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     snifter
Member
Username: snifter
Post Number: 146
Registered: 11-2002Rating: 
Votes: 5
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| | Wednesday, January 29, 2003 - 12:49 pm: |  
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Greetings folks...
I've never been one to take anything on face value, and this applies particularly to what I read in trading books.
When I read about some pattern or technique or strategy that will supposedly benefit my trading, I neither believe nor disbelieve it until I've checked it out for myself. Only after I've checked it out thoroughly do I consider myself qualified to have an opinion on it.
I've frequently found (to my surprise) that many patterns that are touted by well respected authors as being reliable trend reversal patterns are in fact nothing of the sort....in fact the opposite is often true - the so called trend reversal pattern is actually a trend continuation pattern.
In other words, a certain amount of what you read in trading books is just out and out BULLDUST.
Now don't get me wrong...trading books generally get the thumbs up from me - in fact most of whatever trading knowledge I have has been learnt from books.
However, I caution you to always check out what you're reading by testing it on historical data to see if the claims being made are in fact correct.
OK, in light of what I've said above, here are my views on some well known chart patterns.
My findings are that the following patterns which are considered to be trend reversal patterns are no such thing...they are in fact TREND CONTINUATION PATTERNS.
Bearish Engulfing pattern
Bullish Engulfing pattern
Evening Star
Morning Star
Dark Cloud
Piercing Pattern
Double Top
Double Bottom
If nothing else, I hope I've challenged your thinking!
Cheers,
Snifter
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tony
Member
Username: tony
Post Number: 33
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 01:20 pm: |
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Snifter,
I am shocked! It seems that I must spend $$$ to buy a charting package that could enable me to do backtesting.
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spider
Member
Username: spider
Post Number: 286
Registered: 10-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 03:42 pm: |
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Candlestick patterns tend to be short term, as long as you know that you can trade them.
I do agree strongly with the double top / bottom, statement.
I remember seeing some American guy on tape, a while ago, and he said that double tops and bottoms were usually continuation patterns! This was the first time I had heard this. He showed heaps of examples from US charts.
So I went home, and went through my charts, and sure enough he was right.
Every book I had read said that ,double tops were very powerful reversal signals etc.
Goes to show, don't believe everything you read, trust your own judgement, and test everything!
spider.
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 243
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 04:45 pm: |
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Spider
Was this Bill McLaren? He distinguishes between double tops and double bottoms in up-trends and in down-trends.
Colin
(Message edited by colin_twiggs on January 29, 2003)
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 244
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 04:59 pm: |
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Snifter
When you refer to double tops/bottoms, are you referring to equal highs/lows or a completed pattern with a break below/above the "neckline"?
Colin
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kaveman
Member
Username: kaveman
Post Number: 6
Registered: 11-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 05:20 pm: |
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Yes Colin, that statement goes for all patterns. Most people tend to omit the final confirmation of the pattern which is the break and test. Unfortunately most patterns that are finally confirmed are often too late to trade, unless you happen to be there when it actually makes the final breakout move.
Just being a particular shape on the chart does not make it the "trading pattern".
This goes for candlesticks as well. Any text you read worth its salt always has a final statement that can be glossed over as extra words to fatten the text. A pattern should only be traded if the next day's trading confirms the direction.
Back testing of any pattern should always include the next trading day as confirmation. It may be as simple as adding the open price is above/below the last close of the setup, depending if you are going long/short/buy/sell.
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hazluk
Member
Username: hazluk
Post Number: 40
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 07:29 pm: |
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Snifter-Colin: first there was Spider dismissing indicators & now you giving the thumbs down to said pattern formations & candle stick patterns.
Will it be ever safe to go back in the water!!
Keep it up fellas.
Colin - await some further commentary on those double bottoms.
Perhaps some qualifications could be included by updating 'trading basics' under the relevant section.
(Practically ALL my learning's been done by reading everything in your trading basics section - I've found it to be as much if not more helpful than many of the books I've read!)
