[Soultrader]

One particular topic I have been thinking about recently is technical analysis. The markets never change because human behavior will never change. Anyone involved in the markets will know that we are not really trading the markets. We are trading other people. Thus human behavior reflects market behavior and we are able to exploit recurring price patterns to profit from. That is the core belief in technical analysis.

However, technical anaylsis and price patterns have mainly been studied and researched for daily charts. In intraday trading, do this patterns still remain valid? Classic price patterns such as the head-n-shoulder and triangles have become widely popular among the trading public. What was once an edge is no longer present. That is why false breakouts, pattern failures have become a popular trading strategy among professionals.

My biggest question is this: do technical analysis work when day trading the futures markets? From my personal experience specializing in the dow mini futures, the answer is no. Let me explain:

Classic head-n-shoulders patterns can stilll be traded successfully with a different set of guidelines. The only reason why they work is simply because price is unable to make a higher high than its previous peak. This indicates weakness and traders will usually short this pattern. Amatuers will usually short the break of the neckline. This is usually too late into the move. I have learned that trading soley on technical patterns is a sure way of losing. Many professionals are fully aware that amateurs love trading price patterns. Therefore, they have made tweaks in the rules and guidelines for trading these patterns. Pattern failure is fairly common in the dow futures.

Another favorite by the trading public is double bottoms and double tops. Amatuers love shorting new lows. In the dow futures market, the markets will usually trade 5-8 points below the previous low just to reverse and rally. The markets need to test new lows and highs to see if there is significant buying or selling pressure in these levels. When professionals realize that the only participants involved are small traders, they will usually reverse it in the oppposite direction.

Regardless of any pattern or technical indicator, price is king. Tape reading and volume analyis are pure information that can help you trade with an edge. In the futures markets, you need to be able to define key support and resistance levels. These are the high probability trade zones. There are different ways in finding these zones using, fibonacci cluster levels, pivot points, moving averages, etc.... You must find something that you feel comfortable trading with. I specialize in using pivot points, pivot point clusters, and market profile. Others prefer moving average cluster zones. I strongly believe trading off these key levels give you a higher probability trade than relying on technical price patterns.

I have had the opportunity to day trade with many professionals . I have yet to meet a trader who relies soley on technical price patterns. Of course we are all aware of the pattern. The only time I will trade a pattern is when it lines up with a key price level in my market analysis.

Do your homework and know your market. Hard work and preseverance is the key to trading success.

[Lisa]

Hey J.Lee, thought you might want to take a look at this article:

Why does technical analysis work?

[Soultrader]

Originally Posted by Lisa »

Hey J.Lee, thought you might want to take a look at this article:

Why does technical analysis work?

Thanks Lisa. I like to emphasis more on classic price patterns. I do recognize candlestick patterns but these patterns are not taught in trading books. They are patterns that I just recogniize from years of trading experience. I do not look for standard price patterns such triangles and flags. Instead I look at the bigger picture. For example, one particular pattern I see over and over again is a low, a higher low, then a 61.8% fib retracement from the swing low to the swing high. To me this pattern represents a low in place and will usually look for a long entry at or near the fib line.

Most of my trading methodology involves pivot points and market profile. These are technical tools but different from technical indicators such as Moving Averages, ADX, RSI, MACD, etc... I do not like using lagging indicators. I like to base my trading on price action alone. I hope this clarifies things.

It's pure voodoo, alright! Voodoo economics at its finest. And it works. That's all I really care about.

[torero]

I'm obliged to defend trading price patterns because I use it. I think people use it in different ways from what it was originally taught by the early pioneers. Over the years, newbies or instructors come with different interpretation and perceptions on how these patterns work. I, for one, use them daily to daytrade. But I thing I would like to emphasize, and this goes for other types of technical analysis using indicators etc, is that price patterns in higher timeframes than the timeframe you use to make your entries and exits are the ones that work.

Many people assume that the same price patterns forming in the same timeframe they use to trade work at a higher percentage. They do happen but I always rely higher timeframe pattern to confirm my direction and timing of my trades. 2nd, many make their entries without pattern confirmation... big mistake. I always wait for the break of the pattern, pullback or retrace, then proceed in the expected direction, that's when I come and not come in at the first break. As market change where more and more fakeouts, false moves, etc keep fooling the average trader that confirmations become a necessity to trade successfully. I also use patterns along with S/R and Pivots, so it's not a be-all, end-all strategy. Like everything else in trading, nothing by itself works, combine with other things work wonders.

The concept behind price patterns is well... price. So Price is King in patterns. If you take a look at the formations, they are an advanced version of price action... how? higher highs and higher lows or lower highs and lower lows. So, back to head-and-shoulder, what do you see? Higher high/higher low, then the right shoulder... what happens? Lower high/lower low. Same logic as price action to me. I think alot of people assume price projections from patterns are bunch of bull. Fine by me. At least I have a target to shoot for and determine my R/R before committing a trade. I know price projections (measured moves) work very well in Forex.

[brownsfan019]

Here's what TA can work in futures on an intraday basis - TA is simply a self-fulfilling prophecy. The more people 'seeing' the TA setup, the more likely it is to work.

For example, in one of the threads here, someone posted a 'pinochio' bar chart setup. I never heard of it. But, in candles that was simply a gravestone doji. So, if candle traders are shorting the doji and bar chart guys are shorting the pinochio, price may travel lower simply b/c of the amount of shorts entering the market. And since each of us may enter at different intervals, it's simply a matter of if there are enough guys trading the doji/pinochio setup to drive it lower.

So, it can be argued that the TA was in fact what pushed the price lower to the point where the tape readers got interested as well. I really believe it's just a matter of how many things line up at/around the same time on the majority of traders charts. That's all. If you have a trade that failed, all that says was that the majority of traders out there did not see what you did. Trades that work are simply telling you that the majority of traders 'agreed' with you, but not necessarily b/c of the exact same reasons. I don't think that discounts TA at all. I mean, I am successful trading with candles and moving averages, so I could argue that if you are tape reading and not making serious money, tape reading is lagging. My point being that the setups themselves - whether tape reading or TA or flipping a coin - is simply one part of the overall picture of why your trades win or lose.

[walterw]

I want to add my input... market performs by itself (not by TA), the forces of supply and demand basicly respond to the psicology of the masses... wich is fear and greed... now TA reflects whats happening in a wide variety of presentations, who has the edge ? maybe the aproach that understands that finally what moves the market its the big smart money.... so here on TA you have "aproaches" that do take into acct the smart money and others that dont.... so I cant mix all aproaches on the same bag and say TA doesnt work, because TA with this so diferent considerations have very different outputs.... TA is an accesory.... if you understand whats behind TA (true market performance) then you are near to success.... cheers Walter.

[notouch]

Newbies often get frustrated with TA because they use it incorrectly. Typically they'll do something like put RSI on a 5 minute chart and buy every time the line crosses above 30 and sell every time the line crosses below 70. Or they may buy every time they see a hammer on the 2 minute charts. They'll lose money and conclude "technical analysis doesn't work". TA is just a way of reading the markets. Looking at the daily YM chart for example we can see a double bottom then a rally then a 50% pullback of the rally then a doji then a dragonfly doji. What's that telling you? It's telling you supply was cut off at the low, then strong buyers came in but the buyers took the price too far up so it retraced but then strong buyers came in again. Using TA to read the markets we could see that a further rally was a strong possibility and the market acted as expected.

Also TA isn't just about candles and indicators. Volume analysis and Market Profile are forms of technical analysis.