which is why the chart pattern and price pattern trading is so seductive.
The thing to remember is that you can find 50 of those perfect chart and price patterns that succeeded wildly, while you can find another 50 that have the same characteristics, that failed miserably. Or you can find certain perfect chart and price pattern signals where the market moves 300 pips in your favor, while other ones the market may move 1,000 pips in your favor.
Similarly, you can find failed perfect chart and price pattern signals where the market moved 300 pips against you, while other ones the market moved 1,000 pips against you. Of course you were stopped out way before, but the market would of kept moving against you had you not gotten out.
There are all these disparities and discrepancies because the chart and price patterns do not cause the market to move.
If you like to use chart and price patterns as sort of an early warning system to cause you to get interested in researching a market more, then that is absolutely fine. But don’t just stop researching a trade because the market forms a nice pattern. Remember that everyone looks at charts. Catching the big trading moves and the big profits revolves around doing work and research in addition to whatever chart and price pattern research you may currently be doing. Or the very bold just choose to dump the chart and price pattern research and go straight to pure order flow.
Here is a quote from Bruce Kovner in the market wizards:
Kovner: I can’t hold a position unless I understand why the market should move.
Kovner: There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.
Does Kovner sound like someone who would place a trade based only on a chart pattern?
There are other traders who say they don’t care “why” price moved or why it will move in the future. Well Bruce Kovner, the now retired billionaire hedge fund manager, just said that he can’t hold a trading position unless he understands why the market should move. I will go with his advice over some random forum troll any day of the week.
For all the technical analysts out there, remember all the times when the market made a huge move, but your technical analysis was unable to detect it happening. For there exists massive profit potential there.
Order flow always occurs first and moves the market. Order flow is always present.
Then if the bulls and bears happen to form in such a way as the chart and price pattern forms, then you get a signal from the charts.
Then if the market moves enough, the moving average crossovers will finally signal an entry point for those technical indicator traders. But by then, the move can already be over.