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angler
Member
Username: angler
Post Number: 46
Registered: 12-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 08:29 pm: |
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HI All,,
With your testing,,,what sort of criteria did you use for the double bottoms.
While writing this is am reading an article from T.A of Stocks and Commodities there the guy uses a trough to trough of 2 wks minimum and the prise rise between bottoms of 10% minimum and he claims to have tested 92% success rate,,thats with a price variation of bottoms of 4% or less.And did you include volume in your testing.The bottom must be at the end of a down trend.
I like you dont believe everything I read but unless everyone tests the same shares I guess different results will happen,
Regards
Angler
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 247
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, January 29, 2003 - 09:52 pm: |
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Kaveman
There are too many false breaks to just rely on a breakout from a pattern. I agree - confirmation of some sort is necessary.
Colin
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snifter
Member
Username: snifter
Post Number: 148
Registered: 11-2002Rating: 
Votes: 2
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| | Thursday, January 30, 2003 - 10:14 am: |
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Greetings all...
Good to see so many responses to my 'BULLDUST' thread....I thought it would challenge your thinking and it looks like its done just that!
Let me explain where I'm coming from with regard to double tops and double bottoms.
Years ago I bought and studied in detail a book on futures trading - "Curtis Arnold's PPS Trading System".
After studying all the classic works on trading and in particular on chart patterns, Curtis Arnold decided he'd do his own testing to see if all these chart patterns were as reliable as they were said to be.
He found that double tops and double bottoms were not particularly reliable as trend reversal patterns, but were very reliable as trend continuation patterns when they occured during a trend and signalled a move in the direction of the trend.
For example....
If there's an uptrend in place and you get a temporary pullback, then the market resumes the uptrend, and a bit later you get another temporary pullback, and both pullbacks stop at the same or very similar levels, you have a double bottom within the uptrend.
This is a powerful signal to go long and is one of the most reliable patterns in technical analysis. The uptrend will almost certainly advance further after the appearance of this pattern.
Conversely, if there's a temporary rally during an established downtrend, followed by the resumption of the downtrend, then a bit further down the track there's another temporary rally that halts at the same or similar level to the first rally, you have dobule top within a downtrend.
This is a powerful short entry signal and the downtrend will almost certainly advance further.
I tested Curtis's theories on many years of futures data on many different contracts, and found that his findings on double tops/bottoms were spot on.
I then tested them on stocks and found that the same thing applied.
Double tops in downtrends are not all that common, double bottoms in uptrends aren't all that plentiful either, but they're powerful patterns when they do show up.
They appear to be far more reliable than double tops during uptrends that are supposed to be trend reversal patterns, or double bottoms during downtrends that are supposed to halt the downtrend and send the market into an uptrend.
My findings are that a double top in the context of an uptrend will usually cause only a temporary retracement, but not a fully fledged trend change.
And a double bottom in the context of a downtrend will usually cause a temporary rally, but not a change to a new uptrend.
Anyway, I mention these patterns not to convince you that I'm right, but to get you thinking and develop the habit of checking into things for yourselves, rather than accepting at face value everything you read. So I suggest you all get busy and check out lots of charts and make up your own minds about double tops and bottoms.
Colin has made a good point about double tops/bottoms being confirmed by taking out the neckline. When this happens they are of course much more reliable. But I've found nothing in any information I've read that says a double top/bottom has to take out the neckline to qualify as a double top/bottom.
Nor have I found any hard and fast rules about how far apart the two tops/bottoms have to be, or how close in price they have to be.
Obviously the closer they are in price, and the further apart they are in time, the more reliable they become.
And on candlestick reversal patterns....
A Bearish Engulfing pattern is frequently referred to as a trend reversal pattern. Conventional thinking says that if this pattern shows up during an uptrend, its an indication that the uptrend is about to become a downtrend.
Well all I can say is "don't bet on it"! The price will change direction to down, but the new downmove will usually be temporary and the uptrend will remain intact and will advance further.
