Lesson 6 of 6 · 8 min

Patterns and Why to Take Them with Caution

A pattern is a shape the price sometimes draws and that someone has given a name. The best known are the double top, head and shoulders, the triangle and the flag. They are worth knowing, because they are part of traders' shared language. But they should be taken with caution, for several concrete reasons.

Four reasons for caution

• Hindsight. On an old chart the shape is obvious because you already know what followed. At the moment of decision you see only the left half.
• Subjectivity. How similar must the highs be? How many candles may pass? Without rules, two people looking at the same chart see different things.
• Confirmation bias. You remember the patterns that worked. The ones that did not develop never got a name or a post.
• Wrong numbers. Claims such as “this pattern works in 80% of cases” circulate on social media with no source and no definition of success. Do not take such a claim as fact.

How to turn a pattern into a testable rule

Once you have a rule, you can count. Suppose historical data gives 20 cases and 9 reached the target before the stop, with a risk-reward ratio of 1.5. Expected value: 0.45 × 1.5 − 0.55 × 1 = +0.125 R per order, still before costs. It sounds nice, but 20 cases is too few. Just three successes fewer would give 6 out of 20, that is 0.3 × 1.5 − 0.7 × 1 = −0.25 R. The result of such a small sample can be pure chance.

Training without hindsight

The best exercise against hindsight is a chart where you do not know what follows and do not even know which period it is. The Time Machine below shows real daily candles without dates, names and real prices. You trade day by day through 60 days, and at the end you find out what it was and how simply holding would have done. The tool buys with the whole account and has no stop order, so you track the stop yourself. Do it like this:

• Before every decision write down what you see: the structure, the levels and the pattern, if there is one.
• Write down the entry condition, the stop price and the exit before you move on to the next day, and if a day closes below the stop, sell.
• Play several rounds and record the result, the largest account drawdown and the comparison with holding, and only then review them as a whole.

A good result on historical charts is not a guarantee for the real market either, where there are fees, fear and delay. Most short-term traders in practice do not beat the market, and knowing the names of patterns does not change that. What changes your odds of survival is risk management, which comes in the sixth module.