How failed chart patterns can be your best friend
As the saying goes … history doesn’t repeat itself … it rhymes with itself.
This is why, when we see a chart pattern forming … we shouldn’t assume we know what’s going to happen. When we do that, we can only be right or wrong.
However, if we watch and learn, we can make a profit when the chart pattern succeeds … and STILL make a profit when it fails.
How?
Because we understand what that failure means … and what traders are likely to do next.
And fortunately, traders’ reactions to failed patterns are just as predictable as their reactions to successful patterns …
Most traders grind their teeth when chart patterns fail … at best it’s a trading opportunity missed … at worst it’s a loss taken on your account.
But we can get so set on what patterns ‘should’ do … we fail to examine what happens when they don’t perform according to the text book.
And what happens next can be just as predictable (and often even more profitable) …
You may have heard the saying ‘from false moves come fast moves’.
What it means is that a failed chart pattern can be the perfect starting point for a big, fast market swing. If you’re ready, and you know how to act – you can take advantage of it.
What a failed chart is telling us (if we bother to listen)
In the example below, we see a triangle consolidation pattern.
The price breaks out to the up-side … then reverses and is followed by a rapid sell-off …
What are the forces at play here?
At the upper edge of this pattern, sellers have been coming into the market, creating this area of resistance (the upper border of our triangle).
But, once the level of resistance is broken, buyers looking to get into the market will act – forcing the price upwards.
Also, the sellers will have their stops triggered – which equates to more buying momentum.
However, within a short time this momentum has fizzled out and the price has moved back below the original resistance level. Now our buyers are sitting on a loss (and thinking about selling) … and our sellers are considering getting back into the market.
This is a crucial moment to watch for a sell-off – and, if it happens, it’s likely to be fast. And that’s exactly what happened on our chart above.
The same thing happens if the failed chart pattern is to the downside
Here’s another example, where the price broke below support levels. This time we experience accelerated buying power …
When the breakout fails, and the price creeps back above the former support – that’s where we have our entry and can enjoy a big rally to the upside.
One of the great things about these trades is that our support or resistance levels are clearly defined, so we can trade with a very good risk-reward ratio.
What if the price changes direction again?
Another great way to enter a trade from a breakout is on the pullback.
I’ve written a fair bit about pullbacks in the past – they are a very powerful signal, and could be confused with the failed pattern entry we’re looking at today.
A pullback occurs when a breakout returns to the level of support that it broke … and then changes direction again – bouncing with momentum off that level.
Just as with a failed pattern, this move will often have a momentum, with the price shooting off.
The trick with profiting from both of these patterns is to recognize the crucial moment … as the price returns to that key level or support or resistance. This is where we need to be watching for bullish or bearish price action.
This is one of the few instances I recommend using tight stops, as these trades are a great opportunity for lots of upside, with limited downside.
In this way, failed chart patterns and pullbacks can be even more profitable than the patterns that match your text book.
JOIN US ...
Get full access to members-only resources, plus my weekly email updates ...
I will NEVER share your details for marketing purposes. Privacy policy
Strategies I'm Using
It has taken 2 years to persuade this market…- These videos show how to make 24% gains in…
As you can see from all the data I've…
Get the low down on the Heikin Ashi Mountain…
8 comments
David
Hi again Jason,
Yes, all things have to be taken in context. Fakey’s though when properly formed and at strong support/resistance areas are generally high probability in my experience.
My head’s too simple for complicated things. Higher timeframe trend, pullback to support/resistance, enter on a lower timeframe, maybe a bit of divergence thrown in, momentum recommences, about all my brain can cope with.
Have a good weekend fella.
David
Hi Jason,
Your reply says everything you need to know about Elliott Wave in my opinion. I read it 3 times and still can’t make head nor tail of it. The first chart was a simple fakey as I pointed out in my reply, why complicate things?
Jason
Hi David,
Understandably some folk find Elliott Wave very subjective…….it is a “pattern recognition” system and some of us are just not very good at this. If you read the theory, and yes it does take some reading, and put in the time to familiarise yourself with the patterns, things will be a lot clearer and I have found it to be time well spent!
Mark’s piece was about “pattern failure” and I was simply pointing out that from an Elliottician’s point of view there was no ‘triangle’ pattern here as Mark had suggested.
Your simple ‘fakey’ is fine to point out in hindsight, but I can find as many of these that are fake as those that are not!! You say it as if this ‘fakey’ is a dead giveaway when it certainly is not……if you take all the candles to the right of the red circle away, this could just as well have been an ‘expanded flat’ (a very common corrective pattern) before price resumed to the upside…..and then your ‘fakey’ would have faked you!
Elliott Wave Theory is a road map if you like, and at times you will come to junctions; the wave principle will show the ‘probable’ best route ahead based on what has happened in the past, but I would never suggest solely relying on it. I use it to back up my strategies to add weight to them and increase the odds in my favour. What it is very good at is telling you when you are wrong and either stopping bad entries or getting you out of a duff trade early. Hopefully you won’t have to read this reply three times to understand my point of view!!
Jason
Mark, your first chart does not show a traingle pattern at all, you are trying to force the issue here; triangles (as per Elliott Wave Theory) have far more rigid rules & guidelines than you are applying here! What is shown is either a Wave 1 or A (possibly leading diagonal) followed by a Wave 2 or B (flat correction) and then the main thrust lower is either an impulsive Wave 3 or C (sub-divided into 5 waves). As the wave structure to the left of the peak was a clear 3 wave corrective count to the upside, the next move was always likely to be to the downside and no ‘point-of-ruin’ had been exceeded ‘following the peak in price’ to suggest otherwise!
The second chart shows a 5th wave termination following a 4th wave ‘triangle’ (abcde) consolidation that started with a small wave ‘a’ up in mid-Dec, wave ‘b’ down ending just before start of Feb, wave ‘c’ up ending just after mid-Feb, wave ‘d’ down ending just before the end of Mar and wave ‘e’ up ending early Mar. A terminal Wave 5 thrust follows, which itself can just be made out to sub-divide into 5 waves down.
There are no ‘failed’ patterns here and there was certainly no trade to the ‘upside’ in the first chart nor a trade to the ‘downside’ from 4416.5 in the second chart!!
jesu vadian
could you tell us how to place our stops. i always get stopped out, i have tried tight and also fairly large stops like 50pips.
thanks.
Mark Rose
I’ll add it to my list of topics to cover, plus you may find this post helpful: https://www.tradersbulletin.co.uk/stop-loss
Mark Rose
Absolutely – this is a the perfect set-up to use your candlestick knowledge on. Note that even as the price accelerates away on the first chart, we still manage to get a cheeky pullback.
David
I agree Mark. This is a classic fakey setup, Motherbar (MB), inside bar (x2), next bar breaks the high of the MB and then closes back inside it’s range. That bar was also a bearish Outside Bar as well so overall a pretty strong statement of intent.