However, if a Bearish Engulfing pattern shows up during a rally within a downtrend, well now that's a different story altogether....it gives a very strong signal that the temporary rally is over and the downtrend is about to resume.
A good example is a weekly PHY chart. Take note of the three highs of 469c in Nov. 01, 438c in March 02, and 400c in August 02.
A falling trendline joins the tops of these three rallies (yes Spider, I do use trendlines occasionally!!) and the last of these rallies ended via a Bearish Engulfing pattern that was followed by the continuation of the downtrend.
SRP weekly chart. In March 02, while in an established downtrend, SRP put in a temporary rally to 740c. A Bearish Engulfing pattern ended this rally, and a resumption of the downtrend followed immediately after.
Also on the weekly SRP chart take note of the retracement that hauled price back to 610c in June 01. A well established uptrend was in place at the time, and the temporary dip down to 610c was halted courtesy of a Bullish Engulfing pattern that indicated the uptrend would continue, which it did.
RHC weekly chart. In July 01 the 254c low of the retracement was called by a Hammer, then another Hammer showed up 2 candles later. Hammers are considered to be reversal patterns that turn downtrends into uptrends, but they're unreliable when used in this way...they're much more reliable as uptrend continuation patterns - as these two hammers demonstrated.
Also on the weekly RHC chart, a Hammer at the Sept 02 low of 341c should have, according to many candlestick books, changed the downtrend into an uptrend. But the ensuing up move was just a temporary rally, followed by the resumption of the downtrend.
TIM weekly chart. A rally during the downtrend lifted prices to 159c in March 01. This rally ended with the appearance of a Dark Cloud, followed immediately by the continuation of the downtrend. As trend reversal patterns during uptrends, Dark Clouds are unreliable. But they're very reliable as trend continuation patterns when they appear during downtrends.
I could go on quoting examples of candle reversal patterns that proved to be trend continuation patterns, but I think I've given you all enough to think about.
Don't believe or disbelieve me until you've checked out a couple of hundred charts for yourselves and made up your own minds.
Cheers,
Snifter
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kaveman
Member
Username: kaveman
Post Number: 9
Registered: 11-2002Rating: N/A
Votes: 0
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| | Thursday, January 30, 2003 - 11:17 am: |
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Candle patterns are actually assigned probability factors. Some are deemed stronger signals than others. I have seen many charts with candle setups that went against the accepted reversal or continuation they are meant to represent. That does not phase me in the slightest as with any style of TA you choose there are always times when the following price action moves against what you expect. That is the risk, that is also what stop losses are for.
I have read a few books on candlesticks, and they basically say that they should be used as part of your trading arsenal, not the only component. I rely on a number of signals for trade signals, eg canldestick setups, P&F charts (both close and high/low), price chart patterns. I trade breakouts and find these the best tools for me.
I could go through every chart and pick out instances where the accepted setup picked the correct folowing direction, and then on the same chart find times when the same setup did not signal the expected. You could say the same for any calculated indicator.
There is no such thing as a perfect predictor of price action. trading is a numbers game as I have often read. You trade with probabilities and risk/reward ratios. If your profitable trades return more overall than your losing trades you will be in front.
Snifter, I put to you now to go through those same charts and find setups that did call the expected signal. You will find those as well. Then do your testing to see if you could have made profitable trades based on the whole picture.
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 249
Registered: 09-2002Rating: N/A
Votes: 0
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| | Thursday, January 30, 2003 - 11:30 am: |
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Snifter
Double Tops and Bottoms
I agree that equal bottoms are a strong bull signal in an up-trend and not in a down-trend. Also, that equal tops are a strong bear signal in a down-trend but not in an up-trend.
However, a completed double bottom pattern (with a break through the neckline) is a useful reversal signal in a down-trend. Likewise, completed double top patterns in an up-trend.
Engulfing Patterns
Have you noticed that Engulfing patterns closely resemble Key Reversal days?
Colin
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snifter
Member
Username: snifter
Post Number: 149
Registered: 11-2002Rating: N/A
Votes: 0
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