“Just as the river where I step is not the same, and is, so I am as I am not.” Greek Philosopher Heraclitus
Technical traders seek opportunities within similar patterns. Whether it be a candlestick pattern, chart pattern, moving average crossover, trend hold or break, support or resistance reversals, fib retracements, even moon phase or seasonal trends, technical traders look for, and attempt to profit from, history repeating itself.
Though it may seem natural, and even mundane to say so, the ability to recognize patterns is both subjective and quite extraordinary. Subjective in that two traders’ perspectives of the same chart rarely, if ever, match. Trends are subjective, as are support and resistance lines and any number of other indicators used to measure price changes. Since the market is neutral and has no opinion (it just is), one trader may consider the market bullish, another bearish. Again, all based on subjective perspectives.
The ability to recognize patterns is indeed extraordinary. We were not born with a universally accepted pattern recognition chip in our brain. It is developed over time as recognizable patterns take shape based on our own personal experiences. Case in point: my 10 year old son recently asked me how I knew to drive from our house to his school without a map. Kids ask the darndest things (it could have been worse). I am able to recognize the roads that lead me there. Although there are a few different routes to take, I choose the route that makes the most sense to me and I follow the route without the need to read the street names along the way (don’t ask me cause I don’t know them all anyway). I have stored away a pattern wherein I do not have to rethink the route anew each day and I certainly do not need to read the street signs to make sure I’m on the right road. With this in mind, let’s take a look at two charts (or routes) of $X from the perspectives of two seasoned traders and the new traders looking over their shoulders:
In chart A we have a trend trader who looks for patterns denoting previous trend reversals. He sees a reversal, a support, and a continuation of a new trend. It has taken trend trader some time to develop his keenly subjective sense of market direction. He knows there are other ways to interpret the charts. There may even be indicators that would lend caution to this “bullish” set up but he has determined that this is his bullish trade. It’s his edge. It makes sense. It is the quickest route to his profit taking destination. A new trader may not “see” this pattern but considers trend trader to be extraordinarily gifted in his abilities.
You may click charts to enlarge.
In chart B we have a consolidation trader who looks for strong support and resistance patterns with no discernible trends. She sees $X at a resistance level; therefore, looks to short the stock for a reversal back to a previously defined support. She knows there may be other ways to discern this price action but shorting seems to be the appropriate course of action as she successfully (and profitably I might add) traded the previous support and resistance areas. It makes sense. It’s her edge. A new trader may only see red and green candles with no discernible pattern (like my 10 year old son who does not see the route) but once consolidation trader maps out the course, new trader “sees” the trade and considers it an extraordinarily brilliant decision.
No matter the trader and no matter the pattern, each one of us “sees” something different based on our uniquely designed perceptual maps. There is no “right” or “wrong” way to read a chart… just the trader’s way based on previous experiences both independent of and in conjunction with other traders’ ideas, such as the experiences of the new traders mentioned in the above examples. But once an acceptable map is subjectively created, the successful trader follows it, changing course only when deemed necessary. Changing course, again, is based on each trader’s perceived reasons to do so. Sure, patterns do often repeat but they do often fail. When a trader recognizes a pattern he is also able to recognize the pattern’s failure, much like Heraclitus who recognizes that the river today may not be the same as yesterday and neither is he the same man with the same opinion today as he was yesterday. His opinion or perception may need to change with any changes in conditions.
Now, back to my son. He proceeds to inform me that his mother travels a different road or two than I and that she believes her way is the best way for two reasons: 1) others in our neighborhood take the same route (the trend argument), and 2) her way is the quickest (the momentum argument). However, I beg to differ since my way involves the least resistance (less traffic lights) and the greater support (my lead foot).
Of course, if there is an accident along my established route I’ll take a detour and follow the trend.