Trading is a complex subject that can be difficult to fully comprehend. It goes against our natural inclination for simplicity, as we often seek out easy answers to complicated topics.

This is why we often see trading “gurus” and chartists promoting a set of chart patterns that claim to guarantee huge returns to grab our psychological attention. Some online sources even promise success rates as high as 90% with a 60% profit return. But are these patterns truly foolproof or are they just too good to be true? Let’s explore this further with TradeDots.

What Are Chart Patterns

Chart patterns are formations that appear on a price chart of trading assets. There are various types of chart patterns, each with its own unique characteristics. Traders have identified commonalities among these patterns and have compiled a set of chart patterns that predict the likelihood of a price movement, whether it be upward or downward, in the near future.

A chart pattern can be recognized by analyzing price movements using trendlines and price pivots. TradingView offers a feature that helps identify chart patterns, which can be accessed through the indicator list.

The Top Three “High Return” Chart Patterns

Inverse Head & Shoulders

This pattern boasts an impressive success rate of 90% in reversing a downtrend, with an average price change of 45% when entering this pattern.

The “Inverse Head & Shoulders” pattern occurs when the price of an asset hits a bottom three times, forming two troughs known as the “shoulders” and a lower trough known as the “head.” This pattern suggests that the price of the asset may soon start to rise.

If the price of the security breaks out above the resistance line, it could indicate that the reversal is complete. Conversely, a break below the support line could signal a continuation of the downtrend.

So, how accurate is this pattern? Let’s examine an example on $CL1!. On the left side of the chart, the “Inverse Head & Shoulder” pattern is formed. The market price breaks through the resistance for a few bars but immediately returns within the resistance line. It never reaches the targeted price and even breaks through the support level. However, instead of moving in either direction, the market moves sideways, resulting in losses for traders on both sides.

Another example of $CL1 on a different time period shows a similar outcome. The price fails to break through the resistance level and retraces back to retest the support level. But eventually, it rises back up, causing losses for those who stopped their losses early.

One might argue that this is because the price never truly breaks through the resistance level, so one should never buy in early. However, the following chart on Litecoin ($LTC) is another example that demonstrates that without a good take profit system, traders will still experience a negative abnormal return with this chart pattern.

Below are two more examples in the crypto market that prove chart patterns are not highly reliable. It is more important to determine when to take wins and losses.

With the assistance of the TradeDots indicator on the chart, which labels market reversal signals (e.g., green dots for an anticipated downtrend), traders can easily avoid buying into patterns that seem too good to be true.

Triangle Chart Patterns (Descending Triangle / Ascending Triangle )

The triangle chart patterns, whether descending or ascending, have a relatively high success rate of about 85%, with an average price change of 40%. These statistics make them highly profitable chart patterns, as you can find online.

Descending triangle patterns are formed when one trend line connecting a series of lower highs and a second horizontal trend line connecting a series of lows. In contrast, ascending triangle patterns are formed with a horizontal line to be drawn along the swing highs and a rising trendline to be drawn along the swing lows.

The two triangle patterns are both a continuation pattern, but sometimes be treated as reversal patterns, depending on the direction of the the price broke out.

Let’s investigate into how truly effective these patterns are. For this first example of a descending triangle on Bitcoin ($BTC), we could see the price broke out the resistance. But before reaching the take profit price, it reverted back and broke through the support level, forcing a stop loss. Without TradeDots, traders could never take any profits from this trade.

The next example on Amazon ($AMZN) behaved similar: breaking through the resistance then retraced back and broke through the support level, causing losses for traders who did not take profits.

There are also times when the price did meet the expected profit point. Using the following Nvdia ($NVDA) as an examples. The price broke through the support level and following the trend to touch the take profit point.

There are instances when the market experiences significant fluctuations, resulting in losses for traders on both sides. For example the following two examples involving CFDs on Gold and C3.ai ($AI). They demonstrate that the price can break through resistance, retest the support levels, or even surpass them, leading to losses for traders who took long positions. Then, the price can also reverse and generate substantial returns, causing losses for traders who went short.

Therefore, it is crucial for traders to be prepared for market changes and react promptly. Predicting or comprehending the trading market is not an easy task.

Bull Flag

Bull flag is another pattern that claims to yield an impressive 39% returns with an 85% success rate.

The bull flag pattern occurs when the price of a security undergoes a rapid and sharp increase, followed by a consolidation phase where prices consolidate within two parallel trendlines. This pattern indicates that the security’s price may soon move in either direction, depending on the breakout’s direction.

To illustrate this pattern, let’s examine a textbook example involving Netflix ($NFLX). The price action adheres to the pattern and reaches the take profit point.

However, there are also times when the price failed to breakout and continues to decline until it reaches a triple bottom.

The last example again highlights the market’s unpredictable nature. Relying solely on a single indicator or chart pattern to predict market trends is not advisable. Sometimes, the price may test our stop loss area before reverting to a reversal pattern.

Bottom line

In conclusion, instead of blindly adopting a single trading strategy, it is essential to thoroughly analyze the market based on its current conditions. Utilize multiple indicators and time frames to confirm the market’s status. Additionally, adopt a systematic approach to trading, always implementing stop loss and take profit levels when the price aligns. Avoid succumbing to emotions during trades and continue to learn and refine a strategy that best suits your trading style.

About TradeDots

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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves risk, and it is important to conduct thorough research and seek professional guidance before making any investment decisions. Prospective investors are encouraged to perform their own due diligence or consult a financial advisor before making investment decisions.