How to increase the profitability of patterns on the foreign exchange market?
The use of patterns in trading on the foreign exchange market, whether it be Price Action, candlestick patterns or patterns of technical analysisis one of the popular methods of price prediction and is used by many traders. Nevertheless, there are a lot of examples when a seemingly perfect pattern "cheats" the trader, not realizing its potential.
Today we are going to look at one of the ways to increasing the efficiency of graphic patterns on the foreign exchange market.
Beautiful, but unprofitable figures
Unfortunately, cases of "non-working" patterns on the foreign exchange market are common. It is enough to take a closer look at the chart to find them.
Naturally, the older the timeframe, the higher the probability that everything will work, but at larger time intervals misses also take place.
For example a loss-making Pin bar
For example, the following situation. There is a Price Action pattern formed on the chart, known as Pin–bar (Pin bar). This is reversal patternThe Pin bar signals a change in market sentiment. Pin bar looks like a candle with a small body, a long tail on one side and a short one on the other. The body of the candle should lie within the High-Low of the previous candle. It is assumed that the occurrence of the pattern precedes a reversal of the price.
As you can see, a nice Pin-bar has formed on the chart, which could have been a prerequisite for opening a sell trade. If this had happened, the trader would have made a loss on such a deal.
Unworkable "Bear Takeover"
This situation can occur with any pattern. For example, reversal figure "Bearish takeover", in which within an upward trend there is a set-up in which the body of the previous bullish candle is within the Open-Close of the next bearish candle. It is assumed that this pattern is the end of an uptrend and the beginning of a downward trend.
Here is an example of a classic "Bearish Takeover", after which there was no price reversal - after a small correction the uptrend continued. Although the candlestick pattern itself was formed "as the book says", as a result the uptrend is on the chart. An attempt to fall did not succeed, the price reversed upwards.
The described case is not the saddest. Still, the price was going down for some time, and the trader could have had time to move the stop loss to breakeven.
It is impossible to visually distinguish a "successful" pattern from an "unsuccessful" one. Here is an example with the same "Bearish Takeover", but it has already worked properly.
The initial conditions for the formation of the set are the same, but the result is quite the opposite. As expected, after the occurrence of the "Bearish Takeover" the uptrend ended, the price reversed and the downtrend began.
How do I check the profitability of a pattern?
Considering the above, it is obvious that we need to check the patterns. There are a lot of tools for "filtering" graphical figures - it can be technical indicators, support and resistance levels, etc. Rather effective way shown itself the use of volumes, and in particular the standard indicator Volumes.
Let's consider the same "Bearish Takeover", but in combination with indicator Volumes. The logic of pattern filtering is very simple:
- The volume corresponding to the first candle is quite small. This indicates that the bulls have stopped investing in buying the asset.
- The volume on the second candle increases sharply. Given that the second candle "absorbed" the first, we conclude about the change in market sentiment.
The difference in volume often indicates the potential of the pattern. For example, if the volume on the second candle on 30%-40% is higher than on the first candle, the working out of the pattern can bring good profit.
And here is an example of how using the indicator Volumes can save the trader from a loss.
A "Bearish Takeover" has formed on the chart, but the volume on the second candle is less than on the first. This means that the volume of sales is not enough to break the upward trend and reverse the price.
Of course, sometimes this method of filtering fails, but in most cases it allows you to distinguish a losing pattern from a profitable one.
Conclusion
In conclusion, it should be noted that trading on the financial markets, including the currency market, based only on the use of patterns, candlesticks and technical figures, itself carries increased risks. And only the introduction of additional filters, different in nature of work from your main tool, provides an opportunity to reduce these risks and increase profitability. It is only necessary not to be lazy to research the question, search for variants, consider market novelties. Our forum, where professional traders confer with each other on these issues, can help you a lot.
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If you're going to trade by price action, for God's sake, read the book, which says to enter on 2-3 candles. not before! I generally enter on D1 on 3 candles after the pattern. well, it's not hard))