A Dynamic Chart Formation
In the prior series, your introduced to price ranges that are worth your attention as a trader trying to manage risk and assess the trend. The underlying concept that both price ranges and price patterns, which will be looking at over the next you articles, is that price and the traders who trade price have a distinct memory and will often behave in a manner similar to past behavior.
Using an example from another world, an addict of any substance has an association to the benefit emotionally of a harmful substance and therefore is at higher risk for repeating a behavior that is detrimental to their long-term well-being. The memories have set up triggers in the brain that make repeating past behaviors more likely. We are applying that same well-known concept to price on the charts and trading.
What You should Watch
As traders, there are few things that were always looking at to build an edge. Naturally, many traders will look at the news and trying figure out if some currency in the underlying economy is in trouble or continuing to strengthen. However, the charts with their trends and patterns will help us confirm if the larger market is agreeing with our views.
In order to confirm or invalidate our views we will look for patterns on the charts. Specifically we will look for two types of patterns. First, we will look for trend confirming or continuation patterns. These types of patterns develop as a correction against the larger trend, which offer traders like you and me an opportunity to enter the trade with improved risk to reward ratio.
Second, we will look for reversal patterns. Reversal patterns are rare and you should have a higher sense of distrust that the pattern will play out.
Building a Bias
Don't Put Too Much Trust in the Pattern
Of the two types of patterns, continuation and reversal patterns, it is better to doubt the reversal patterns and trust the corrective patterns. I spend over 10 hours every week hosting a live trading room called daily FX on-demand and it is very common for traders to think a reversal pattern is more likely than a continuation pattern, which is a fallacy.
By definition, a reversal is going to require greater force and often a unexpected news event to not only cause doubts in the belief of the larger market but additionally cause people to see that the belief they previously held was wrong. It does not take too much imagination to know that people will often defend their beliefs long after doubt first creeps in and it takes even longer for people to admit they were wrong and reverse course. Therefore, a reversal in the market should be treated as a rare statistical event relative to a continuation pattern which allows people to confirm what they've previously believed
Bonus: Be Late to the trade, early is often for thrills >profit
One thing you will hear discussed over the next few articles is that it is okay to be late into a trade. Many traders often associate being late with some type of failure but I would much rather preferred to be late in a continuation of a trend that has a higher probability of continuing as opposed to being early any potential reversal pattern that does not take shape and causes you to be in a losing trade that could significantly reduce your account equity. By all measures, we want to avoid any significant loss of account equity and always put ourselves in higher probability scenarios to grow our trading account if possible
Next, we will discuss both the types of continuation and reversal patterns in the FX market and things that you can look or associate those patterns with in the news and sentiment